Why do we need to talk about car value when we're thinking about insurance? Well, your car insurance is affected by two factors, firstly you, and secondly the car you drive. The “you” part is the risk that you represent and includes factors like your age, how long you have been driving and where you live. The “car you drive” part is the risk that comes from your vehicle, its value, its risk of being stolen and how often cars like it are involved in accidents.
Car insurance companies also pay up to replace other drivers’ cars that you damage, so even if your car is worth nothing and you are a very safe driver insurers are still at risk for millions of rands, so your premium is never going to go down to zero. But you can reduce your premium by understanding the concepts of Retail Value, Trade Value and Market Value, and giving your insurance company an accurate car value when you fill in the proposal form. So first, we need to look at different kinds of car value and what they mean…
Car Value Part One: Retail Values
If you think retail value refers to the list price of your car you need to think again! Retail value is the price a car dealer would sell your car for, taking into account the number of previous owners, its age and condition, and how many kilometres it has been driven.
Let’s say you see a new car in a showroom, it might be R400,000, you buy that car, and hand over your R400,000 in cash. You might think that your new car's retail value for insurance purposes is the R400,00 that you paid, but its retail value will only be about R350,000 because that is the price the dealer would sell it for now it is no longer a new car. This is simply because it has had one owner, you.
Car value goes down the second a car is brought or driven off a lot, this is called depreciation, and depreciation strongly affects the value of your car, particularly retail value.
Car Value Part Two: Trade Values
Trade value is the price a dealer will pay you for the car (as opposed to retail value which is the price a dealer will sell your car for to another customer). It’s lower than the retail car value because the dealer has to make a profit, which he does by selling the car for the retail price, pocketing the difference between retail price and trade price as his mark-up. The trade value is generally R50,000 – R100,000 less than the retail value. That means if the retail value of your car is R350,000, the trade value is around R275,000. You take your car to the dealer, he will pay you the trade value of R275,000, he will sell your car to another customer for the retail value of R350,000, and he will pocket R75,000 in profit. Simple!
Car Value Part Three: Market Values
People sometimes think the market value is whatever you can get for your vehicle by selling it yourself on the open market (such as through an online ad rather than using a car dealer), but there is an exact way to calculate the market value when you are valuing a vehicle for an insurance company.
Market value is an average of the retail value and trade value, which looks like this: (retail value + trade value) / 2 = market value. So, if the retail value of your car is R400,000 and the trade value is R350,000 then the market value = R400,000 + R350,000) / 2 = R375,000.
Car Value: The Bottom Line
Insurance companies work on an indemnity principle which means you should never be better off after making a claim than you were before the claim. After all, insurers don't want to help you get rich from their pockets! An insurer will only ever pay you what the car was worth on the day of the accident, not what you paid for it, and this is something that's important to keep in mind.
If you have an accident in a new car that cost you R400,000 your insurer is never going to give you R400,000. The car value drops every day and with every kilometre it is driven (that depreciation, remember?), so your car’s retail value is always going to be lower than the price you paid for it. Even if you ignore any insurance excess on your car insurance policy you will never get enough to buy a brand new replacement vehicle of the same make, model and year because the minute you drive your car away from the dealer’s showroom its retail value falls by 10 – 20%.
All that being said, it's important that you know which of the kinds of car value we've talked about to tell your insurer. Why? Because you don't want to pay premiums that are higher than necessary, but you also want the best chance of getting the majority of your investment back if you have to make a claim.
Which Car Value Should You Tell your Insurers?
Logic would say you should insure your car for its full value (the Retail Value), but you can make savings if cheap car insurance is an absolute priority by insuring your vehicle for either the Market Value or the Trade Value. The disadvantage of using one of these lower values is that if your car is written off then you are going to be a long way short of getting enough for an exact replacement. However, if you're looking at cheaper premiums then this risk might be worth it. You can always use any claim money to buy a cheaper model of car, or to make a down payment on a financed vehicle.
One serious point to bear in mind is that your insurance will use the car value you give them until you change it, even though it is falling every day (depreciation!). Insurers do this even though they will never use that initial car value if it comes to a crunch, and it means that though the value of your car is going down you'll continue to pay the same insurance premium each month as though your car value never changed. KingPrice Insurance is the only South African car insurance company that has a unique product that automatically reduces your car value each month to account for depreciation. This company also reduces your premium each month as your car’s value falls. Gotta be worth a look…
Main Subject: car value
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