Ever heard of top up insurance? If you haven’t, then you could be missing out on something that could potentially save you thousands of Rands. But don’t worry, we’re here to tell you everything you need to know about top up insurance and how it works.
What is Top Up Insurance?
Top up insurance is also sometimes known as top-up cover or credit shortfall insurance, and it is a little complicated to explain (but we’ll do our best!). When many people buy a car these days they don’t pay the full price up front, instead choosing to finance the vehicle. Rather than paying a car dealership all those Rands at once, you’ll pay your bank or credit company a fixed monthly price until your car is paid off. At the same time, you will also be paying your car insurance company to insure your car. All of this is all very well and good, unless something happens…
Let’s say your car is totaled, there’s been an accident and the vehicle is completely unusable. Your insurance company agrees, and pays out the money that it owes you for insuring the vehicle. But you still owe money to the bank because your car was financed. What you will probably find is that the money your insurance company gives you is far less than the amount that you still owe to the bank. And that difference is what top up insurance is designed to cover.
Wait, How Does This Happen?!
You might think this is a bit unfair, but it’s actually very normal. The problem is that when you insure your car you’re insuring it for “market value.” This means that the insurance company will only pay out enough money to cover the cost of buying a car that is close to identical to the one that was destroyed. And cars, as we all know, lose value over time. You’re still paying your bank the amount of money that the vehicle cost you, but in the year or so since you bought that car the value of it has gone down. See how that works?
Another factor is that when you finance a vehicle you often end up paying the bank more than the cost of the vehicle itself anyway. Say you buy a car for R200,000. The amount that you will owe the bank will be more than R200,000. Why? Because you will also be paying interest and financing charges as well. When you choose the convenience of financing you end up paying a little more overall. We told you this was a little complicated, but this is basically what happens.
So, what are your choices here? Well, you can pay back all the money that you still owe the bank using your insurance pay out plus a little extra and then buy a much cheaper car. Or… you can think ahead and get yourself some top up insurance.
How Top Up Insurance Works…
Top up insurance is generally sold as an add on to a regular insurance policy, and it is designed to cover the difference between what you owe the bank and the amount that your vehicle is insured for. Should you owe the bank R120,000, but your car is insured for a market value of R100,000, credit shortfall insurance will pay the extra R20,000 if there is an accident that totals the car or if your car is stolen. It’s pretty simple.
There are a couple of caveats though. Firstly, most companies will only sell you top up insurance as an addition to a comprehensive vehicle insurance policy (check out our car insurance terms and definitions page to find out more about different kinds of vehicle insurance). So if you opt for third party only, or fire and theft, then you probably won’t have the option of adding top up insurance.
Secondly, top up insurance only pays the difference between what your car is insured for and financing value, so if your car isn’t insured for market value you still might have a problem. For example, the market value of your car is R150,000, you owe the bank R170,000, giving you a shortfall of R20,000. But your car is insured below market value at R120,000. In the event of an accident or theft, your credit shortfall insurance will only pay R20,000, it will NOT cover the fact that your vehicle was insured below market value. So you will need to be careful that your vehicle is fully insured at its market value.
One other thing to be aware of concerns balloon payments. Some financing options let you pay a certain monthly rate for a certain number of months, and after that you will owe a balloon payment. If this is the case for you then be cautious when shopping for top up insurance, since many insurance companies do NOT cover these balloon payments (though some do, and others offer additional add on extras to cover them).
Do You Need Top-Up Cover?
Whether or not you need top up insurance depends on which vehicle you’re buying and how you’re buying it. If you’re not financing a vehicle and are paying full price up front then obviously top up insurance is unnecessary. If you’re financing a new vehicle then top up insurance is a valuable add on to your policy, since it will prevent you being out of pocket if something happens to your new car. Even if you’re financing a second hand car, top up insurance can be beneficial, as long as that car is a relatively new model (cars lose more value in the first few years of ownership than they do later).
If you do opt for top up insurance, then you’re going to need to keep an eye on it. As you make your financing payments to the bank the difference between what you owe the bank and the market value that your vehicle is insured for is going to get smaller and smaller. At some point you will reach the stage where your regular insurance will completely cover what you owe the bank, and then top up insurance is no longer necessary. It’s up to you to keep an eye on that and to cancel your top up insurance once you no longer need it!
For those that are financing a relatively new vehicle top up insurance can be a great idea, though naturally it will add a little to your monthly insurance premiums. However, if anything happens to your car, you’ll be safe in the knowledge that all costs will be covered and that you’ll be able to replace your vehicle with something similar to what you lost. Top up insurance can be the difference between being able to pay off your vehicle financing and still get a car or not, so it’s certainly worth considering. Nobody wants to lose money, and nobody wants to be without their car, and that’s why top up insurance is a valuable addition to your normal car insurance policy.
Main subject: top up insurance
