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Should you insure your car for retail, book or market value?

Retail Value

This is the value that a car ‘retails’ for if you were to buy it from a dealer. This retail value includes the mark-up that the dealer earns on the sale. In other words, the retail price is what you, the consumer, pays for your motor vehicle.

The retail price is the closest value to the replacement cost, i.e. the nearest amount needed to replace your car with a similar vehicle in the event of theft or write-off. If you experience a total loss you’ll probably have the best pay out if your car is insured at its retail value.

If your car is new and you insure it at the Retail Value, a year later your premium pretty much stays the same but your car’s Retail Value will have gone down with depreciation. It’s therefore an important strategy to ask your broker for an updated insurance quote based on your car’s depreciated value, every year on the anniversary of your insurance policy. This will save you money.

Due to the condition of indemnity, an insurer’s role is not to enrich you, but to indemnify you or return you to the state you were in before the event of claim. It’s for this reason that an insurer will not pay you out more than the value of your vehicle’s current worth – as a matter of principle.

For example: if you insured your Golf GTI at a retail value of R330 000 and a year later, due to depreciation, the car retails at R264 000 for a like-for-like car of similar mileage and year model (a 20% depreciation in the first year assumed) − your insurer is not going to pay you out R330 000, but rather  R264 000.

It’s in your best interests to ensure that your insurance premium stays in line with your car’s shifting retail value. An insurer will typically not tell you to pay lower premiums as your car depreciates, so remember to ask your broker to get you a lower quote for every year that your car ages.

Trade/Book Value

The trade or book value of a motor vehicle represents the average price that a dealer will pay for your vehicle so it’s the price you’ll receive from the dealer when selling your car. The dealer will then add a mark-up and on-sell the vehicle to the public at a retail price higher than the trade value received.

The trade value is therefore less than the retail value, so if you insure your car at its trade value, you’ll pay a lower insurance premium on a like-for-like basis compared to insuring at retail value − but you’ll be covered for less.

Market Value

Caution needs to be taken here, as there’s a misunderstanding as to what your total loss claim pay out will be if you’ve insured your vehicle on a ‘market value basis’.

The market value calculation used in the insurance industry to calculate your claims pay out, is the average of the trade value and retail value. Expressed in a formula calculated as follows:

Market value = (Trade value + Retail value) / 2

Market value in general is a function of many variables, such as mileage, vehicle condition, service history, accident reports etc. and importantly is in the domain of market demand and supply. Some buyers can get lucky with a really good deal and some sellers can get a really generous offer, but what’s important is the average prices in the market for that vehicle.

There are specialist publications that can be bought at most book stores which estimate car depreciation rates by make, model and year. Examples of such a handbook include Mead and Macgrouther’ Auto Dealer’s Digest.

If you’re in doubt as to what you’ll receive as a pay out in the event of a total loss claim, speak to your broker to find out what your car is insured for i.e. the current ‘market value’ they place on the car, and then do some homework by getting an idea of the car prices out in the market. If your insurer’s value and your deemed replacement market value for the same car is out of line, consider updating your cover.

Since the market value is lower than the retail value, you can get a lower insurance premium. In the interests of saving money however it is not advisable to insure your car at a lower amount. Some insurers don’t even allow this as it’s of no benefit to you.

It’s important to note that in a total loss scenario it can be likely that you won’t have exactly enough money from your insurance claim pay out to replace your car unless off course you buy a cheaper vehicle, as vehicle prices are constantly changing, and don’t forget you’ll also have to pay the excess on your insurance policy.

Fell free to contact us on 044 382 0550 if you have any questions about your current car insurance, we’ll be happy to help.


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