Buying a new or second-hand vehicle is probably one of the biggest investments you will ever make. Why then take any chances when it comes to safeguarding and insuring this investment?
However, at today’s prices, buying a new vehicle is something very few of us can do without some form of financial assistance. Therefore, when insuring your vehicle, it is critical also to incorporate whatever financial agreement or assistance you have in place.
“One of the most common forms of ‘financial assistance’ is the hire purchase [HP] agreement,” says Jono Soames, general manager: personal at Mutual & Federal. But while HP allows you to buy your dream car, it can also end up costing you money in the event of an insurance claim.
For example: if the replacement value of your vehicle is R200 000 but the HP value is R240 000, you will sit with a R40 000 shortfall the day you claim for the replacement of your vehicle. Even if you have comprehensive insurance on your vehicle to cover the R200 000 replacement value, your repayment to the bank to cover your HP agreement will fall short by R40 000.
Some insurance companies automatically cover the credit shortfall, while others offer HP top-up if and when you purchase your new or used vehicle in terms of such an agreement, says Soames. This top-up covers the difference between the reasonable retail/market value of your vehicle and the settlement balance outstanding — that which is still owing to a financial institution.
“Therefore, when determining the value of your vehicle for insurance purposes — be it based on the reasonable retail value or market value of the vehicle — it is critical to include this ‘difference’ in that amount,” says Soames.
Having said that, the responsibility to establish and maintain the correct replacement value of your vehicle remains the responsibility of the policyholder, he says. Most insurance companies will be able to offer assistance, but the ultimate responsibility rests with the insured.
“Don’t think that by insuring your vehicle for less than its actual replacement value you will be saving on your monthly premiums,” says Soames. “You could end up losing a great deal more — especially if you’ve purchased your vehicle on HP. Not only will your insurance fall short on the replacement value of the vehicle, but you will also end up owing your financial institution the outstanding balance on that agreement.”