Insurance and Assurance

Types of Vehicle Insurance

Motor vehicle insurance is, unfortunately, a necessary evil, even if you pay cash for a motor vehicle. It comes in two main forms:

• Balance of Third Party, Fire and Theft Insurance- provides you with cover for damage to the other party's vehicle in the event of an accident, and for your vehicle in the event of loss by theft, or fire. No cover is provided for repairs to your own vehicle in the event of an accident. Some people feel this level of cover is adequate because if you have an accident which is caused by a third party, you can claim against that third party's insurance. In practice, it is very difficult to make such a claim, and it usually requires a civil court action to get satisfaction. The insurance company and the finance house will not be to keen on pursuing such an action on your behalf, so you will end up being liable for the outstanding finance contract.

• Comprehensive Insurance - provides you with all of the cover noted above, including damage to your own vehicle, even if the accident is your fault. More expensive than the first option, but it provides you with far greater protection.

Rule Number 1  Take comprehensive cover if you can possibly afford it.

You may either sign up for vehicle only insurance, or you may use an option on your householders comprehensive policy to effect vehicle insurance. Stand alone vehicle insurance usually has a higher premium, than you would normally pay as part of a householders comprehensive policy, so choose carefully.

Rule Number 2  "Piggy back" on an existing short term insurance policy if you can, to achieve a lower premium.

You will have no doubt seen the adverts for vehicle insurance which offer ridiculously low premiums. You might be tempted, but be careful. There is always a reason why the premiums are so low. Usually, it is because the excess associated with a claim is large. You need to decide what works best for you. High monthly premium with low excess in the event of a claim, or lower monthly premium with a large excess in the event of a claim.

Rule Number 3  Select the premium/excess combination that best suites your needs.

The market value of your car declines each year. This is called depreciation. You will notice, however, that your insurance company will continue to insure your car for the original purchase price. In the event of a claim, the insurer will only pay out the average of the market retail and market trade values, even if your car is insured for the original purchase price. You should insist that your insurer adjusts the insured value of your car on the anniversary of the policy.

Rule Number 4  Adjust the insured value of your car annually in line with its depreciated value.

Obviously, you must get quotations from competing product providers and again, compare the entire package, not just the premiums, before making a choice.

Top-Up Insurance

If you choose to finance the purchase of a motor car, another product that you might want to consider is Top-Up Insurance.

Let's say you purchase a new small car for R55 000.00. Thirteen months later, the car is stolen while you are out to dinner. You immediately notify the police, get a case number, and lodge a claim with the insurance company.

Six weeks later, the normal waiting period in the event of car theft, the insurance company settles your claim. One of the things you will have done when signing the finance agreement, is to cede the benefits of the motor insurance policy to the finance house. As a result, the insurance company will pay the finance house first, but only after deducting any excess, to settle the outstanding finance agreement. All well and good, but a short while later, you get an invoice from the finance house for a scarily large sum of money. How come?

When the insurance company determined what it would pay in respect of your claim, it uses the following formula:

Retail Value of Vehicle + Trade Value of Vehicle/2=Pay Out

As you probably know, the day you drive your new car out of the showroom, it looses up to 20% of its value. If the finance house decides to waive all interest penalties which it would normally charge for early settlement of a finance agreement and provides you with an accounting balance settlement, chances are that, within the first two years of the cars life, you will owe the finance house more than the insurance company is likely to pay out in the event of theft or a write-off.

This is where Top-Up Insurance comes in. For a modest premium per month, you will have the peace of mind knowing that in the event of the car being stolen or written off in an accident, the finance account will be completely settled.

Rule Number 1  Review the need for Top-Up Insurance on the anniversary of the policy.

Two years is usually the break even point, after which such insurance is no longer necessary.

Rule Number 2  Cancel the policy when it's no longer necessary.

As usual, ask for quotations from competing product providers and compare the total package, not just the premiums.

Credit Life Assurance

If you finance the purchase of a motor vehicle, you might want to consider taking a Credit Life Assurance Policy. This policy provides you with a form of life assurance cover which will either settle all outstanding finance payments on your death or permanent disablement, or make monthly payments in the event of extended illness or temporary disablement.

There are a variety of products on the market, but both the motor dealer and the finance house would like to ensure that their own product is sold with the finance agreement. Why? Because there is good money in it. You need to satisfy yourself that you are getting the best possible value for your money when purchasing a credit life policy.

Rule Number 1  Always ask for full details of the policy.

You should look at the following:

• the benefits of the policy.

• any conditional clauses or waiting periods governing when benefits come into effect.

• any exclusions - the circumstances under which benefits will NOT be paid.

Rule Number 2  Always ask for competing quotations from different product providers.

Rule Number 3  Compare not only the premiums payable, but the complete benefit package as well.

You will have the option of paying a monthly premium or a period premium. If you you pay a monthly premium, the premium amount will be added to your monthly finance payment which is usually paid by debit order.

If you choose the period premium option, you have the choice of paying a lump sum premium for the finance period in cash up front, or having it added to the finance agreement. If you choose the second option, remember that you will be paying finance charges on the total value of the lump sum premium. You should ask the sales person to quote you a monthly premium, as well a period premium. Compare the monthly premium with the difference between the monthly finance payments as a means of deciding which is the most economical. For example:

As you can see from the above example, it would be more economical for you to choose the monthly premium credit life. This will not necessarily apply to every transaction, as finance period and the interest rate charged are influencing factors.

Mechanical Warranty Insurance

If you purchase a used vehicle, you might want to consider taking a Mechanical Warranty Insurance Policy. Most dealers and finance houses offer such a product, but of course they vary widely in terms of the cover offered and the premiums which you will need to pay.

These policies are particularly beneficial when the manufacturers warranty has expired. The cover provided is not the same as you would get with a manufacturers warranty, but if you experience some sort of major component failure, such engine or gearbox, such a policy will be a great help in paying for the repair.

Typically, the cover provided is subject to restrictions on the extent of the pay out, often dependent on the cause of the failure, the nature of the repair, and the age and kilometre reading of the vehicle. Most policies place stringent conditions on the insured with regard to servicing according to manufacturer requirements, else they will not meet a claim. Look carefully at such requirements before committing to a particular product. Remember, as is the case with all short term insurers the unstated intention is to limit the claim settlement as much as possible.

Rule Number 1  Check out the terms, conditions and exclusions of the policy carefully before making your choice.

You should always ask for quotation from competing product providers, and do compare the entire package. Also, try to get the names and telephone numbers of one or two existing policy holders who have lodged a claim previously, so that you can get feedback on their experiences "from the horses mouth". If the insurer is not prepared to put you in touch with existing policy holders, BE CAREFUL!

Rule Number 2  Speak to existing policy holders. BE CAREFUL if you are not permitted to do so.

Cover is usually provided for a period of years, dependent on the age of the vehicle. The older the vehicle, the shorter the period of cover available, the higher the premium and the smaller the benefits. Some insurers also place a restriction on kilometers traveled during the period of cover.

Rule Number 3 Be sure that the premium payable is justified by the cover provided.

Premiums are payable in advance for the entire period of cover. Again, you have the choice of paying the premium in cash, or adding it the the purchase price of the vehicle if you finance the purchase. Remember, adding it on will cost you more in finance charges, particularly if the cover period is say two years, and the finance agreement period is 48 months. You will still be paying off the premium up to two years after the cover has lapsed!!

Rule Number 4 Pay the premium up front in cash if you can afford to do so.