Over and Under Insurance - 14 Sep 2009 08:52
To pay less each month on your car insurance premiums, many decide to underinsure their vehicles and pay in the outstanding balance between their claim and the damage. Others, to prevent having to pay one big lump-sum, over-insure their cars hoping they might have extra cash from a claim to put in a new sound system. While both theoretically have their pros, you lose money either way.
Underinsurance
?Refers to insuring assets for less than their real value. While this will bring down your premiums, you are only insuring your vehicle for a percentage of its value. This means that you will only ever be paid out that percentage – on every claim.
For example, if your car is worth R100,000 and you cover it for R80,000 you are only insuring your car for 80% of its value. If you claim accidental damages to the amount of R5,000 (although covered in the R80,000), you will only be paid out R4,000 or 80% of the R5,000 (R5,000 x R80,000 ÷ R100,000 = R4,000). While the difference may not be a lot of money on a claim R5,000, if the car is stolen, you’ll be responsible for the R20,000 difference if you want to replace the vehicle. It makes sense then to insure for replacement value instead of saving every month.
Over-insurance
To prevent the above from happening and earn yourself a couple of extra thousand rand in the event of your car being stolen, you over-insure. This will cost you more each month, but you rationalise that it’s worth it.
For example, if your car is worth R100,000, you cover it for R120,000 hoping to receive an extra R20,000 when claiming. But you don’t. Your insurer will only ever pay out the maximum market value of the car and never more. This means you’ve insuring an extra R20,000 of imagined value which doesn’t even help to cover your excess when claiming. It’s a waste of money.??
Whenever it comes to insurance companies, honesty is the best route possible. This will save you both monthly and in the long run.
To pay less each month on your car insurance premiums, many decide to underinsure their vehicles and pay in the outstanding balance between their claim and the damage. Others, to prevent having to pay one big lump-sum, over-insure their cars hoping they might have extra cash from a claim to put in a new sound system. While both theoretically have their pros, you lose money either way.
Underinsurance
?Refers to insuring assets for less than their real value. While this will bring down your premiums, you are only insuring your vehicle for a percentage of its value. This means that you will only ever be paid out that percentage – on every claim.
For example, if your car is worth R100,000 and you cover it for R80,000 you are only insuring your car for 80% of its value. If you claim accidental damages to the amount of R5,000 (although covered in the R80,000), you will only be paid out R4,000 or 80% of the R5,000 (R5,000 x R80,000 ÷ R100,000 = R4,000). While the difference may not be a lot of money on a claim R5,000, if the car is stolen, you’ll be responsible for the R20,000 difference if you want to replace the vehicle. It makes sense then to insure for replacement value instead of saving every month.
Over-insurance
To prevent the above from happening and earn yourself a couple of extra thousand rand in the event of your car being stolen, you over-insure. This will cost you more each month, but you rationalise that it’s worth it.
For example, if your car is worth R100,000, you cover it for R120,000 hoping to receive an extra R20,000 when claiming. But you don’t. Your insurer will only ever pay out the maximum market value of the car and never more. This means you’ve insuring an extra R20,000 of imagined value which doesn’t even help to cover your excess when claiming. It’s a waste of money.??
Whenever it comes to insurance companies, honesty is the best route possible. This will save you both monthly and in the long run.