Over - Under Insurance
Under – and Over Insurance seems like a paradox, but be warned, either way you loose. Let’s look at this in a little more detail and you can save yourself the hassle of being either under or over insured.

What is Under Insurance?
Under Insurance is a term used when an asset, i.e. your car is insured for less than its value. The result is that you will only be paid a proportional part of your claim. The best is to illustrate the principle involved by way of an example:

Value of car = R100 000
Insured for = R 80 000
You put in a claim for R5 000 worth of damage to your car. As you are under insured the payout will be calculated as follows:

The term used is Average, and the implication is that you should always insure at replacement value. Technically, you become your own insurer for the balance of the loss.

80 000 x 5000- 100 000 = R 4000

Values when insuring your car
We are dealing with three different values here:

1. Retail Value: Refers to the price a car dealer might be able to sell the car for.
2. Trade Value: Refers to the price a dealer might pay you should he buy the car from you.
3. Market Value: Is halfway between the Retail and Trade Values.

The moral of this story is that if you want to obtain the maximum payout should your car be written off, you need to insure for Retail Value. Very few insurers offer this option and you will be paying between 5% more on your monthly premiums. You will need to shop around for car insurance at Retail value; most companies use the market value when insuring your car.

The Auto Dealers Guide is a good tool to use when determining your car’s market value.

What is Over Insurance?
You decide to make sure that you will not fall prey to under insurance and decide to rather go to the other extreme. Your car’s market value is R100 000, but you decide to insure it for R120 000. If your car is stolen or written off you will be laughing all the way to the bank with your R20 000 extra. WRONG!!

This is a case of Over Insurance and the insurance company will simply ignore the fact that you were over insured by R20 000 and only pay out on claims up to a maximum of the market value of R100 000. All this time you have been paying more than what is necessary and every month you threw some money in the water.

An important point to remember here is that it is your responsibility to ensure that your car is insured for the correct value. You need to be pro-active here and review your car insurance annually and ask your broker or insurance company to ensure that your car is not insured for more than its market value. This point is overlooked by most of us and over time it can cost us dearly.

Another point to take into account is the outstanding amount owed to the financing institution. Let’s say your brand new car is stolen or written off in the first year after purchase and you obtained finance from a bank. You will most probably find that the declining market value of the car from new to used is far below the amount you still owe the bank. In such a scenario you could suffer a major financial blow. The best would be to make sure your car is ensured for the outstanding balance on the agreement at all times. In the case of a total loss the insurance company will first pay the financier and if this amount is less than the amount outstanding you will be held personally liable for the balance.

Make sure that you are not under OR over insured. It is YOUR responsibility, don’t leave it up your broker or the Insurance Company.