Does Car Value Affect Insurance?Published Monday, March 27, 2023
Different factors influence the premium prices of a car insurance policy and the amount you get as compensation if it's written off or stolen and not recovered. Is the vehicle's value one of them?
Essentially, the value of your car is one of the biggest factors in determining how much you should pay for an insurance policy. As a result, many have to enter a car valuation for insurance quotes.
In addition, insurance providers consider a car's value to determine the level of risk. The more expensive it is to repair or replace a vehicle, the higher the premium prices will be.
However, when you request a car insurance quote, you have two options to choose from: insuring your vehicle for its market value or for an agreed value.
Read on to learn more about both options, their differences, and how they can affect your insurance policy.
What Is Market Value Car Insurance?
"Market value" is a common term in the insurance industry. It's used to refer to the value of your car depending on what it would fetch on the open market at the time of a claim.
In other words, if you choose this alternative, your policy will offer coverage for a reasonable replacement cost based on your vehicle's market value.
Insurance providers determine it by comparing your car to other vehicles' market value, considering different factors, such as the following:
- Mileage or how many kilometres it has travelled
- Overall condition
- Service and accident history
However, it's important to know that it doesn't have to do with a car's trade-in value, the amount a collector or another private purchaser would pay for your vehicle, or the costs you would pay to replace your car with a new one.
When you insure your vehicle for market value, and it's written off after an accident or stolen, the compensation you receive will be based on the price your insurer estimated your vehicle was worth before the event.
Are Premiums Expensive If You Insure Your Car for Market Value?
Insuring a car for market value brings different benefits to vehicle owners, including lower premiums. It's the main advantage related to these insurance policies.
They're cheaper compared to other types of insurance due to market value depreciation.
The market value of your car tends to depreciate over time. Therefore, the amount you receive after an accident or theft is based on the insurer's estimate of how much your vehicle was worth on the open market before it was damaged.
Most of the time, that amount is lower than what a vehicle's market value was the first time you took out or renewed your insurance policy.
What About the Payout?
When you insure a car for market value, there's uncertainty about the payout or how much money you will receive as compensation from the insurance provider if the vehicle is damaged, written off, or stolen and not recovered.
In other words, the compensation may be less than what you expect or what you paid for your car insurance policy.
Who Is Market Value Car Insurance Good For?
Besides involving lower car insurance premiums, insuring vehicles for market value can be a good option for those who own older models.
Depreciation usually slows down after a few years. Therefore, the payout you may receive for an older car may still be large enough to cover replacement costs.
If you want to dispute the amount assigned to your vehicle's value, you can try to reach a new agreement with your insurance company. However, complex or escalating cases are handled by the Australian Financial Complaints Authority (AFCA).
What Is Agreed Value Car Insurance?
This term describes a sum fixed after an agreement between the vehicle owner and the car insurance provider upon taking out or renewing a policy.
When you insure your car for an agreed value, the insurer doesn't consider potential depreciation during the policy term. As a result, if your car is written off after an accident or you can't recover it after it's stolen, you'll know the exact amount of money you're going to receive as compensation.
In other words, the amount you'll receive in case of total loss or irreparable damage is often higher than what a car would sell for on the open market.
It's based on the amount that you and your insurer agree on or negotiate at the start of the insurance policy term.
Are Premiums Expensive If You Insure Your Car for an Agreed Value?
Overall, the sum insurers set and the settlement car owners receive is usually higher than if a vehicle is insured for market value. Therefore, insurance premiums are also higher.
What About the Payout?
The compensation you'll receive if you insure your car for an agreed value is often greater than its market value, even if it depreciates. In addition, the amount for which you insure your vehicle is usually more flexible.
Also, unlike market value car insurance, there's certainty about the sum you'll receive from the insurer if your vehicle is written off or stolen.
If you decide to insure your car for an agreed value, always check your renewal notice carefully. Some car insurance providers often switch policies to market value when renewing.
However, you can contact your car insurance provider and ask to remain in the agreed value contract to fix that.
Insurers also consider a few factors in order to determine if a vehicle owner can choose this option when requesting car insurance quotes.
Overall, a person can insure their cars for an agreed value if:
- The vehicle is less than 10 years old
- The car has no pre-existing damage
- The car has not been converted to run liquid petroleum gas (LPG)
- The agreed value is within an acceptable range of market value
Who Is Agreed Value Car Insurance Good For?
Insuring for agreed value may be the best option for those who own new vehicles or autos with greater sentimental value.
It's also recommended for those who have modified their cars to add features with a higher value than the stock-standard model.
Since new cars' value tends to depreciate more quickly, agreeing on a sum for compensation can help you get an insurance payout large enough to cover replacement costs.
Those who obtained a car loan to finance their vehicle and still owe money may also want to consider an agreed-value car insurance policy. If that's your case, you won't be stuck with outstanding car loan repayments caused by a gap between your vehicle's market value and the amount you paid.
However, those who insure their cars for an added value must be willing to pay higher car insurance premiums.
Main Differences Between Market Value and Agreed Value Car Insurance Policies
Do you still have to determine which is the best option to insure your vehicle? These are the main differences between a market value and an agreed value car insurance policy.
- If you insure your vehicle for an agreed value, you must pay a higher car insurance premium. However, premiums are lower when your car is insured based on market value.
- Market value insurance policies are good options when your vehicle is older. If you want to insure a new car, agreed value policies are better.
- When you insure your car for an agreed value, you know how much money you'll get as compensation. Instead, if the policy is based on a vehicle's market value, there's a level of uncertainty about how much you'll be paid.
Which Option is Better for a Comprehensive Car Insurance Policy?
If you want to take out a comprehensive car insurance policy, both options can be good. However, you should consider certain factors to make the best decision.
Choosing the right option to calculate your car insurance value depends on how much you're willing to pay in premiums, your vehicle's age, the value of your car relative to the market, and more.
Do you want to pay for a cheaper car insurance premium? Insuring your vehicle for its market value could be the best way to go. However, you should keep in mind that the compensation you'll receive if there is permanent damage after a car accident or loss could be lower than what you initially paid.
Contrastingly, if you have a new car, insurance policies based on an agreed value are the best options.
When vehicles are reasonably modern and have non-standard accessories or factory options, added value policies are often better suited, even if the car insurance premium is more expensive.
Can the Value of a Car Affect Insurance?
As you can see, the value of your car is a key determining factor when it comes to compensation for permanent loss or damage.
In this regard, the short answer is "yes." The value of your car influences your insurance policy, premium prices, and the amount you can get as compensation.
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