MONEY CLINIC | What do these car insurance terms really mean?

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With some insurers, you can now insure your car for an agreed value.
With some insurers, you can now insure your car for an agreed value.
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With so many confusing terms and concepts, it's no wonder that misunderstandings and disputes with insurers happen all the time. That's why it's crucial to understand the different car insurance terms and policies.

According to Wynand van Vuuren, client experience partner at King Price insurance, many people don't know what certain terms mean or take advice from their friends instead of finding out the facts.

Wynand clears up some common misconceptions around car insurance:

Retail, market and agreed value

Most insurers offering comprehensive cover will insure your car at its retail value. This retail value is what it would cost to replace your current car.

In other words, this is what it would cost to buy your car from a dealer right now, considering its age, condition and mileage. The retail value is typically higher than the market value, which you could sell your car for right now. 

"Here's what’s important to know," says Van Vuuren. "For various reasons, cars lose value from day one. This means that your car's retail and market values decrease over time. So, if your car is written off or stolen, and it’s insured for its retail value, your insurer will only pay out what the car is worth at the time of the loss. They won’t pay you what you paid for the car."

With some insurers, you can now insure your car for an agreed value. This means you can choose a more realistic replacement value for your car. With King Price, for example, this agreed value can be up to 20% more than today’s retail value. It’s fixed for three years and doesn't depreciate – so if your car is written off or stolen during this time, you know exactly how much your payout will be.

The credit shortfall dilemma

There's also a lot of confusion in the marketplace about credit shortfall. Credit shortfall covers the difference between your car's insured value and the amount you still owe the bank. 

"If you've financed your car, the insurance payout at the time of the car being stolen or written-off can be less than the outstanding finance amount," says Van Vuuren. 

"If you add credit shortfall cover to your policy, your insurer will also pay the amount you still owe the bank after they've settled your claim. Many people think that credit shortfall covers the gap between your car's insured (retail) value and the price of a new car. It doesn't." 

Questions may be edited for brevity and clarity.

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