Taking out car insurance may be less of a stock standard procedure than many motorists realise. Insurance policies are designed to provide coverage for specific risks and events and are tailored to meet the unique needs and circumstances of each policyholder. One of the most important factors to consider when choosing the appropriate level of cover is the value of the vehicle, which will depend on a few distinct perspectives on how much the asset is worth.

Commenting on this is Siyakha Masiye, Spokesperson at MiWay Insurance who explains that there are different ‘levels of value’ that need to be considered when taking out car insurance. These include retail, market, trade-in and special agreed value. “Each of these value options has specific implications for the amount the car is insured for, and ultimately, the amount that can be claimed for in the event of an accident or write-off.

The choice that car owners make will depend on a range of factors such as budgetary constraints, risk tolerance and the importance of full replacement versus cost-efficiency. Either way, it’s important for motorists to be equipped with the right information on what these value options mean for their insurance coverage to make an informed decision.”

Retail value

The retail value of a car refers to the current selling price on the dealer’s floor as per the TransUnion Dealers' Guide. In other words, a car’s retail value will match the purchase amount and the level of value that most insured parties opt for when taking out cover.

Having a car insured for its retail value means that in the unfortunate event that the car is completely written-off and a claim is processed, the insurer will pay out the amount needed to replace the vehicle with one of the same make or model taking into consideration the condition of the car and the mileage.

Masiye states “This level of value generally results in higher premiums compared to other value options. However, it is the option that offers car owners the most peace of mind as it provides financial protection to cover the car’s replacement value and is the most effective way to avoid untimely out-of-pocket expenses.”

Market value

On the other hand, some motorists choose to insure their vehicle at its market value, which is the price it would yield if sold under current market conditions. It is the average between the vehicle's retail and trade values. It is lower than the retail value. In these cases, if the insured car is involved in an accident, stolen, or damaged beyond repair, the insurance payout will be determined based on the car's market value at the time of the incident.

The claim calculation will consider factors such as depreciation, condition, and market trends. An easy way to understand market value is to see it as the amount someone would pay for the car if it were to be sold second-hand through a private sale.

As such, insuring a car at market value exposes the insured to more volatility because market values typically fluctuate over time. So, while insuring a car at market value may result in lower premiums compared to insuring it at retail value, this typically involves taking on more risk in the long run.

Trade-in value

Some policyholders may opt to insure their vehicle at its trade-in value, which is the amount the car would yield if it were traded in at a dealership or retail outlet. This is also commonly referred to as the ‘book value’ of the vehicle. Generally, the trade-in value of a car is lower than its retail or market value.

Insuring a car at trade-in value may therefore result in lower premiums compared to other value options but involves a higher degree of risk that will fall on the shoulders of the insured.

Agreed value

Some insurers offer a ‘special agreed value’ option in addition to the more standard levels of cover. In these cases, the car owner will enter into an agreement with the insurer that accounts for a predefined value over a specified time period. This means that if the car is written off or stolen, the insured will know exactly what payout to expect in the event of a valid claim.

Typically, these types of insurance agreements are reserved for classic and rare vehicles that are difficult to replace and not as readily available as modern makes and models. In these cases, car owners will be aware that in the event of the complete destruction of their vehicle, the chances of the insurer replacing it with a similar vehicle will be relatively small.

“It’s important for policyholders to discuss their options with their broker or insurer in as much detail as possible. When choosing insurance, it’s vital to do a mental fast-forward to claims stage and to consider the worst case scenario, which is what would happen if the vehicle needs to be replaced completely and the financial implications involved. This will provide policyholders with a good reference point for gauging what their unique needs are now and in the future.” Concludes Masiye.