Understanding the real value in value-added insurance

Your gleaming new wheels are ready for you to whisk them off into the sunset. You’ve signed all the papers and sorted out the vehicle financing; now there’s only one final task standing in the way of you yanking off that giant red bow and leaving the dealership in your dust: motor vehicle insurance.

But when you call your financial adviser thinking that taking out a policy will be as smooth as your new ride, you’re bombarded with an overwhelming array of extras: excess reducers? Credit shortfall? Inception value cover? What are these? And more importantly, are they really necessary?

While these value-added insurance products are always optional, they can – as their name implies – add a great deal of value when taken out in conjunction with your short-term insurance policy.

When incidents occur, we often think: “Phew, at least I have insurance!” Yet, in many cases, we still find ourselves coughing up for unplanned costs such as hefty excesses (a first amount payable by you in the event of a claim), or submitting a claim and then facing higher premiums in the long run.

Value-added insurance products can – for a few rand more – help you to eradicate these smaller risks, which might end up costing you a great deal down the line.

Value-added insurance products are everywhere – you’ve no doubt been offered one at some point in your life, perhaps without even realising it. However, awareness and education around them is still limited, as was the case with gap cover a few years ago.

Here are some of the most common categories of value-added insurance products and what they bring to the table.

– Excess reducers: this product pays your first amount payable (excess) on your behalf. It could be limited to a single risk like your vehicle cover, or cover your entire policy, with no excess payable at all. You must have a valid claim on your main insurance product for the excess reducer to kick in.

– Scratch and dent cover: these ‘mini-policies’ mean that should you pick up some minor damage thanks to that old nemesis, the dreaded Parallel Park, you can have these scratches taken care of without shelling out thousands of rand.

These policies are taken out over and above your insurance policy, and cover you for the cost of slight cosmetic repairs to the bodywork of your car for a set time. They are generally very affordable, typically costing a few hundred rand.

– Credit shortfall: should you purchase your car via vehicle financing and your car be written off or stolen, this insurance covers the gap between what your insurer pays out (the insured value) and the balance of what you owe as per your credit agreement, which is often significantly more as a result of interest or balloon payments.

– Inception value cover: the cost of vehicles has been steadily climbing since 2022, which is where a relatively new insurance product called Inception Value Policy (IVP) comes into play. If you bought your car for R500 000 in 2021 but today it is worth R350 000, your insurer would only pay out the current retail value should it be stolen or written off.

An IVP pays out the difference between retail value at inception and retail value at date of loss. This means that you will get out the full R500 000 that you paid for your vehicle in 2021.

Consult has recently gone one better with its Original Inception Value (OIV) product, which includes inflation-linked escalation.

This was designed as Consult realises your R500 000 in 2024 will not get you the same car it did in 2021, and this is where a product like this adds immense value.

Chat to your financial adviser about the value-added insurance products they offer, as these are often extremely cost effective and can ultimately save you a great deal of money down the line. – IOL

* Kuyler is the head of short-term insurance at Consult by Momentum.