When you renew your car insurance, you will have to decide on the sum insured for your car. So how do you determine the sum insured? Do you choose the market value or the agreed value? Let’s find out in this article.
What is “sum insured”?
Before we go into the details, let’s first understand the meaning of “sum insured.”
The sum insured for a car refers to the maximum amount for which your car is insured. According to the General Insurance Association of Malaysia or Persatuan Insurans Am Malaysia (PIAM), the basis for assessing the true worth of a car is its market value at the time of a loss. Further, the sum insured should not be below the market value. If the sum insured is below the market value, then the policyholder will have to bear the difference.
When deciding on the sum insured for your car, you may choose either the market value or the agreed value.
What does “market value” mean?
Market value refers to the current calculated worth of your car. If you choose the market value, your car is covered for what it is currently worth in the market. Say that you choose the market value as the sum insured for your car, your insurer will give you a payout according to the market value of your car at the time of theft or loss (not the market value at the time of your insurance renewal). Refer to our example below.
Example: You have chosen the market value of your car as the sum insured. At the time of insurance renewal, your car was valued at RM100,000. 11 months after the insurance renewal, your car met with an accident and was completely wrecked. Instead of getting RM100,000, you only received RM85,000 in compensation as your car market value has depreciated by 15% at the time of loss.
What does “agreed value” mean?
Agreed value is the value agreed upon by both the insurer and policyholder at the time of insurance renewal. Insurers determine the agreed value based on a few underwriting factors and risk assessment. Say that you choose the agreed value as the sum insured for your car, your insurer will give you a payout exactly as the agreed value. Below is an example.
Example: You have chosen the agreed value of RM100,000 as the sum insured for your car. 11 months after the insurance renewal, your car met with an accident and became a total wreck. You received the full amount of the agreed value, RM100,000, even though your car’s market value has depreciated by 15% at the time of loss.
Market Value vs Agreed Value
Many users may consider that the insurance premium following the agreed value is fairer. Many would think that they should get compensation as per the sum insured for their car, not the market value of their car at the time of theft or loss.
However, you actually have to pay a lower premium if you choose the market value than the agreed value as your car sum insured. Despite being able to pay a lower premium, here’s the risk: car market value depreciates around 10-15% annually. So as mentioned earlier, you can expect a lower payout or compensation at the time of theft or loss due to the value depreciation.
On the other hand, if you choose the agreed value as your car sum insured, the premium you have to pay may be higher. But the upside is the compensation following a loss or theft is not affected by the market value, so you’ll get the full amount as your insurer and you have agreed at the time of insurance renewal.
Risk of over-insurance/under-insurance
The biggest risks of following the market value are over-insurance and under-insurance.
Say that the sum insured of your car is above the market value (over-insurance), the compensation you will get will still follow the market value at the time of theft or loss. Meanwhile, if the sum insured is below the market value (under-insurance), the compensation you will get will be lower than the market value.
Before you agree to any sum insured, ensure that you check your car’s market value.
Is the agreed value or market value better?
Understand first the risks of choosing either the agreed value or market value before deciding on your car sum insured. Let’s help you understand the risks.
When is choosing the agreed value better for you?
Say that you have just bought a brand new car, with a bank loan. Choosing the agreed value may be a better option. Why? Say that your car is stolen or wrecked by an accident, you will get the amount as agreed earlier when you buy or renew your auto insurance. You can use the payout to pay the car loan or even buy a replacement car.
Note that not all insurers offer the option of setting the car sum insured following an agreed value. Do check with your preferred insurers whether they offer this option.
When is choosing the market value better for you?
On the other hand, if your car is rather old (say, more than 15 years old) and debt-free, you may consider choosing the market value. The compensation you can get will be lower, but the premium you will have to pay is lower than choosing the agreed value as the sum insured.
Can you insure your car below the market value?
You are not encouraged to set the sum insured below the market value. In fact, some insurers do not allow their policyholders to under-insure their cars.
For example, the market value of your car is RM20,000. However, in order to get a lower premium, you choose to insure your car for only RM15,000, which is below the market value. Some insurers may not allow this. Even if some do allow this, the compensation you will get at the time of theft or accident will also be lower than the market value.
Get professional advice before renewing your car insurance
Having read the above, we strongly encourage you to understand first the risks and benefits of choosing either the agreed value or market value as the sum insured for your car. This is to ensure that the coverage you will get is sufficient.
Would you like to get some advice before renewing your vehicle insurance? We are happy to help. Just reach out to Bjak to get exclusive customer assistance from insurance experts, anytime you need.
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