Should you opt for flat or % based car insurance excess?

car insurance

Tell us, what do you expect from your insurance?

Some of us expect to be better off after a claim. But for most of us, we simply want to be in the same situation as we were before the loss. In this blog post, we look into car insurance excesses and how to avoid picking the wrong option when you take out your car insurance cover. It seems like something you can simply skim over during your chat with your broker or direct insurer, but it might come back to haunt you.

If you have car insurance in place, you have a car. Let’s start with that.

Everyone seems to be driving a new car nowadays. Now that wouldn’t be so shocking in of itself if it wasn’t for the price of new cars:

  • A bottom of the range Toyota Yaris costs R235 400
  • A Hyundai i20 goes for R234 900
  • A Mercedes C class clocks in from R590 168 according to their website and we are willing to bet that all you get for that is a chassis and four wheels (everything else is going to cost a whole bunch extra).
Why then spend hundreds of thousands on a car & then shoot yourself in the foot when it comes to insurance?

Meet Frank.

Frank owns an Audi S3 valued at just over R650 000. Frank is a successful small business owner, and while he keeps a tight rein on his business, he’s far from clued up when it comes to his car insurance.

  • His car insurance is dirt cheap, so he’s not complaining about that
  • His policy information is all up to date, so there won’t be a problem with a claim coming back rejected, BUT
  • He’s going to get hammered when he claims because of his percentage-based excess

Let’s first understand what and how insurance excesses work and then find out why Frank is going to feel disgruntled at claim stage.

First off, what is an insurance excess?

An excess is an amount you, as the insured, must pay every time you wish to claim. Call it what you like, it’s there to discourage you from making unnecessary claims, and it’s commonly called compulsory excess. There is also something known as voluntary excess. Voluntary excess is in play when you agree to pay an additional amount over and above the compulsory excess in exchange for an even cheaper monthly premium.

So here is how an excess works: If you have a car accident – and your excess is R1 000 – this is the amount you pay to the panel beater when you arrive to pick up your car.

Are there different types of excesses?

Offhand, we can think of three:

  • Flat excesses
  • No excesses and
  • Percentage based excesses

Let’s look at each of them in more detail.

Flat excess

This type of excess is very popular nowadays. There’s a flat amount, let’s say for argument’s sake, R3 500 which is paid by you regardless of how big or small your claim is. The one catch is that additional amounts could be payable. For instance, there might be an additional amount payable when:

  • the driver at the time of the accident is younger than 25
  • the driver has a license that is less than two years old

* Make sure you double-check your policy wording for this

No excess

If you’ve reached retirement age, then excesses usually fall away. If you’re a pensioner, check your policy schedule for excesses. If you see excesses, raise a stink with your insurer. The other reason you might not see an excess built into your policy is that you are paying extra not to have one. Most of us know this as ‘waiver of excess.’

Percentage based excess

In the good old days, all insurance excesses were percentage-based, and they’re still popular with many commercial insurance policies.

So how do you know if you’re paying a percentage-based excess?

Look for the words ‘excess’ and for a sentence which says something like this:

Your excess is 5% of the claim with a minimum of R3 000 per claim

So, imagine for a moment you have a car insured for R50 000:

  • R50 000 x 5% = R2 500
  • Which is less than the minimum of R3 000
  • That means your excess is R3 000, simple enough to understand

Now imagine your car is worth R100 000:

  • R100 000 x 5% = R5 000
  • Which is more than the minimum of R3 000
  • Which means your excess is R5 000
Why is Frank going to get hammered at claim stage?

Frank recently bought the Audi S3 for around R650 000. Here is his excess structure:

  • Own damage – 5% of claim amount with a minimum of R3 000
  • Theft/Hijacking – Additional 5% of claim amount with a minimum of R3 000 (unless a factory-fitted tracking device is fitted) in which case this excess is waived.

Can you imagine what kind of excess Frank was in for?

R650 000 with a 5% excess means R32 500 if the car is written off.

If the car is stolen, well that is more pain and suffering.

R650 000 x 10% means no car and a R65 000 excess to sort out. Ouch, that is going to hurt. And remember that when he buys a new car, he’ll also have the pleasure of paying VAT on that as well.

To be clear, if the cars retail price is R650 000 including VAT, the price before VAT is R565 217 – We could be wrong, but that’s R84 782 in VAT!

While R65 000 might be a lot for you and me, for Frank it was a risk he was willing to take when he signed up the policy.

But there was one thing Frank hadn’t considered – He owed the bank far more than what the car was worth. To be exact, he owed close to R700 000 because of finance charges.

Just so we’re on the same page here; if Frank wrote his car off, he’d have to pay:

  • the R32 500 excess as well as
  • the R50 000 settlement value.
  • We’re talking about R82 500 as his overall loss.
Getting back to why you take out insurance in the first place
  • Isn’t it to be in the same place as you were before the loss? Was this what happened to Frank? Let’s replace his car with a similar model – R650 000
  • Amount paid out by his insurance company – R617 500
  • Amount of that which was used to settle outstanding finance – R50 000
  • Franks left with R567 500 to buy himself a similar car

Frank wasn’t in the same position as before. That much is obvious.

Insurance will never put you back into the exact same situation as you were in before your claim. But a percentage-based excess could make your situation far worse, especially if you are driving an expensive car.

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The InsuranceFundi Team

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