If a claimant’s vehicle is written off by the insurance company in a crash or theft, the resulting payout can vary wildly depending on the type of policy in place. Choosing between market value and agreed value is one decision to be made in a policy. Knowing which tier of protection is best for you can help to save a lot of money in the long run. With the importance of this choice in dictating any potential reimbursement, it’s surprising how misunderstood these terms often are.
Defining market value and agreed value
In the case of an accident where the vehicle is effectively written off as a total loss, a market value settlement means the insurance provider would pay the claimant a sum equal to whatever the estimated car value would have been directly prior to the crash. This is typically the default, or “cheap” insurance setting.
With a market value option in your policy, your premiums are bound to be fairly low, but you won’t stand to get much money back in the event of a worst case scenario.
Agreed value, also known as guaranteed value, is a typically more expensive option where the customer will come up with a number to be paid of with beforehand in the event of an accident. This customized payoff is usually either enough to replace the vehicle in full, or pay off outstanding payments if the car is still being financed. It tends to be significantly more expensive than market value; however, the price distinction depends entirely on the size of the payout.
Market value lowers your monthly premium, increases personal risk
Unless there is something special about the vehicle, market value tends to be the default option. Because most people are going to wish to keep their premiums as low as possible, it’s possibly the option most people would wish to take, unless there are circumstances that would exacerbate the risk of having a crash and losing a vehicle.
If a vehicle is wrecked, a market value situation means it’s ultimately up to the insurer to decide how much you should be paid. Unless you stay up to date with the sale value of your car, you probably won’t be able to predict how much you’ll be reimbursed for. Suffice to say, it’s never nearly as high as you’d ever hope it would be.
Agreed value offers certainty at the cost of higher premiums
If the agreed value is higher than what an insurer would typically pay under market value, the monthly premiums are hiked up. However, this added security is often worth it for people who take this route, especially if the vehicle itself is especially valuable. Special, vintage, or rare vehicles would definitely want to get a more fulfilling level of coverage.
If you’re still in the process of financing a vehicle with a loan, it’s a good idea to insure it in total to the amount you still owe on it. If a financed vehicle is crashed, you’re still responsible to pay it off; a payout to account for this can help to avoid a needless hole in you bank account.
Value depreciation and replacement cost are major factors
From an insurer’s perspective, cars are like diamonds; they cease to be worth nearly as much once they leave the dealership. Value deprecation is in constant effect with your vehicle, and your car’s market value continues to drop with every day you own it for. This generally means that a market value payout for your car will probably only be a fraction what you originally paid for it.
In the event of the worst case scenario, and you were only given part of the money the car was worth, would you have the necessary funds available to pay for the rest of a replacement vehicle? Would losing a car and being unable to replace it yourself ruin your livelihood? Asking yourself these questions should make it clearer whether it’s worth it to be dinged the extra bit each month.
One of the major appealing things about agreed value is that it stays the same; you don’t have to worry about depreciation. However in the case of a long-term relationship with an insurance provider, you may want to reconsider the agreed price later on to account for currency inflation.
What is the likelihood of a write-off event?
There is unfortunately no way to be able to account for the real likelihood of your car being stolen or otherwise wrecked. However, putting the car’s use and your environment into consideration, there are certain life circumstances that beg for a stronger contingency plan.
If you live remotely and operate your vehicle gently, the risk of needing to file a claim goes down, as does the need to mount up your monthly premium. Although it’s not recommended to be cheap and careless with your insurance, you might stand to keep your insurance more basic if your vehicle’s going to be out of harm’s way regardless.
Is there a final recommendation for a particular situation?
Ultimately, you need to factor in and balance a number of major factors together to see which one jumps out first. The importance of your vehicle should dictate whether you go for agreed value or not. If it’s particularly valuable by itself, or otherwise vital to your likelihood, having the added certainty of agreed value can be a lifesaver. As always, asking your insurance representative for a recommendation based on your circumstances may shed some fresh light on the decision.