Beyond insurance – The importance of value-added insurance products
While taking out vehicle insurance is vitally important, consumers don’t always understand the importance of value-added insurance products when taking out a vehicle finance loan. These include solutions like mechanical breakdown warranty, and tyre and rim cover. However, two solutions play a particularly significant role, and these are Extended Cover and Credit Protection. We ask Absa’s Pascal Siphugu to tell us more about this.
What is Extended Cover?
Extended Cover, also known as credit shortfall insurance, top-up or gap insurance cover is designed to cover the difference between your vehicle's retail value (or the amount for which the car is insured) and the outstanding balance or amount you owe on your loan. This cover kicks in if your vehicle is stolen or written off as a result of an accident.
Why is Extended Cover important?
Financing a car means paying monthly instalments to the bank. A vehicle’s value depreciates the older it gets, it will depreciate by 15 to 20% in the first year, and by approximately 50% after five years. Therefore, you’ll have a gap between what your comprehensive policy pays and what you owe the bank. If your car is stolen or written off you’d still need to continue paying your car instalments, and just because it’s worth less doesn’t mean that there will be a drop in the amount you owe on the loan. Your insurance payout may not be enough to cover what is owed on your finance agreement.
If you take a look at the example below, you’ll be able to see how Extended Cover could typically assist and why it’s important.
Vehicle purchase price: R 200 000
|Due by customer
|Payment by insurer
|Outstanding balance owed to the bank
|Settlement from insurance based on vehicle retail value
|Contribution towards excess
Example for illustration purposes only
As you can see, the gap cover will assist in covering the shortfall. The last thing you want is to keep paying off a car that you don’t own anymore.
Another value-added product, the value of which may be underestimated, is Credit Protection. Can you tell us what it is?
Credit Protection is a type of insurance that can be used to repay debt or make monthly repayments on a customer's behalf in the event of an unforeseen life event. It can be used to pay off a range of debts, including vehicle finance loans, home loans, personal loans, credit cards, and so on.
What life events can be covered by credit protection?
Depending on the option you choose, credit protection plans can cover your debt in the event of loss of income, critical illness, temporary disability, permanent disability, terminal illness or death. It will either settle your outstanding vehicle loan or pay your monthly repayments for a limited period of time when your obligations become due if an insured event occurs.
Can a credit provider insist on a customer taking out credit life during the contract period of the loan?
Yes, they can, so that the loan can be paid out if anything happens to the customer that limits their ability to pay their debt.
Learn more about our Absa| Cover your insurance shortfall with an Extended Cover
Learn more about Credit Protection.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.