Securing depreciation protection as part of your car insurance in New Zealand is crucial to avoid significant financial losses if your car is written off. Understanding how depreciation works, the types of coverage available, and which providers offer the best deals can make a big difference. This guide provides detailed tips to help you navigate the process.
Understanding Depreciation and Its Impact
Depreciation is the decrease in the value of an asset over time. For cars, this means that the amount you could sell your vehicle for reduces as it gets older. This happens due to wear and tear, mileage, market conditions, and the simple fact that newer models become available. When you file a car insurance claim after a total loss (write-off), the insurer will typically compensate you for the current market value of the car, which is invariably less than what you originally paid.
Consider this example: You buy a new car for $40,000. After three years, due to depreciation, its market value is only $25,000. If the car is written off in an accident and you only have standard comprehensive insurance, you will likely receive $25,000, leaving you $15,000 short of what you originally paid. Depreciation protection aims to bridge this gap, providing a higher payout closer to the original purchase price.
Types of Depreciation Protection Coverage
Several options can help protect you from the financial sting of depreciation:
- New Car Replacement: This is generally the most comprehensive form of depreciation protection. It typically applies to new cars (usually less than one or two years old) and ensures that if your car is written off, the insurer will replace it with a brand-new vehicle of the same make and model, or its equivalent if the model is no longer available.
- Agreed Value Policies: With an agreed value policy, you and the insurer agree on the value of the car at the start of the policy. While this value will still depreciate, it provides a more predictable payout in the event of a total loss. These policies can be beneficial for classic cars or vehicles with significant modifications.
- Gap Insurance: Although not strictly depreciation protection, gap insurance covers the “gap” between the market value of the car and the outstanding amount you owe on your car loan. This is particularly useful if you financed your car, as the payout ensures you are not left owing money on a vehicle you can no longer use.
- Limited Depreciation Coverage: Some insurers offer policies that provide a percentage of the original purchase price, or a capped amount above the market value, in the event of a total loss. This is a less comprehensive option than new car replacement, but it still offers some level of protection against depreciation.
Tips for Securing the Best Depreciation Protection
1. Shop Around and Compare Policies
Don’t settle for the first car insurance quote you receive. Compare policies from multiple providers to understand the different levels of depreciation protection available and their associated costs. Websites like Compare Insurance or Money Compare can help you compare several insurers side-by-side, however it is best to compare directly with a few providers to get your tailored pricing. When comparing policies, pay close attention to the following:
- Coverage details: What is covered, and what is excluded? How is the payout calculated?
- Eligibility criteria: Are there any age, mileage, or vehicle type restrictions?
- Excess: How much will you need to pay out of pocket in the event of a claim?
- Premiums: How do the premiums compare between different policies with similar coverage?
It’s not just about price. Cheaper policies often lack comprehensive depreciation protection, so consider what you want covered. Some insurers will provide policy information documents that set out the fine print.
2. Understand the Policy’s Fine Print
Before signing up for a car insurance policy, carefully read and understand the fine print. Pay close attention to the following:
- Depreciation Calculation: How does the insurer calculate depreciation? Is it a fixed percentage per year, or does it vary depending on factors like mileage and vehicle condition?
- Total Loss Definition: What constitutes a “total loss”? Some policies may have specific criteria, such as the repair cost exceeding a certain percentage of the car’s market value.
- Exclusions: What situations are not covered by the policy? Common exclusions include damage caused by illegal activities, racing, or off-road use.
- Excess Options: Can you choose a higher excess to lower your premiums, or vice versa? Understand the trade-offs and choose an excess amount you’re comfortable paying.
Understanding these details will help you avoid unpleasant surprises if you need to make a claim.
3. Consider New Car Replacement Cover
If you’re buying a new car, new car replacement cover is the gold standard of depreciation protection. It ensures that if your car is written off within a specified timeframe (usually one to two years), the insurer will replace it with a new one of the same make and model. This eliminates the financial loss associated with depreciation.
For example, you buy a new car for $45,000 and have new car replacement cover for the first year. Six months later, the car is written off in an accident. The insurer will replace it with a brand-new car, even though its market value may have already depreciated to $40,000. This gives you complete peace of mind during the initial period of ownership.
4. Evaluate Agreed Value Policies for Unique Vehicles
If you own a classic car, a modified vehicle, or a car with significant upgrades, an agreed value policy may be the best option. With this type of policy, you and the insurer agree on the car’s value at the start of the policy term. This value is typically based on a professional appraisal or Competitive research.
While the agreed value will still be subject to depreciation over time, it provides a more predictable payout in the event of a total loss. It also ensures that the value of any modifications or upgrades is taken into account, which may not be the case with a standard market value policy.
5. Think About Gap Insurance When Financing
If you’re financing your car, gap insurance can be a valuable addition to your car insurance coverage. It covers the “gap” between the car’s market value and the outstanding amount you owe on your car loan. This is particularly important if you made a small down payment or financed the car for a long term, as depreciation can quickly outpace your loan repayments.
For instance, you buy a car for $35,000 and finance it with a $30,000 loan. After two years, the car is written off and its market value is only $20,000. However, you still owe $25,000 on the loan. Without gap insurance, you would be responsible for paying the remaining $5,000. Gap insurance would cover this amount, ensuring you’re not left owing money on a car you no longer have.
6. Negotiate and Ask Questions
Don’t be afraid to negotiate with insurers and ask questions about their depreciation protection offerings. Here are some questions you might want to ask:
- “How does your depreciation protection work?”
- “What is the maximum payout under this policy?”
- “Are there any limitations or exclusions to be aware of?”
- “Can I increase the level of depreciation protection for an additional premium?”
- “What happens if I modify my car – will the depreciation protection still apply?”
Insurers are more likely to provide better deals and clarify their policies if you negotiate. Also, don’t be afraid to walk away if the offered terms don’t meet your needs.
7. Consider the Car’s Depreciation Rate
Some cars depreciate faster than others. Factors like make, model, popularity, and reliability can all affect a car’s depreciation rate. Research the depreciation rate of the car you’re considering buying to assess the level of depreciation protection you’ll need. Some sources, such as Motoring NZ, publish articles about which cars hold their value well in New Zealand.
If you’re buying a car that’s known to depreciate quickly, you may want to opt for a more comprehensive level of depreciation protection, such as new car replacement or gap insurance.
8. Factor in Other Insurance Needs
Your car insurance should not only protect you against depreciation. Think about other risks you would like to be covered for. These may include:
- Third-party liability: Covers damage you cause to others or their property.
- Collision coverage: Covers damage to your car in a collision, regardless of fault.
- Theft coverage: Covers the loss of your car due to theft.
- Natural disaster coverage: Covers damage caused by events like floods, earthquakes, and storms.
- Windscreen cover: Covers the cost of repairing or replacing a damaged windscreen (a common claim in NZ).
Balance your need for depreciation protection with these other coverage considerations to create a comprehensive insurance package.
9. Review Your Policy Annually
Car insurance needs can change over time. Review your policy annually to ensure it still meets your needs and that you’re getting the best possible deal. Factors that may affect your insurance needs include:
- The car’s age and value
- Your driving habits
- Changes in your financial situation
- Availability of new insurance products or options
Renewing car insurance is an important process. If your car has depreciated substantially since last renewal, you might find you no longer need depreciation protection.
10. Increase Your Excess to Lower Premiums
If you’re on a tight budget, increasing your excess can be an effective way to lower your car insurance premiums. However, be sure to choose an excess amount you’re comfortable paying out of pocket in the event of a claim.
For instance, if you increase your excess from $400 to $800, you may see a significant decrease in your annual premiums. However, if you then need to make a claim, you’ll be responsible for paying double the excess.
11. Look for Discounts
Many insurers offer discounts that can lower your car insurance premiums. Some common discounts include:
- Multi-policy discount: Offered when you bundle your car insurance with other policies, such as home or contents insurance.
- Safe driver discount: Offered to drivers with a clean driving record.
- Loyalty discount: Offered to long-term customers.
- Low-mileage discount: Offered to drivers who drive fewer than a specified number of kilometers per year.
- Security system discount: Offered to car owners who have installed security systems, such as alarms or immobilizers.
Ask insurers about available discounts when getting a quote.
12. Check the Insurer’s Financial Strength Rating
Before committing to an insurance policy, check the insurer’s financial strength rating. This rating assesses the insurer’s ability to pay out claims in the event of a major event or financial downturn. Ratings are typically provided by independent agencies. A higher rating indicates a more financially stable insurer. Some examples are Moody’s and Standard & Poor’s. While it is not common for insurers to collapse in New Zealand, having confidence in the financial stability gives you peace of mind.
Case Study: Depreciation Protection in Action
Sarah purchased a new car for $50,000 and opted for a comprehensive insurance policy with new car replacement cover for the first year. Six months later, the car was written off in a collision. Without the depreciation protection, she would have received only the car’s market value, which was $45,000. However, because she had new car replacement cover, the insurer provided her with a brand-new car of the same make and model, saving her $5,000 in depreciation costs.
John purchased a used car for $20,000 and financed it with a $15,000 loan. He took out gap insurance to cover the difference between the car’s market value and the outstanding loan amount. After a year, the car was written off and its market value was only $12,000. However, John still owed $14,000 on the loan. The gap insurance covered the $2,000 difference, ensuring John wasn’t left owing money on a car he couldn’t use.
FAQ Section
What is the difference between market value and replacement value when it comes to car insurance?
Market value refers to the current worth of your car, taking into account depreciation. Replacement value is the cost of replacing your car with a brand-new one of the same make and model. Most standard car insurance policies pay out the market value in the event of a total loss, while new car replacement cover pays out the replacement value.
How long does new car replacement cover typically last?
New car replacement cover typically lasts for the first one to two years of the car’s life. After that, the policy will typically switch to paying out the market value in the event of a total loss.
Is depreciation protection worth the extra cost?
Whether depreciation protection is worth the extra cost depends on your individual circumstances. If you’re buying a new car, financing your car, or own a unique vehicle, depreciation protection can provide valuable peace of mind. However, if you have an older car with minimal depreciation, the additional cost may not be justifiable.
Can I get depreciation protection on a used car?
While new car replacement cover is typically only available for new vehicles, you may be able to get an agreed value policy or gap insurance on certain used cars. Check with insurers to see what options are available.
Will modifications to my car affect my depreciation protection coverage?
Modifications to your car can affect your depreciation protection coverage. Some insurers may not cover the value of modifications, while others may require you to specifically declare them and pay an additional premium. If you’ve modified your car, it’s important to discuss this with your insurer to ensure you have adequate coverage.
What should I do if I disagree with the insurer’s valuation of my car?
If you disagree with the insurer’s valuation of your car, you have the right to dispute it. Provide evidence to support your claim, such as a professional appraisal or examples of similar cars being sold for a higher price. If you’re still not satisfied with the insurer’s response, you can escalate the matter to the Insurance & Financial Services Ombudsman (IFSO) scheme, which provides a free and independent dispute resolution service.
How often should I review my car insurance policy with depreciation protection?
You should review your car insurance policy with depreciation protection at least once a year, or whenever your circumstances change (e.g., you move, you buy a new car, or you make modifications to your car). Regularly reviewing your policy ensures that you have adequate coverage and are getting the best possible deal.
References List
- Compare Insurance (compareinsurance.com.au)
- Money Compare (moneycompare.co.nz)
- insurance & Financial Services Ombudsman (IFSO) scheme
- Motoring NZ (motoringnz.com)
- Moody’s (moodys.com)
- Standard & Poor’s (standardandpoors.com)
Protecting your car’s value is a smart financial decision. By comparing policies, understanding the fine print, and considering the specific needs in New Zealand, you can secure the best possible depreciation protection. Don’t wait until it’s too late. Start shopping around for the right coverage today and drive with confidence, knowing that you’re financially protected in the event of a total loss.
