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Insurers consider the value of your car as well as factors such as its make and model to determine your insurance rates. While it is not the most important factor, your car’s value significantly impacts your insurance rates.
An expensive car is likely to cost you more in insurance premiums because its parts are expensive to repair and replace. Valuable cars are also more likely to be stolen or vandalized. However, if you have a cheaper car, it does not automatically result in lower insurance rates.
Why Are Cheap Cars Expensive to Insure?
While most people assume that luxury vehicles are the most expensive to insure, some cheap cars also come with higher premiums. After all, expensive cars are often targeted by thieves and carjackers and insurance companies charge higher premiums to mitigate those risks.
However, cheaper cars can cost more to insure because they lack safety features which makes them more likely to get stolen or involved in accidents. Cheap cars also have less sturdy frames which may result in more significant damage even in minor collisions.
If you have a cheap vehicle, there is also the risk of you and your passengers getting seriously injured if you are involved in an accident due to its frail frame. Your insurer will factor in all this data before determining your premiums.
Another factor that might affect insurance rates for a cheaper car is the difficulty of obtaining replacement spare parts. As older models get phased out, manufacturers may stop making their parts even as the car prices drop.
There is also the risk of vehicle failure caused by low-quality spare parts which results in more insurance claims.
How Do Insurance Companies Calculate the Value of a Car?
Before determining how much you will pay in premiums, the insurer must calculate the value of your car. Insurers also use this estimate to determine the Insured Declared Value which is the maximum amount you can receive in case of a claim.
Your car’s value is determined using its current market value. This is not the value at which you bought the car as market prices change rapidly. To calculate the current value, the insurance company will subtract your car’s depreciating value from its market value. The current value is also the car’s Insured Declared Value.
In case of an accident where your car is completely destroyed and written off, the insurance company will settle the full IDV indicated when you bought your insurance policy. The higher your IDV the more you will receive as settlement.
It is critical to ensure that you get a higher IDV value when buying your policy. You can achieve this by getting quotes from different insurance companies and settling for one that offers an IDV that is closest to your vehicle’s current market value.
You can also choose to buy zero-depreciation as an add-on cover to increase your Insurance Declared Value. This prevents the insurance company from subtracting the depreciating value from the current value when estimating its IDV.
You may have to pay higher premiums for the zero-depreciation cover, but it is worth it to get a higher IDV. One major setback with this option is that most companies do not offer zero-depreciation add-on cover for cars that are older than 5 years at the time of buying the insurance cover.
How Does Your Car’s Value Affect its Insurance Group?
Insurance groups are categorized from 1 to 50. Cars in group 1 are the cheapest to insure while those in group 50 are the most expensive. Some factors that determine your vehicle’s insurance group are:
● Damage and cost of parts
● Repair costs
● Repair duration
● Car performance
● Security features
● Safety features
● Car Value
Repair costs account for over 50% of car insurance claims. Luxury cars automatically have higher repair costs and rank higher in the insurance groups. Keep in mind that some cheap cars may also rank higher in the insurance groups because of difficulty in obtaining parts for repair and replacement.
Does Upgrading Your Car Affect Its Insurance Rates?
Should you decide to buy a new car, you can transfer your older car’s insurance policy to your newly acquired vehicle. You are required to inform the company and submit the necessary documents to get a transfer.
However, upgrading your car increases its premiums. A new car poses different risks compared to an older model and comes with different liabilities.
A high-value vehicle might have more expensive parts which cost more to insure resulting in higher premiums. Your insurer may ask you to pay the difference in premiums immediately after the transfer is effected.
Be sure to inform your insurance company when you upgrade your car to transfer the policy. Failure to inform your insurer may result in loss in case of a collision because you cannot raise a claim on an uninsured vehicle.
The Deficiency Balance
New cars lose a significant amount on their valuation immediately you drive off the lot. In case of an accident where your car is completely totaled, you may receive an IDV value less than its market value. This is even worse when the car is relatively new.
If your car is financed, the deficiency balance can potentially leave you with negative equity. We recommend looking into gap insurance to cover the total loss when the IDV may be less than the remaining balance in case of an accident.
Other Factors That May Affect Your Car Insurance Rates
Aside from its value, other factors that may affect your insurance include:
● The age of your car
● The car’s engine capacity
● The make and model of the car
● The type of insurance cover you choose
● The safety and security features of the car
● The service location of the car
Your car’s insurance cover can significantly affect its insurance rates. Whether you choose to buy a luxury model or a cheaper option, it is important to shop and compare insurance companies to make sure you choose the best policy for your needs.
