Making a large purchase such as buying a new car, or investing in a property, is not a decision to take lightly. It’s also a decision that takes a lot more thought these days, in light of our struggling economy. While these purchases are rarely simple to complete, it is important to choose the right asset to acquire in the first place, as this is a choice that will have long-term financial consequences.
It might seem affordable now, but will it be when you have truly considered your purchase?
What many people fail to consider when the time to buy arises, is what the insurance on their new purchase will cost as part of the deal. Incorporating insurance premiums into your budget is essential, to protect what you are buying (even beyond making the final payment). If you can’t manage the insurance cover, you arguably can’t afford to make the purchase.
Sometimes it comes standard
Purchasing a new car or home always requires insurance cover. It’s important to assess what is required and what your monthly insurance expenditure will be. On a more expensive asset, the insurance is likely to be considerably more expensive. A car worth R300 000, for example, will require different cover to one valued at either less or more. Factors like value, usage and who the regular driver will be, also influence the premium.
While you are paying off your car, you should also have cover in case the vehicle is written off. Imagine having to pay for the vehicle when you can no longer use it. Car insurance is generally automatically adjusted at renewal and remain in place throughout the journey of paying off the car and owning it. Even when your car has been paid off, you need to ensure it remains covered because you could have an accident with serious financial implications.
You have the option to add your new purchase to your existing insurance (for example, you might be covered by one insurer on your home and contents already, but now you are buying a car and the car dealer offers you insurance). Often, having all your insurable interests under one policy can mean a cheaper insurance premium, and if the seller (or bank) agrees with the conditions and accepts that your risk is covered, this is simple enough to do.
Keep an eye out for what you can’t see
When buying a new property, it can be worth the effort to get a professional contractor to assess if any fixtures could result in subsidence or other damages over time. You will need to notify your insurer about any issues upfront, and may be able to make some adjustments to the property to bring it up to insurable standards. This is a cost you need to think about before you sign on the dotted line. You may have major maintenance costs ahead or may find the property will be too expensive to insure (even if only in time).
A property is usually a purchase you’ll keep for many years, and throughout that time, you’ll need insurance cover. Even when the bond is paid off and you own the home, a fire or flood could destroy everything you’ve worked so hard to pay off. So, while you may think you won’t have the bond to pay, you still need to budget for the insurance. The true replacement cost in your policy also needs to be kept up to date.
Times are changing
With climate change creeping in, coastal properties are becoming less insurable as the risk of flooding increases. It’s difficult to think ahead and it’s not necessarily fair to have to forego your dream of living by the sea, but performing a due diligence on the property before you buy could save you a lot down the line. Due to risks such as location, insurance is sure to be a costly aspect of the purchase. If you are sure you can accommodate it in your budget, go for it, but be very sure about your sums. The same can be said no matter where you choose to buy – it must be affordable to insure.
You may be able to afford insurance for a large purchase over a shorter period, but remember that your asset should be covered for its entire lifetime, unless you’re willing to forego it altogether. Each large purchase is unique, as is each budget, so keep yours in check and be realistic about the future.