The first-time car buyer’s guide to insurance

The world of car insurance can be confusing to navigate for first-time car buyers, as there is already so much to consider when selecting the right car and deal. Ultimately, insurance provides a safety net that returns you to the same financial position you were in before an incident occurred. For many, this safety net could make the world of difference when the unexpected happens.

Is car insurance necessary?
The short answer is yes. You may think you are a good and conscientious driver, but the unfortunate reality is that the way other people drive is completely out of your control. There is also the reality of drunk driving to consider. This remains one of the biggest threats to South African motorists – 961 drunk drivers were arrested in South Africa in January 2022 alone.

Another factor to consider is the prevalence of auto-related crime, including theft and hijackings. This kind of crime can be devastating on multiple levels including financially. So, car insurance is not only about your driving abilities, it’s also about safeguarding against everyday hazards that are outside of your control.

Different types of cover
Each company has different policies with different nuances, but traditionally, car insurance falls into three broad categories: comprehensive, third-party only, and third-party liability with fire and theft cover.

A comprehensive insurance policy provides cover against crime, weather damage or destruction, and when you are involved in an accident (whether or not you were responsible for the accident).

Third-party only policies provide cover in the event that you cause damage to or destroy someone else’s car. This type of cover does not include cover for your own car, so you will need to foot the bill for repairs or replacement.

Third-party with fire and theft insurance covers everything that is included in a third-party only policy, as well as fire, theft and hijacking. With this type of policy, you will not be covered against accidental damage, e.g. colliding with another vehicle or with a stationary object.

What is excess and how does it work?
What many first-time car buyers don’t realise is that before an insurance claim is honoured, the claimant has a financial obligation to pay what is known as the first amount payable or ‘excess’. Your excess amount will be determined by your risk profile.

You also have the option of a voluntary excess, which allows you to set your own higher excess amount and lowering your premium in the process. To make this work for you, you’ll need to weigh up the pros and cons of each option with your adviser.

What is a balloon payment and is it insurable?
Balloon payment arrangements are an increasingly popular way of financing a car in South Africa. These arrangements allow car buyers to enjoy relatively lower premiums, paying a lump sum (balloon payment) when the loan term comes to an end.

While this may be a viable way of paying off a car for some people, for others it’s a risky decision that may prove expensive when you want to pay off your vehicle. If you’re involved in an accident before you’ve paid off your car you will be liable to settle the balloon payment. To help cover this cost, you can apply for shortfall cover to make up the difference between the market value of your car and the amount you still owe on the car at the time of an accident. Adding shortfall cover to your policy will increase your premium, but the risk of losing your car while you’re still paying it off is not something worth gambling on.

How will my premium be determined?
Insurers base their premiums on each individual’s risk profile. Aspects that are considered to determine your risk profile include your age, driving experience, your claims history, your average annual mileage and your credit rating. Other determining risk factors include the make, model and value of the car as well as geographic risk factors depending on where you live. For instance, if you live in a rural Free State town you will pay less than if you live in Gauteng.

First-time car buyers with little driving experience can generally expect higher premiums than experienced drivers, but by driving responsibly, avoiding making unnecessary claims and adding security measures to protect your car, you can negotiate lower premiums over time.

It is important to note that if you buy your car using vehicle financing, most banks will require you to insure your new car even before you leave the dealership, as part of the loan agreement. There are a variety of factors to consider when selecting the right insurance package, and cost is only one element. Therefore, it is important to speak to a financial adviser to help you negotiate the best deal whilst ensuring you have adequate cover for one of the most valuable assets you can own.