Should you lower the Value of the asset to get the benefit of low premium? 

This article was posted on 03 June 2016

Posted in Loans

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The purpose of purchasing insurance in South Africa is to protect yourself from any potential financial loss to your assets in case of damaged or being stolen. Of course, being able to save the premium cost is a big factor for successful insurance planning. The easiest way people find to save premium is by insuring the assets for a lesser value. Yes, you will be paying less if you insure your asset for a lower value. Is this a good way of saving insurance premium? The answer is NO. Let us find out why,

Every asset being insured has a value. You deliberately declare a lower value for the asset just to get a reduction in the premium. This leads to what is called "underinsurance". In case an asset is underinsured, the problem comes when there is damage and you claim for it. Let us see how claims are settled in underinsurance cases.

Suppose your home contents worth R500,000 is insured for R250,000. You will be saving on the premium, but now you are underinsured. If a theft of R100,000 has happened. The insurer does a survey of the sum at risk at your premise and finds that the total assets are worth R500,000. Now you have insured only 50% of the total assets. The insurer assumes liability of only up to 50% of any loss. The other 50% is to be borne by you. That means the insurer will pay you only R50,000(i.e. 50% of the loss). 

The home contents insurance claims are paid from a pool created by the insurance company from the contributions of all the policyholders who had opted for insuring their home contents. Now, you opted to insure only 50% of your assets with the insurer, which means that you have accepted to self insure the remaining 50%. The insurer’s liability will be restricted to 50% of the loss in all such cases. 

The same can happen to your car insurance too. If there is underinsurance, the insurance company's liability will be restricted to the proportion of the insured value to the actual value of the car. You should bear the rest. 

Underinsurance doesn’t always happen with an intention to deliberately lower the premium. It can be a result of people calculating the value of items based on depreciation, where as insuring on replacement value basis. To avoid this, you should do an up to date asset inventory of all your household contents based on replacement value basis. 

Underinsurance generally doesn’t apply to insurance policies like health cover or life insurance in South Africa. In life insurance, the agreed sum is paid on your death. In life insurance, there can be inadequacy of the amount received by the family, if you don’t choose the coverage amount correctly. Your dependents will be receiving the full amount of cover chosen by you from the insurance company. But, if you haven’t planned the value properly, they might find the amount insufficient to cover your debts and survive. 

Declaring a lower value is not the best way to lower the premium. There are other ways to reduce premiums in home insurance as well as car insurance. Being underinsured is as bad as being uninsured.

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