When you buy a vehicle, you are paying the market value of that vehicle. This can be a brand new vehicle or a used vehicle. Over a vehicle’s lifetime the value changes based on its usage and condition. This fluctuation in value we call “actual cash value” or “ACV.” When you have an accident or insurable loss, the damage to your vehicle is repaired or replaced with parts of similar condition or you are paid the actual cash value for the vehicle if it is deemed a total loss.
So what is “Actual Cash Value?”
ACV is calculated as: replacement cost less depreciation. This means your settlement will be valued based on the year built, mileage and overall wear and tear on the vehicle.
Why is this important?
If you finance a vehicle, you may find yourself borrowing funds for over 5-7 years for your vehicle. During this time, your vehicle may depreciate faster than you are paying down your debt.
For example, you purchase a new Dodge Durango for $63,000. After 4 years of ownership, you still owe $25,000 of your loan. However, the vehicle may only be worth $19,000. If you are in an accident and the vehicle is deemed a total loss, you will only be paid what the vehicle is worth; in this case, $19,000. This will leave you with a balance of $6,000 to pay for a vehicle you no longer own.
How can I protect myself from this problem?
If you purchase an Extension Auto Policy (Auto Pak), you can add the replacement cost endorsement to protect yourself financially from depreciation. This endorsement will insure your to the full replacement value of your vehicle. This coverage is available for brand new vehicles as long as we add the coverage within 120 days from delivery. The premium is calculated on the value of the vehicle which we calculate based on your bill of sale (MSRP).
If you purchase this coverage with SGI Canada, you have 2 years of full replacement value (plus inflation) for all insurable perils. After 2 years, you will continue to receive this coverage for an additional 3 years, however, you are restricted to collision coverage ONLY. However, 5 years of replacement cost coverage would cover most peoples loan terms on the vehicle. Very important to have in place for the duration of your loan.
The premium of this coverage is based on the value of your vehicle shown on your bill of sale. For example: $50,000 vehicle would cost approximately $75 for the replacement cost endorsement. This would be additional to the base price of your extension auto policy.
So how does this work?
If you are in an accident and your vehicle is deemed a ‘total loss,’ In Saskatchewan, SGI will do an estimate on the replacement value of your vehicle. In other words, if they go to a dealership and try to buy your exact vehicle with the same options, what would that cost? Then they will allow you to go buy that vehicle and they’ll pay for it. If they no longer make your model or style of vehicle, you might have to choose a different model. To which, they will pay you out for the replacement value, plus inflation and you can go choose a different vehicle.
What happens if I buy a vehicle that is not brand new, but still has significant value? For example, a dealer demo vehicle or a luxury vehicle.
Good news for you, through our sister company, Block’s Agencies, they have access to another insurance company, Optiom, that can insure your vehicle for your purchase price. This would be a separate policy specifically designed to insure the vehicle for the difference in market value to your purchase or replacement value. Here is a breakdown of what they cover for USED VEHICLES:
OPTIOM BENEFITS FOR USED VEHICLES
- Vehicle models up to 10 years old
- No kilometer restriction
- Under 6,500 kg gross vehicle weight
- The full benefit goes to a new vehicle (no cash in lieu of)
- Used Vehicle Total Loss Benefit
- Optiom Prime will pay the difference between the market value of your vehicle (at the time of the loss) and your vehicle’s value at the inception of the policy
- Vehicle models up to 5 years old up to $60,000 for vehicles valued up to $150,000 and up to 60 months of coverage
- Vehicle models over 5 years old up to $20,000 for vehicles valued up to $150,000 and up to 36 months of coverage
- Total Loss Deductible Reimbursement
- If you must pay your deductible in the event of a total loss, Optiom will reimburse you and pay up to $500 if written off
How much does this cost?
This coverage is based on the value of your vehicle and your claims experience record. For a few hundred dollars per year, you can keep yourself protected from depreciation. There have been certain scenarios where people have traded in their vehicles on newer models and then transfer over their existing loan onto the loan of the new vehicle.
Another example: You purchased a vehicle 4 years ago, and you have now negotiated to purchase a new vehicle and they are taking your vehicle on trade. They are paying you $11,000 for your vehicle, to which you owe $18,000. The new vehicle value is $50,000. With the interest charges and finance fees, your loan on the new vehicle is $55,000, plus the carry-over loan = $62,000. Now you owe $12,000 more than what the vehicle is actually worth. This can potentially be a huge issue if they total off the vehicle.
This is a VERY IMPORTANT reason on why this coverage is so crucial. Whether you finance the vehicle or not, insuring your vehicle against depreciation can be extremely helpful in the event of a claim. So when it comes to insuring your vehicle, please contact our offices as we have many options to keep you financially safe and secure. That way, you aren’t making any future payments on a vehicle that you no longer own.