How can purchase price car insurance keep you from being out of pocket?
Purchase price protection insurance protects you from being left out of pocket if your car insurance pays out less than the amount you paid for a new car. Purchase price insurance is designed as a backup for your car insurance policy. In the event of a total write-off, your car insurance will only pay out up to the sum insured.
This article will cover how purchase price insurance actually works, who it may be suitable for and what to look for in a policy.
How does it actually work?
If you insured your car at market value, your payout will be the amount the car was worth at the time of the accident, subject to depreciation. This amount might be considerably less than you paid at the time of purchase.
When you make a claim on a purchase price insurance policy, you will get the difference between your car insurance payout and the amount you paid for the car, up to the limits of your policy.
If you take out this extra policy, it means you’ll be more able to afford a replacement car of similar quality, rather than needing to downgrade after an accident.
Note that purchase price insurance is different from gap insurance, which instead covers the difference between the amount you owe your car financier if you have a loan, and the amount paid out by a car insurance policy. However, some purchase price insurance policies are also able to function as gap insurance, or vice versa.
Is it worth taking out purchase price insurance?
Most people benefit from this level of protection, but it may not always be worth the cost. Some of the reasons you would consider purchase price insurance include:
- If you have a high-value car that will depreciate quickly
- If you need a car for work and want to know you’ll be able to afford a replacement if something happens
- If you have reason to expect a difference between your car insurance payout, and the amount you paid for your car. For example, if you bought a car with modifications that are not covered by your car insurance policy
An effective purchase price protection insurance policy needs to work hand in hand with your car insurance, and working out value for money involves looking at both policies. For example, if your car is insured at an agreed value instead of market value, the additional policy might be less worthwhile. Conversely, it might cost less overall to insure your car at market value and then use purchase price insurance to counteract the difference.
The cost of your protection policy is determined by many of the same factors as your car insurance, and you can generally choose your level of cover. As the policy covers the difference up to a specified amount, you have the option of taking out partial protection, for a lower value amount, to reduce premiums.
A purchase protection policies last for several years. Over this time a new car will depreciate considerably, and the difference between your comprehensive car insurance payout and the initial purchase price could be larger than it was when you first took out the policy.
What to look for in a purchase price protection policy
Be aware of the terms and conditions before signing up. Purchase price protection policies generally will
- Not pay out if your car insurance doesn’t pay out. If your accident is excluded by your car insurance policy, you won’t be able to claim purchase protection either.
- Only pay the difference for total-loss car insurance claims. If the cost of damage from the accident is less than the sum insured of your car insurance policy, it will not apply.
- Only be available for certain vehicles. Depending on the policy, you might have trouble finding purchase price cover for motorcycles, business vehicles or cars that are very old.
In most cases you can only get purchase price protection insurance together with comprehensive car insurance policies, and not with cheaper policy options.
Making a choice largely comes down to finding an effective match between your car, your car insurance and the purchase protection policy. This type of cover is more important for high-value cars, and it may be worth using a car insurance broker to help you fit all the pieces together.
An smart combination of insurance policies can deliver protection far beyond that of a single policy. If things go wrong it can be well worth the effort.