What’s the difference between market value and agreed value?

Cars are essential for many Australians in their day-to-day lives. Data from the Department of Infrastructure and Regional Development revealed that there are 19.4 million licensed drivers in the country, approximately 72 per cent of the population.

For those with cars, having car insurance is essential and understanding the difference between market value and agreed value is important, especially in the event of an accident.

If your car was stolen or written off, the amount you get could be the difference between your insurance paying enough to cover a replacement or needing to acquire extra funds.

What is market value?

If your car insurance includes a market value option, this means that if your car is stolen or written off the insurer will calculate what the purchase price would likely have been before the incident. They will pay this amount for a total loss claim.

The calculations are based on the value of the vehicle as a used car and will take into consideration the make, model, age, condition of the car, and mileage. Most drivers choose this type of insurance as it is usually standard and won’t increase your repayments.

What is agreed value?

Drivers have more to think about on an agreed value plan as they can negotiate a guaranteed fixed dollar amount as the payout in the event of a loss.

The agreed value option isn’t popular as it typically requires policyholders to pay more in premiums in exchange for a guaranteed payout.

How different is it when you make a claim?

The benefit of an agreed value is that policyholders have peace of mind knowing that they will receive a payout and the exact amount.

When opting for market value, which is when your insurer will calculate your vehicle’s probable value, there is no certainty as to what the amount could be. Cars depreciate and can lose up to 60 per cent of their value in the first year of ownership alone. This means that some cars could be underinsured, and a payout wouldn’t be enough to purchase a like-for-like car.

It is still best to check the Product Disclosure Statement for details as insurance companies might expect to renegotiate the agreed value annually to account for depreciation, or it may automatically switch your insurance to market value when it renews.

What’s better?

Choosing one over the other depends on your circumstances.

If you have an older car that is low in value market value might be the way to go as you’ll require a relatively small payout to replace it with a similar one.

However, if you’re insuring a new car and want to protect it against depreciation an agreed value cover would be better suited. If you’ve taken out a car loan, this option may be useful as your insurance payout will most often cover any outstanding balance.

Market value is usually the most affordable option and the most common. It’s unlikely that you’ll find agreed value provisions in third-party insurance, and fire and theft insurance, and it’s important to note that not all comprehensive plans offer this option.