#WhatIWishIKnew – What Factors To Consider Before Buying Car Insurance? We Asked A Financial Expert
There are several factors you need to consider when deciding on which car insurance policy to purchase. In this article, we provide some tips to help you navigate this process. Read more to find out!
Whether you purchase online or through an agent, buying car insurance may not be as straightforward as it seems.
The process itself may be simpler online because you can compare policies and rates, but there’s still a chance of misinterpreting the terms, jargons and facts, especially if you don’t have access to an expert who can shed more light on the topic.
And though the internet has made it easier for us to self-educate on various matters and topics, our minds could still be clouded by myths and misconceptions, which in turn, influence our decision-making process.
To help us identify the different factors to consider before buying car insurance, CompareHero.my spoke to a financial expert to help us get a better perspective on the topic.
But first – what is car insurance?
If you didn’t already know, car insurance is a contract between you and the insurance company that protects you against financial loss or damage, in the event of a road accident, and in some instances, theft and fire.
People buy car insurance to avoid paying a huge lump sum of money to cover the physical damage and vehicle repair costs, but it comes at a premium which must be paid annually. But of course, the type of protection depends on your coverage.
Car insurance is also referred to as auto insurance, vehicle insurance, and motor insurance, with cars being its own separate category, as it only focuses on cars. For more context, there are other types of motor insurance categories according to different vehicles, such as motorcycles, trucks, and buses.
Okay, but is car insurance compulsory – why should you get it?
Yes, you don’t really have a choice when it comes to car insurance, as it’s completely mandatory for all drivers in Malaysia to get a valid car insurance policy.
Without car insurance, you won’t be able to renew your road tax through the Road Transport Department (JPJ). And without your road tax, you won’t be allowed to drive on Malaysian roads legally. If you do get caught driving without a road tax, you will be fined up to RM3,000, according to Section 14(4) of the Road Transport Act (RTA) 1987.
Beyond the law, there are other serious reasons as to why getting car insurance makes a lot of sense and could easily justify why it shouldn’t be an option, but a must.
For starters, though we are sure many drivers in Malaysia are responsible on the road, it doesn’t deny the fact that the country had the third highest fatality rate from road traffic accidents in Asia and ASEAN, behind Thailand and Vietnam, according to figures from the latest Global Status Report on Road Safety published by the World Health Organization (WHO) and the World Bank in December 2018.
The report, based on figures in 2016, states that out of the 7,152 deaths that year, 87% were males and 13% were females. For further context on the severity of this data point – transport accidents (5.4%) were the fourth most common cause of death in Malaysia in 2016, behind ischaemic heart disease (13.2%), pneumonia (12.5%) and cerebrovascular disease (6.9%).
These statistics clearly show that Malaysians have a higher chance of getting involved in road traffic accidents, compared to their peers from neighbouring countries, and the best way to protect yourself against the possible staggering financial costs is to be insured.
“Around five years ago, on average, about 20 Malaysians were involved in road accidents per day, but now that number has reduced to about 15 per day,” Yong Chu Eu, Founder and Principal of Money & Life Academy told CompareHero.my. He is also a member of the Malaysian Financial Planning Council and the author behind the financial book, “Master Your Finance, Master Your Life! Five financial strategies to cope with stress.”
“You can measure the risk that, we Malaysians, face everyday – that is why we need car insurance. Besides that, you can’t predict when an accident will occur,” he said. “It’s not advisable to purposely delay renewing your car insurance either – even if it’s just for one day – because accidents can happen within seconds, at any time.”
Now that you’ve understood why buying car insurance is a necessity, let’s get into what factors one should consider before pressing the “purchase” button or saying yes to a policy:
1. Understand what type of coverage you need
There are three main insurance types in Malaysia, mainly, third party, third party, fire, and theft (a.k.a. Second party) and comprehensive cover.
“From a definition standpoint, all three coverages are almost the same. The reason why I say this is because if products enter the market, they will need the approval of Bank Negara, and they can’t market it without their approval,” Yong said.
With that said, the coverage does vary accordingly, but just in case you’re confused over these wordings, here’s a quick overview of how insurance companies term them and what is generally covered by the three types:
- First party → you, the driver
- Second party → the insurance company
- Third party → everyone else
|Third party||Most basic of all. Only covers the third party involved in the car accident. Basically, if you’re at fault, a third-party insurance would cover the cost of damage, death, and/or injury to the other party.|
|Third party, fire, and theft (a.k.a. 2nd party policy)||Everything above, plus coverage to your own vehicle if your car gets caught in fire, or gets stolen.|
|Comprehensive cover (a.k.a. 1st party policy)||Everything above, including fire and theft, plus coverage to your own car if it gets damaged due to an accident.|
2. Figure out if you need any additional coverage
Though the ‘comprehensive’ policy sounds all-encompassing, it doesn’t actually protect you from all types of damages like floods and typhoons. So in order to be “fully-covered,” you’ll need to buy several add-on coverages.
“Additional coverage gives you the option to expand your coverage based on your needs and circumstances,” Yong said. “Let’s take windscreen coverage as an example, for some people it may not be very important, but if you work in the factory area then it would be best for you because of all the large trucks that carry stones and sand, which might hit your vehicle. So it really depends on your area.”
However, not all additional coverage options (‘add-ons’) are necessary, so it really depends on your own circumstances.
Some add-ons that you can choose from include:
a) Windscreen coverage
This one-time purchase-only plan insures damages against the windscreen or windows of the car. The car windscreen premium is calculated based on 15% of your windscreen value.
b) Special Perils Coverage
This option could be of particular interest to Malaysians (or non-Malaysians who live in Malaysia) as we all know that floods are synonymous with the country. Take the tragic Kelantan-Terengganu-Pahang flood of 2014 which killed 21 people and affected over 200,000 others, as an example.
This option pays for damages inflicted on the vehicle due to floods, typhoons, hurricanes, earthquakes, and landslides, among others. The additional premium is 0.5% of your sum insured for the vehicle for the year.
Oh, by the way, sum insured refers to the replacement price of your car, including the value of any legal modifications and on-road costs.
c) Strike Riot and Civil Commotion (SRCC)
Though riots are not common in Malaysia, this extra coverage would protect policyholders against loss or damages to the vehicle due to strikes, riots, and in instances of civil commotions. We heard that this insurance premium is set at 0.3% of the sum insured.
There are obviously more add-ons in the list, but to avoid being too long-winded, we recommend you checking this analysis we did on the five types of car insurance add-ons and whether it’s worth getting.
3. Compare, compare and compare policies!
We may seem biased, but comparing products could really help you make the right choice especially if you are faced with the dilemma of having so many, sometimes hundreds, of available products to choose from.
On top of that, independent aggregator and comparison platforms such as ourselves will ensure that we give you a thorough, unbiased review of the product at hand.
Conducting product comparisons is also the basics of due diligence. At the end of day, you want a product that you are satisfied with, and doing basic due diligence via comparing products could help you achieve that.
“It’s up to you to really compare different offerings and see which work best and is most suitable for you,” Yong said.
4. Read the Product Disclosure Sheets of your policy
Just as how you would compare different products before choosing the right one, you should also look through the chosen product’s Product Disclosure Sheet to ensure you are aware of all the details, before signing off on it.
Interestingly, many Malaysians aren’t aware of the existence of Product Disclosure Sheets, according to a 2014 study by Bank Negara Malaysia (BNM), which had interviewed over 400 consumers in the Klang Valley area for the study.
In fact, that study revealed that there was a low level of awareness among consumers on the existence and the purpose of Product Disclosure Sheets, and that only half of the respondents recalled seeing the one. In many cases, the information was only presented to consumers only after a decision had already been made to purchase a product, and so consumers were not readily aware of the opportunity to use information contained in the sheet to compare financial products and services.
The takeaway from that study – not going through, or at least skimming through, a Product Disclosure Sheet is a waste of opportunity for consumers, as more details could be have been unravelled from it.
BNM, Yong said, requires insurance companies to provide a Product Disclosure Sheet to the consumers to make it easier for them to understand the product. He said he believes that it is in the best interest of consumers to not rely too heavily on financial advisors or agents when it comes to understanding the scope of what a product covers – and instead, take the initiative to understand the product by themselves.
“The product disclosure for car insurance is still relatively easy to understand, even so for personal accidents,” he said. “Other insurance, on the other hand, is typically much more complex and you would need a financial advisor to go through that with you.”
5. Find out and understand the exclusions in your policy
If you didn’t know, an exclusion is a policy provision that eliminates coverage for certain types of risks. In essence, they are basically risks that are not covered by the insurer.
Understanding exclusions, Yong said, is particularly important so that you are aware of what scenarios or situations are covered and what aren’t. This is a crucial step to avoid any difficulties or challenges to your claims process in the future.
Exclusions exist because, let’s be honest – if insurance companies covered everything, then they might go out of business. So it’s no surprise that some scenarios aren’t covered under a standard car insurance policy. With that said, if you pump in a little extra cash, you can opt to have them included:
- Injury or death to driver – Insurers do not typically cover any bodily injury or death caused to you in the event of an accident. The alternative is to get a life and/or medical insurance to cover this.
- Liability claim from passengers – Your insurance won’t cover you if a passenger in your car is hurt and wants to claim money from you. The solution is to get additional coverage.
- Damages or stolen items from your car – You may not get coverage for damaged or stolen items in your car, unless it has been declared in your policy. The solution? Get an add-on cover.
At the end of the day, the goal of car insurance is to protect you against any financial losses so be sure to pick a policy that suits your situation and needs best. “When it comes to insurance, you should not focus on price, as there’s not much difference relatively speaking, what’s more important is the features you are looking for,” Yong said.
6. Insure your vehicle based on the market value of your car
Yong recommends drivers to insure their cars at their current market value – which is defined as the market value of the car at the time of the claim, with considerations given to the condition of the car based on its age, make and model, at the time of loss. That value is also known as the sum insured (what we explained above as well).
Drivers who are under-insured, Yong said, run the risk of getting penalised as the insurer will only compensate part of the loss, in proportion to the difference between the market value and the sum insured, based on this widely-known formula:
Loss Amount Payable= (Sum Insured)/(Market Value)× Assessed Loss
7. Don’t succumb to the pressure of buying car insurance through an agent
The truth of the matter is that there are advantages and disadvantages to both buying car insurance online or via an agent, and there’s really no right or wrong answer because at the end of the day, you know your own personal needs.
But with that said, buying car insurance online comes with several great flexibilities. For one, it’s definitely cheaper as you will avoid the agent fees and it’s much easier to compare products options online side by side than skim through different layers of brochures.
Unfortunately, there is a misconception that buying products online is considered “dangerous” and risky because you have a higher chance of getting exposed to scams, albeit online.
All in all, we feel that in order for you to be more accountable and responsible for your personal finance, you shouldn’t depend solely on financial advisors or agents to explain a financial product that you’re interested in. There’s no denying that there is added value to their service, but part of self-empowerment is to be more responsible and accountable for your own financial life as well as the decisions that you make by yourself – after doing extensive research, of course.
Verdict: Car insurance can be complex, but it’s not entirely foreign
If you are on the lookout for car insurance, but you’re not sure where to start, then we highly recommend that you start researching online, compare all the products and read through educational tips like ours and other informative pieces online to give you some insights to what it’s about.
Though there’s no harm in reaching out to experts like agents and financial advisors, it’s equally important to self-educate to stay informed. And thanks to the internet, information is now readily available at everyone’s fingertips.
We hope you found this article useful!