Car Insurance Value Difference – “Agreed Value” vs “Market Value”

Understanding the difference in car insurance between “Agreed Value” and “Market Value” is an important step that is often overlooked by vehicle owners, while this choice can determine the amount of compensation you receive if your car is in a total loss accident or stolen.

For vehicle owners, you must have noticed that when you want to renew your vehicle insurance, you can determine the insurance value based on the sum of the “Agreed Value” and “Market Value” but do you know what the difference is between the two?

Many people simply choose the insurance value automatically without realizing that there are two different valuation mechanisms and each of them carries significant financial implications for your coverage.

Understanding the Concept of “Sum Insured” or Sum Insured

Before delving into the comparison and difference of car insurance sums, it is important to know the term “Sum Insured” or sum insured, which is the financial value you set to protect your vehicle.

This value will be the basis for calculating premiums and compensation payments. For comprehensive policies, you will usually be given two main options to determine the Sum Insured, which is based on Market Value or Agreed Value.

The choices you make are not just numbers on paper, but are strategic decisions that affect your future financial protection.

The decision to choose between Agreed Value and Market Value should be made based on a careful assessment of your financial situation and personal preferences.

Understanding the Concept of “Market Value”

Market Value means your car is insured based on the current value of the vehicle at the time the claim is made, not at the time the policy is purchased or renewed.

Insurance companies will refer to industry valuation guides, such as data from Insurance Services Malaysia (ISM) or their internal sources, to determine the latest market price for the model and year of your vehicle.

This value is constantly changing and takes into account depreciation factors, market conditions, and current demand for the car model.

The main advantage of choosing Market Value is that the insurance premium is usually cheaper than Agreed Value and this cost difference may seem small at first, but it can save you annual expenses.

However, the biggest drawback is the uncertainty in the amount of compensation.

If your car is declared a total loss or stolen, the insurance company will pay based on the market value at the time of the incident, which must be lower than the value at the beginning of the policy due to depreciation.

This means that even if the Sum Insured on your policy is RM50,000, you may only receive RM40,000 if the market value of your car has decreased at the time of the claim and this situation becomes more disadvantageous if you still have a high bank loan balance.

For example, if your car is covered at a market value of RM50,000, but after a few months the car is stolen and its current market value is only RM40,000, while your remaining debt to the bank is still RM44,000, then you have to cover the shortfall of RM4,000 from your own money.

This risk is known as negative equity and it is a financial trap that is often overlooked by car owners who are just chasing cheap premiums.

Understanding the Concept of “Agreed Value”

In contrast to Market Value, Agreed Value is the amount of compensation that has been mutually agreed upon between you and the insurance company at the beginning of the policy and this amount will remain fixed throughout the coverage period.

This value is determined based on the model, year and several other factors of your vehicle at the time of policy purchase and it is often higher than the current market price.

The main advantage of this system is the absolute certainty of the amount of money you will receive in the event of total loss or theft, without having to worry about depreciation or market price fluctuations.

For example, if you choose an Agreed Value of RM55,000 for your Honda City 2019 car, and three months later the car is involved in an accident resulting in a total loss, the insurance company will pay you the full RM55,000 without any deduction, even though the market value of the car at that time has dropped to RM52,000.

This RM3,000 difference can mean a lot, especially if it helps you pay off your bank loan balance more comfortably or leave some extra money to buy a replacement vehicle.

Although the premium for Agreed Value is usually 5 to 15 percent higher than Market Value, the difference in annual cost is often considered a worthwhile payment for peace of mind and understanding the meaning of “agreed value” will make it easier to understand why there is a difference in car insurance value.

Interesting article: What To Do If You Are Hit By An Uninsured Vehicle?

Making the Right Choice for Your Protection

The decision to choose between Agreed Value and Market Value should be made based on a careful assessment of your financial situation and personal preferences and knowing the difference between the two helps you know the difference in the amount of car insurance you pay.

If you own a regular model car that depreciates predictably, such as a Perodua Myvi or Proton Saga and you are comfortable with the possibility of receiving payment based on the market price, then Market Value may be an adequate and economical option.

However, if you own a limited edition vehicle, a newly purchased car at a high price, or you still have a large loan commitment, Agreed Value is a smarter choice to avoid unwanted financial shocks.

Please note that this option only applies to total loss or theft claims and does not affect partial damage claims which will be paid based on actual repair costs.

You can also change your choice from Market Value to Agreed Value whenever your policy expires and want to renew it.

Be sure to talk to your agent or insurance company about a reasonable amount of Agreed Value and support it with evidence such as purchase receipts or valuation reports to avoid any disputes later on.