Market Value Calculation

The market value calculation is used to determine the value that one can attach to an insured item for the purposes of agreeing on the amount of insurance policy cover one is granted. Of course the value of this cover is also reflected in the monthly premium amount that is paid for the insurance cover. Market value in this sense is the amount at which the market would currently value the item. Usually you would also have a choice of whether to insure your item at its market value or at its replacement value, and this is a critical thing to bear in mind when taking out insurance on any of your personal possessions. Many people do not realise what the difference is and thus what the actual ramifications are - and end up severely disappointed when it comes to claiming, as they find that the amount that they are paid out does not actually cover the cost of replacing the items that they lost.

A market value calculation is made as soon as you take out insurance on any item. Here's a simple example to explain: we'll use cars as the items, as they are one of the possessions that are most affected by depreciation. Let's say you buy a car for R100 000. You drive it off the showroom floor and then take out insurance. If you insure the car at its market value, the insurer will calculate how much you could get for the car if you were to sell it. Because you have already taken possession of the car, it is now a second hand vehicle, which is immediately worth less than the R100 000 you paid for it. So let's say that the market value is set at R90 000. If your car is stolen immediately, this is what you would be paid out on your insurance policy. You can clearly see that if you were then to buy the same car again, using your insurance payout, you would be R10 000 short. Due to inflation, the longer you keep the car, the bigger your potential shortfall. If you drive the car for 3 years, and it is then stolen, you will receive R90 000, but now replacing the car might cost R120 000, because of car price increases. This would leave you with a shortfall of R30 000. So it pays to be savvy about this.