Dec 9 2013
Insurance – What is the Risk?
A Novated Lease Car presents many benefits to both the employer and the individual employee. But it would be irresponsible not to outline the risks associated with salary packaging arrangements. In many instances, there are very simple ways to mitigate these risks once you understand them in a little more detail.
Now all of you would have discussed with us insurance that covers the ‘residual risk’ of your Novated Lease. The residual risk insurance protects the employee (and employer) from many of the financial risks associated with a novated lease should there be illness, death, disability, or an involuntary termination of employment.
However, we would like to highlight the need for people to fully insure their motor vehicle. In other words, we are talking about normal, everyday car insurance.
The most popular coverage out there is the one the insurers call “market value” sum insured. This pays out based on what the insurer deems to be replacement value of your vehicle.
Many people understand the difference between “market value” and “agreed value”, but fail to appreciate the consequences of being under-insured.
An individual with a Novated Lease (or any other car under finance) should ensure that the very least they are covered for is the payout figure of the lease. This is the real risk that needs to be covered, NOT the replacement value of the vehicle.
We see many times when people get a new car under a novated lease, they go for the cheapest insurance, which will always be on market value. In short, these people may very well be under-insured.
If your car is written off, then the finance needs to be paid out as well. The finance with the original vehicle does not roll over to the new car.
We recall one client who took delivery of their car and within 2 days wrote it off. Not one lease payment was made and the finance payout was more than the original amount financed due to early repayment penalties.
The preventative measure to ensure you are never in this position is to take out a policy that is based on “agreed value” and to have “Gap Insurance” coverage. “Gap Insurance” generally coverage covers for the difference between the insurance payout and the finance payout, However, it is important to check the policy wording of the product you are selecting to confirm this! This naturally provides peace of mind for the driver that should the unthinkable happen they would be in the best financial position possible.