Tuesday, January 13, 2015

Understand Your Auto Insurance

  Car insurance has to be one of the biggest scams in the world.  Insurance, in general, is a huge scam, but car insurance and now health insurance gets the extra boost by being required by the government.  What originally was meant to help people now just seems like a profit-driven burden. 

 Insurance sounds like a great idea; pay a small, regular expense to offset a potentially large, unforeseen expense in the future.  In theory, you pay a certain amount each month, say $100, and if a major expense occurs related to your insurance, you tap into those funds to help cover the expense.  The reason that this is better than a savings account is that you also have access to the funds of all the other members of your insurance carrier, so you can cover your unforeseen expenses even if you do not have the money saved yourself.

 Here's the problem.  The insurance carrier is in this business for a profit.  Who can blame them, right?  This means, in order to be profitable, they have to charge you as much as 300% of your potential cost to them.  They determine your costs by estimating the likelihood of you making a claim.  They use statistics based on what is known about people your age, who live in your area, and who drive similar vehicles, but it is still at best a guess.  

 Speaking just about the money, lets say that your carrier insures 100 people for up to $100,000 dollars, and every year 10 of those 100 customers file a claim for the full amount.  That means that their annual output for these claims is $1,000,000.  Divide that $1,000,000 by the 100 customers, and you get $10,000 per customer a year.  Now multiply that by 3, and you get your annual cost, $30,000, to include their 300% profit. 

 That is the basic principle using some very unrealistic numbers.  The bulk of your insurance costs goes to the company; salaries, administrative fees, taxes, advertising, and profits for their stock-holders.  Only a small percentage goes to your actual insurance.

 Generally speaking, there is in reality only one insurance company.  They are all regulated by the government, all set pricing based on a similar rating equation (with a few minor tweaks), and are all required to present a certain amount of solvency per customer carried.  $250,000 in coverage with Progressive is the same as it is with GEICO... it is not like buying a Burger King cheese burger vs. a McDonald's cheese burger.  The state doesn't care who you have insurance with, as long as you have insurance.  The difference is in their marketing and the way the determine risk.  They may offer a few additional products one way or another, but they are all essentially the same via government regulation.

 The reason that states require you to have auto insurance is in case you do damages to someone else.  State governments grew weary of dealing with lawsuits resulting from accidents.  The question that is raised in my mind is; if the state requires the coverage, why not just make it a part of having a driver's license through the state?  Establish a state-managed, mandatory, pooled emergency savings account for all drivers.  There would be no profit motive, and drivers might even be able to apply it to their retirement or other expenses when they could no longer drive. 

 Since this is not the state of affairs, we must deal with how things are now.  How things are now is that because auto insurance is so closely regulated, insurance companies must scramble for every customer they can get.  Most companies sell a 6 month policy, and do not see an actual profit on the policy until you have been a customer with them for three or more consecutive six-month cycles.  In this environment, company loyalty is no longer a way to save money, as getting new customers on the books and then hoping their complacency will keep them long enough to earn a profit is the common strategy.  By shopping around every six months, you are able to keep your insurance costs low.

 Keep in mind when speaking to an insurance company, every question is a rating factor aimed at determining your risk of filing a claim.  If you call in to ask whether a nick on your car-door is worth filing a claim for, you just filed a claim that will impact your future rate even if you do not follow through with it.  With that in mind, start your insurance search by contacting your current insurance company and asking for a record of your claims history.  Insurance companies vary in how far back they go when considering a claim, so get at least two years worth of your records.  Doing this will also be a red-flag to your insurance carrier that you are looking to change companies, which may lead to a discussion about lowering your current rate.  Also, contact your local DMV for a copy of their records of your driving record.  

 When seeking a quote, disclose everything that is requested and on your record.  If the fender-bender you had in the parking lot last summer is not on your record, don't mention it. If you do, it will be included in your record as soon as you say it to an insurance agent. They will verify the information you do give them, so while there is no reason to hide anything in your record, there is no reason to give them anything that is not in the record.  

 When determining your risk, insurance companies consider the following"

-Gender: Can you think of any other business that would get away with determining price based on gender?  Young women are considered less of a risk, and therefore less expensive than young men to insure.  However, this all turns around when your reach your 30s, which means that during the bulk of their driving life women are charged more for insurance.  This could be considered "gender-profiling".  As a woman, you will save money by being on your husband or even boyfriend's insurance.

-Where You Live: State, zip-code, and street address is a rating factor.  Your neighbor may have a better rate because he lives just over the imaginary line.  When Johnny down the street gets in an accident at 16, your insurance rates will go up the next cycle.  Rural living is less expensive on insurance than living in the city.  The less densely populated an area, the better.

-Vehicle: The year, make, and model (and sometimes color.., red is the worst, gray/silver is the best) of your vehicle are all rating factors.  Older costs less.  Safer vehicles cost less.  Less popular models cost less (fewer of them on the road equals fewer recorded accidents in that car).  Liability insurance for a truck costs more than liability in a car because liability covers the damage you cause and trucks can cause potentially more damage.

-Multiple Vehicles: It is less expensive to insure two vehicles on one policy than to insure them separately on two policies.  If you have two vehicles, see about making the least expensive vehicle listed as your "daily driver", while the other vehicle is rated as something other than daily use; farm use, collectible, recreational, etc.

-Usage: Usage/mileage is a rating factor.  Less than 7500 miles a year is best, less than 12,000 miles a year is good.  Used for pleasure is better than personal.  Business use is the most expensive.

-Where You Drive: Where the vehicle is driven is often more important than where you live.  Living out in the sticks doesn't do much for you if you have an hour commute into a major city each day.  If your vehicle is parked at work in a major city, it is more prone to being involved in a claim.   

-Garage: Some companies give a discount for having a garage or covered driveway.  These reduce comprehensive claims.  Purchasing an expensive structure for your driveway can greatly reduce your auto insurance cost.

-Age: Your age is a factor, and sometimes your driving experience (again, what industry is permitted to discriminate based on age?).  Years ago, it was assumed that when you turned 25, your insurance will be reduced.  This is no longer the case, thanks to more accurate statistical tracking.  If 25 year-old drivers in your neighborhood filed several claims, from accidents to hail damage, in the past year, then your rates as a 25 year-old driver will increase.

-Marriage: Married persons get a better rating than single people.  The thinking is that married people have more reason to be cautious, drive safer vehicles, and generally go out less.  Domestic partnership is generally not recognized in the insurance industry.

-Education: Education level is a rating factor with most companies; the higher your education, the less your insurance costs.  This is due to a number of factors; increased education means increased wealth, better living conditions (less crime prone neighborhoods), more reliable vehicles, etc.  Oddly enough, rarely does an insurance company actually verify your level of education.

-Credit:  While some insurance companies claim they do not consider credit, it is almost a universal practice, impacting insurance rates in a number of ways.  In fact, policies can often be cancelled if it is determined that your credit is lacking.  If an insurance company asks for your Social Security number, they are running your credit.  The check will not impact your credit, but opting out of providing your number means they will use your name and address, which can result in an incorrect rating.  You can save yourself some hassle by just providing your SSN.  

 There are two general kinds of auto insurance; liability and comprehensive.  Liability covers the damages you cause to another person or their property and pays nothing for you, your passengers, or your property in the event of an accident.   In most states, liability is all the insurance you are required to carry, and if your vehicle is not worth repairing then carrying the more expensive comprehensive coverage is not worth the money.  Liability can be purchased from any company with little or no concerns as long as they have been operating in your state consistently for several years.  Because of this, you are often best served seeking your insurance from a small insurance office who can connect you with the least expensive carrier.

 Comprehensive insurance includes liability, but also extends to covering damages for yourself and your own property.  This can include when you are damaged by someone who has no insurance, but making that claim will be assuming responsibility for the damages, severely impacting your insurance rates.  With comprehensive coverage, you are better served going with a reliable, well known insurance company.  All companies will raise your rates for filing a claim (even the ones that claim they will not do so eventually), but smaller companies also tend to cancel your policy and may leave you suddenly without coverage and unaware until a police officer informs you during a traffic stop (resulting in fines, fees, and other legal issues).

 Speaking of claims, some carries offer "accident forgiveness".  They will not change your rates for a claim, depending on the size of the claim and how long you have been with the carrier.  However, these claims still go on your record, and will follow you when you shop with other carriers.  Changes in your policy can also result in these claims factoring into your rates, and will impact you if you leave the carrier and then try to return later, so keep this in mind.

 It is in your best interest to shop around every six months, even if you are content with your insurance carrier.  Know how your rating factors impact your costs, and look for a company that considers your combination of factors to be less of a risk.  It is also worthwhile to create a savings account specifically for your vehicle maintenance as well to cover damages that you would be better served paying for on your own rather than filing an insurance claim. 

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