Most states require auto insurance. But that huge market hasn't translated into an informed customer base. These are some of the biggest misconceptions regarding how car insurance does and doesn't work.
The barrage of TV ads in recent years about switching auto insurance companies, usually based just upon lower price, has led to a lot of confusion about how those rates are derived and what they cover. With insurance being required in 48 states, and the subject being fairly arcane to begin with, many folks are misinformed, which can be a very expensive lapse.
Princeton Survey Research recently issued a report detailing how lost many of us are. For instance, a whopping 44% of us think the color of our cars affects our rates. That’s wrong. What insurance companies are looking at is the claim histories for vehicle brands, models, engines, and like that, not color, which does not correlate to claims.
They also look at what cars are stolen the most, which are surprisingly not high-end saloons or race-bred sports cars. Most stolen cars, and therefore the expense that goes with insuring them, are the more common, older, lower-end, easier-to-break-into brands for their easier-to-sell parts.
Princeton also found that 17% of people did not realize that where you live, and the resultant local claims history, is a big factor in rates. Logical, for higher rates in dense, urban areas compared to the sparser traffic, and fewer claims, in rural areas.
Another surprise is that 44% (the same, uninformed folks?) of those surveyed think that you will not be covered if you are at fault in an accident. Also wrong. But you can bet that your driving history is a big factor in your rates and they will go up later if you cause an accident.
A couple of examples how your driving record can impact your premiums; you can expect an average “bump” of 92% (!) for a DUI, 83% for “reckless driving” 83%, 29% for speeding over 31 mph above the limit, and 41% for filing a damage claim over $2,000. Ouch — let’s be careful out there.
But we need to be careful when not driving as well, because our credit scores impact our insurance rates. The thinking goes that if you are careful about your finances then you will also be careful about your driving, and the consequent absence of claims.
Other aspects of coverage to note are 1) personal property stolen from your car may not be covered (homeowners or renters might help, though); 2) insurance companies can't arbitrarily cancel your policy — but if you give them cause, lie on your application etc., they will drop you; and 3) insurance follows the car, not the driver. So when you loan your car to a friend and he/she wrecks it, you are not typically covered – but you do have recourse to sue your friend!
Another myth is that the older, and presumably slower and feebler, you get, the higher your rates. Wrong again, Mr. Stereotyper. Young, unmarried men have the highest claims rate and therefore the highest premium rates. Older, married folks, many having clean records, will see their rates drop a good deal.
Amazingly, 14% in the Princeton report said that they think that their insurance will cover mechanical problems. Maybe they are confusing new car warranties and annual service benefits with insurance coverage.
The last myth to mention is that in the event of a total loss, some folks assume the insurance company will simply replace your car, without a special rider (and premium bump) and your loan or lease will be paid off. Hah! That's why any kind of financing needs so-called "gap" coverage. We need to understand that the moment we drive off the lot we take a sizable depreciation hit (10%+?) to the car's value and that gets subtracted from any insurance company pay out. Leaving us to pay the "gap."
Modern cars are wonderful, gadget-filled, safer, and more reliable than ever. But they are also more expensive than ever (about $30,000 on average last year) and we need to protect these major, movable expenditures knowledgeably. So, if you are not up to date on your auto insurance awareness, read your policy or ask your agent about the major points of your particular coverage. If you’re still not motivated to do so, at least do not answer any surveys.