Paying Too Much? Taking the Sting Out of Car Insurance

Submitted by SharpMan Editorial Team on Wednesday 13th October 2010
In this article
  • How insurance companies calculate rates.
  • What different kinds of insurance cover.
  • Choosing the best-priced insurance company for you.
  • Making sure your new insurance company is legit.
Paying Too Much? Taking the Sting Out of Car Insurance

No one ever said life was fair. Take auto insurance for example. You’ve been driving that 1987 Honda Prelude since college. Finally, after years of hard work and macaroni and cheese dinners, you’ve saved enough dough to invest in a new car. You search the newspaper ads, scour the Internet, consult your neighbor’s brother-in-law the car dealer…and now you are ready to take the plunge into new car ownership. Is it a Dodge Durango? A sporty Saab? Maybe a Mustang? Sure, the extra $400 a month is a bit of a stretch, but it’s doable — that is, until you give your friendly insurance company a call. Suddenly, the only way to afford your dream car is to live in it. And just as quickly that old Prelude doesn’t seem so bad after all. Of course, for the SharpMan, there is another choice. Read on and learn the ins and outs of buying car insurance you can afford:

How are insurance rates calculated?

Every insurance company uses its own formula, but most companies rely on five basic factors: driving record, your car, driving years (a legal form of age discrimination), where you live, and number of drivers on the policy.

Driving record.

Your best bet at decent auto insurance rates is to have a clean driving record over the last three years (no DUI, no at fault accidents, one or fewer minor moving violations). A good record will you qualify for a "Good Driver Discount," and will give you a greater range of lower rate service providers to choose from. For example, companies like 21st Century and AAA refuse to insure drivers whose records miss their "good driver" mark. In fact, if you already have a policy with them and receive a DUI, these companies may drop you when the policy expires. And yes, insurance companies do check your Department of Motor Vehicles record; so don’t waste your time lying about it.

Vehicle choice.

The vehicle you drive also has a lot to do with what you pay. Obviously, a newer car is going to mean higher rates, since it will ultimately cost more to replace if totaled. Furthermore, convertibles, two-seaters and four-wheel-drive vehicles may be fun to cruise around town in, but they’re going to cost you. If you live in a city and are in the market for an SUV, consider avoiding the four-wheel drive models to save on your premiums. Chances are you’ll never need the extra torque.

Driving experience.

The longer you have been legally licensed, the lower your rates. This is the insurance companies’ way of making teenagers (statistically, by far the highest-risk drivers on the road) and their parents pay a bundle for coverage.

Location, location, location.

Where you live also comes into play with your insurance rates, but not necessarily in the way you might expect. Living in an expensive neighborhood can actually raise your rates with companies like AAA, since you are more likely to get into an accident with a newer, more expensive car.

Two is better than one. Of all the factors insurance companies take into account in determining your premium, the multi-driver discount is the most beneficial. In rare cases, a husband and wife can actually have a lower rate together than the husband did as a bachelor. At the very least, putting multiple cars on a single policy will save 50-75%. Of course, if one driver is dropped from the policy, both of you lose out.

Etc. Other factors that various companies consider may include security systems (especially LoJack-type tracking systems), garages, auto-seatbelts and airbags. Every company has its own list of favorites, so it’s worth asking about.

What do all the different coverage types mean?

In general, "auto insurance" covers a variety of areas. Here are the major types you need to consider:

"Liability" coverage pays damages for which you are legally liable arising from injuries, death or damage caused to the property of others. This includes expenses of lawsuits against you, court costs, legal fees, etc. Liability is the most basic form of insurance and is required by law in many states. It does not cover you or your vehicle, only the other guy. If you carry only liability coverage, you will be responsible for your own repairs, medical payments, etc. Coverage usually ranges from $15,000-$100,000 per person and $10,000-$100,000 property damage.

How much you need depends on a number of factors. Consider a worst-case scenario: you are responsible for a significant accident and become involved in a lawsuit. What do you have to lose? A house? A life-savings? Your level of insurance should be ample enough to protect the assets you have — in addition to allowing the other person to receive the medical treatment or repair services they require.

"Medical" coverage pays for reasonable medical expenses resulting from an auto accident and those expenses incurred within one year of the accident. It covers everyone riding in your automobile, as well as you and your household relatives involved in accidents while riding in another car (for expenses beyond the limits of that driver’s policy). As long as you carry a separate health insurance plan, not carrying medical coverage can lower your monthly premium. However, if you do not carry personal health insurance, the bills from even a minor accident can lead to serious financial problems for you and your family.

"Comprehensive" covers loss or damage to your car resulting from things like fire, theft, vandalism, wind, explosion, etc. It is usually required if the car is financed or leased. If you have any expensive custom equipment (stereo, rims, etc.) or park your car on the street at night, you may want to consider this coverage. If your car is parked safely at night and you’re not the type to file a claim for minor stuff like scratches, etc. (since it would raise your rates — nice racket they got going, huh?), this may be a good place to save a few bucks.

"Collision" coverage pays for damage to your car caused by a collision with another vehicle or object. Like comprehensive, collision is usually required if your vehicle is financed or leased. If your car is less than ten years old (or you can’t afford to replace it), you will probably want to include this coverage.

"Uninsured motorist" coverages vary, including medical and property protection and deductible coverage if you are hit by an uninsured driver. The coverage is usually cheap and worth the investment.

"Car rental reimbursement" is well worth the few dollars it adds to your premium. If you’ve ever had your car in the shop, you know how easily "tomorrow" can turn into "next week" or even "next month."

How to find the company that is right for you.

You have a few choices in selecting your insurance company:

Brokers. The easiest (but definitely not the cheapest) way to find insurance is to contact an auto insurance broker and let them do the work for you. Simply look up "insurance" in the Yellow Pages and pick one near you. For a fee (usually $100-$200), they will take all your information and search out the best deal for you from a database that is likely to include many — but not all — auto insurance companies.

If your driving record is a problem or you are currently driving without insurance, chances are a broker will save you enough money and time to make it worth their fee. Another advantage to using a broker is that they take the hassle out of dealing with your insurance company by becoming your point man. For example, they — not you — sit on hold for the adjuster and handle all the paperwork if you ever need to file a claim. That alone could be worth their fee.

Indi-Style. You can also do the legwork yourself. Most companies are glad to give you a quote over the phone or mail you quote info. You can save yourself the broker’s fee by working the phones, but be prepared for a long afternoon. Assume each call will take at least 10-20 minutes once you get past the automated system and reach an operator. You will need to know exactly what kind of coverage you are interested in to get a quote. Be sure to write down the specific coverages each policy offers so you can accurately compare from company to company.

SharpMan Tip: If your driving record is clean and you’ve had no lapses in your coverage for the last five years, check 21st Century and AAA first.

Indi-Style the Fast Way — Online. Finally, you can use the Internet as a free broker. Try NetQuote or InsuranceCompany and answer all the questions honestly and accurately. Within 48 hours, you will be inundated with e-mails and calls offering you policies. That’s right, they contact you — and you choose which company will get your money. Beyond a time saver, searching online saves you the broker’s fee.

SharpMan Tip: Even if you already have car insurance, getting online quotes is so easy that it’s worth getting periodic quotes just to make sure you can’t better what you have.

While the time saved on the front end is great, remember, you’ll still have to do your homework. Once you’ve chosen a few low-cost options, take a few extra minutes to visit the Better Business Bureau Online or watchdog sites like Insurance News Network (aggregators of consumer and Standard & Poor’s reports on insurance companies) to ensure you’ll ultimately get the coverage you seek.

Final Tips
Take the time to check your options. Never assume changing insurance companies is more trouble than it’s worth, especially if you’re buying a new car, moving, or changing your marital status. Having recently gone through a divorce, I received a quote of $1750 per year from Progressive Insurance —

$50 higher than my last policy (which included my ex-wife). A few phone calls later, I received a quote of $1002 per year from 21st Century. Your results may vary, but it certainly can’t hurt to ask.

Happy driving!

This article last updated on Wednesday 13th October 2010
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