Shop Auto Insurance

Title: "Shop Auto Insurance!" in pink on top. Below it is a picture of an Auto Insurance Quote form with a silver pen resting on top.

Consider the Source

I’m not an insurance agent or other insurance professional. Because I don’t work for an insurance company, I don’t have a conflict of interest.

Overpaying

Many people overpay for auto insurance. It’s often because they haven’t shopped their policy in a while.

According to a recent LinkedIn poll, the last time people shopped was:

  • 25% in the last year

  • 29% in the last 3 years

  • 12% in the last 5 years

  • 33% at least 5 years ago

A third of the respondents haven’t shopped auto insurance in over five years. Nearly half (45%) haven’t shopped it in three years.

Title: "Shop Auto Insurance?" in white at the top. It's a poll: When did you last shop auto insurance? 25% < 1 year, 29% < 30 years, 12% < 5 years, 33% 5+ years. Based on 51 votes. The LinkedIn poll ran from 4/26-5/3/2024.

Guideline

Consider shopping if you:

  • haven’t gotten quotes from at least two insurers within the last three years or

  • are paying more than $1,000 a year.

Trust everyone but cut the deck!

Insurance Framework

The cost of additional insurance tends to fall with more coverage. Higher limits cost more - just not a lot more.

That’s because accident expenses roughly follow half a bell curve:

Title: "Auto Accidents." It's half a normal distribution. Expense is on the x-axis and # Accidents is on the y-axis. Four rectangles are Green: Small, Frequent; Yellow: Medium, Infrequent; Red: Large, Uncommon; Purple: Huge, Rare.

Small, Frequent

There are many small incidents:

  • the wind catches a car door and dents the vehicle next to it

  • loose gravel on the highway leaves a mark

  • one car bumps another hard enough to dent a license plate

Dings happen often. The best way to lower their cost is to drive:

  1. a less expensive vehicle,

  2. less often, or

  3. very carefully.

It rarely makes sense to insure small expenses. It’s not even worth the time and cost to submit a claim!

Paying for repairs out of pocket is called self-funding or self-insuring.

Medium, Infrequent

More expensive impacts happen less often:

  • someone sideswipes a parked car

  • loose gravel cracks a windshield

  • two cars get in a fender bender

These medium-sized impacts might cost a few hundred to a few thousand dollars.

Whether it makes sense to submit it to insurance depends on the:

  • cost,

  • at-fault driver’s financial position,

  • impact on future insurance premiums, and

  • deductibles.

Cost
It generally makes sense to submit a claim for thousands of dollars.

However, time is of the essence. The more time elapses, the less likely someone is to get paid.

Financial Position
Whether someone can afford to pay for smaller incidents may depend on their cash position.

One of my high school teachers slid off the road onto a golf course when he was a teenager. It caused $800 in damage.

His parents:

  • didn’t file a claim,

  • paid the bill, and

  • forced him to pay them back with his part-time income.

This is part of why I usually suggest people keep at least three (3) to six (6) months’ of living expenses in an emergency / opportunity fund.

For more, check out: Is Your Cash Starving?

Impact on Premiums
It may not make sense to submit a claim for even bigger incidents.

I know someone whose teen drove off the road and caused over $10,000 of damage to their car. The driver was fine - just shaken up.

  • The accident wasn’t reported.

  • No ticket was issued.

  • The family towed the car to a body shop.

Instead of paying the deductible and higher insurance premiums, they paid out of pocket for the repair. It was an expensive driving lesson!

Consider the premium costs before submitting an insurance claim - especially one less than $1,000.

Deductibles
A deductible is the amount someone pays out of pocket before the insurer pays if there’s an accident. It’s a way to self-insure up to a limit.

Deductibles can be win-win:

  • the insurance company doesn’t pay for every little incident and

  • the policy holder pays a lower premium.

Title: "Win / Win" on top. On the left is a skyscraper on a bright, cloudy day with the words "fewer claims." On the right is a woman pointing to a piggy bank with the words "lower premiums."

Consider how large an expense would need to be to go through the hassle of submitting a claim. If someone wouldn’t file a claim for less than $500, it probably makes sense to have at least a $500 deductible!

Check the premiums at different deductible levels.

  • It’s unlikely someone will be in an expensive accident every year.

  • If so, it’s probably not safe for them to drive!

Large, Uncommon

Big expense are even rarer. It’s essential to have proper coverage for such accidents.

Property
Damages can get expensive in a hurry if someone:

  • hits a truckload of foreign imports,

  • takes out a fire hydrant which floods a business, or

  • causes an interstate pile-up.

People
However, property damages pale in comparison to the cost of injuries.

An at-fault driver may be liable for hospital, rehabilitation, pain, suffering, and other expenses.

Based on another U.S. Department of Transportation source, the average comprehensive cost of an accident in 2001 dollars was:

  • $7,400 with property damage only

  • $44,900 with a possible injury

  • $79,000 with an evident injury

  • $216,000 with a disabling injury

  • $4,008,900 with a fatality

Title: "Average Accident Cost" is a table with Crash Severity ranging from Property Damage at $7,400 to Fatality at $4,008,900. These are in 2001 dollars. U.S. Department of Transprtation and an image of a car crash are below it.

Percent and Expense

About 3% of drivers were in a reported accident in 2021.

The U.S. Department of Transportation reported that in 2021 there were:

  • 6 million police-reported motor vehicle crashes

  • 233 million licensed drivers

The crash types were:

  • 71% property damage only

  • 28% injury

  • 1% fatal

The average cost per accident using 2001 dollars were:

  • $7,400 property damage only

  • $82,600 injury

  • $4 million fatal

Title: "Reported Accidents" on top. It's the same half of a normal distribution with colored bars. However, it now includes 71% and $7,400 for Property Damage Only, 28% and $82,600 for Injury, and 1% and $4 million for Fatal.

Coverage Limits
Because expensive accidents are relatively rare, higher limits may not cost much more.

I like to see coverages like:

  • 100/300/100 or

  • 250/500/250

100/300/100 translates to:

  • $100,000 for bodily injury per person

  • $300,000 for bodily injury per accident

  • $100,000 for property damage per accident

250/500/250 is coverage of:

  • $250,000 for bodily injury per person

  • $500,000 for bodily injury per accident

  • $250,000 for property damage per accident

Huge, Rare

There’s no way to compensate for the loss of human life. However, the American judicial system tries!

Fortunately, there’s an insurance which offers even more protection.

Umbrella insurance sits on top of other insurance - home, auto, motorcycle, boat, etc. It pays amounts above those policies’ limits.

Umbrella generally requires higher limits for the other policies. That means umbrella insurance only pays in rare situations.

Because it’s used infrequently, its quite affordable:

  • $1 million might only cost $200 a year

  • $2 million might cost under $400 a year

A general guideline is $1 million in umbrella insurance for every $1 million in net worth.

What to Have

It often makes sense to keep:

  • cash for small, frequent incidents

  • deductibles for medium, infrequent accidents

  • high limits for large, uncommon crashes

  • umbrella insurance for huge, rare tragedies

Title: "Auto Accidents." Half a normal distribution. Expense on the x-axis and # Accidents on the y-axis. Green: Self-Fund, Small, Frequent; Yellow: Deductibles, Medium, Infrequent; Red: High Limits, Large, Uncommon; Purple: Umbrella, Huge, Rare.

Branding

Insurance is highly regulated. What truly matters is the:

  1. coverage and

  2. financial security of the insurer

Yes, customer service matters.

However, having a personal agent nearby is expensive. Someone has to pay for both their rent and availability!

Insurance endorsed by celebrities can also be expensive. Someone has to pay their acting fees!

Large online insurance companies like Geico and Progressive can be just as responsive at a lower cost.

No Penalty for Checking

Shopping for auto insurance isn’t like shopping for a credit card.

Shopping Credit

Someone’s credit score can fall just by checking rates.

There are essentially three outcomes for people who apply for credit:

  1. They’re approved and accept it

  2. They’re denied

  3. They’re approved and pass on it

All three are bad for lenders.

1) Approved and Accepted
Taking out more credit increases the risk someone will take on more debt than they can afford. They may have trouble paying their bills or - worse - face bankruptcy.

More available credit is higher risk for lenders.

2) Denied
Denying credit is even worse for creditors.

One of their peers reviewed someone’s situation and didn’t feel comfortable lending them money. That’s a red flag!

3) Approved and Passed
The consumer may have just been shopping. However, creditors would prefer only seriously interested people apply.

The first two reasons are why hard inquiries are is a key component of credit score. Reduced shopping is a side benefit for lenders.

Shopping Auto Insurance

There isn’t a good reason for insurers to penalize people for shopping auto insurance.

If someone gets a new auto insurance policy, they’ll almost certainly drop their existing one.

Otherwise, two insurers might pay less separately if there’s a claim! Their payments would be coordinated.

There’s not an “insurance score” which gets impacted by checking for auto insurance like there is with a credit score.

A red circle with a red line through it with the words "Insurance Score" in white. the background is black.

Pay in Full Discount

Some insurance companies offer steep discounts for paying a premium upfront. These discounts can be up to 15% every six months!

That’s like a 30%+ annual return with high certainty. Few opportunities have such a good return for so little risk.

Discounts are another reason to have cash available.

Title: "Pay in Full Discount" in the upper left. Below is says "15% every six months" then "is like 30%+ a year" in smaller font. The right has an image of someone dropping a quarter into a piggy bank overflowing with $1 and $100 bills.

Add-Ons

Regulators want insurers to make money. That way, they have more than enough money to pay the insurance claims.

As a policyholder, you also want them to make money. That means you weren’t in a major accident!

The “extras” are profitable for insurance companies. Use them sparingly.

If someone already has AAA, it probably doesn’t make sense for them to pay for roadside assistance!

I hope this helps!

If you’re interested in a review of your specific situation…


Disclaimer

In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.

Kevin Estes | Founder | Scaled Finance

Kevin Estes is a financial planner helping T-Mobile employees and their families live their best lives.

He worked in T-Mobile Financial Planning & Analysis for nine years and has extensive experience with T-Mobile’s compensation and benefits package. He received a certificate in financial planning from Boston University, passed the CERTIFIED FINANCIAL PLANNER™ exam, and founded Scaled Financed in 2022.

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https://www.scaledfinance.com/
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