Shop Auto Insurance
By Kevin Estes
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.
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:
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:
a less expensive vehicle,
less often, or
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.
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
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
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
Branding
Insurance is highly regulated. What truly matters is the:
coverage and
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:
They’re approved and accept it
They’re denied
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.
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.
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.