Cheap car insurance is all over the airwaves. The General, SA, and even Allstate are touting low cost plans to young and old. Though these offers may seem enticing, it’s important to step back and think through what’s behind the cheap insurance plan promise.
As it turns out, it may be that insurance companies that offer “cheap insurance” do have a secret formula behind the great prices – cutting coverage. Cheap insurance may end up being much more expensive than a regularly priced insurance policy–if the insured has an accident or claim and in the long run.
Francisco Mayo, owner of an insurance agency in Lynchburg, Virginia, agrees that some of the companies who promise unusually cheap insurance policies are likely cutting some corners and perhaps taking advantage of consumers’ lack of insurance knowledge.
“I definitely think that they do often just provide minimum liability limits,” Mayo told me.
Writing policies with low liability limits is something largely practiced by many firms that offer cheap rates. Sometimes these insurers will take the insured’s basic information and automatically plug in the liability limits required by the person’s state without even asking the customer what limits or coverage they want. This is a huge risk for the insured, and could result in a very unfortunate situation.
“If someone is underinsured, it can have a long term financial impact if they have a severe accident they’re liable for. Once those liability limits are exhausted, the individual is responsible for the rest of their damages,” explained Mayo, who has been working in the insurance industry for over ten years.
Mayo has heard from customers first hand who have not only been offered low limits of liability but who have also been provided false information when buying cheap insurance or getting quotes.
“Regardless of what limits the client has when they get their quote, sometimes when they go to these insurers they’re quoted at state minimums. I’ve seen situations where the client asks ‘is this the same coverage I have?’ and the insurer says ‘yes,’” Mayo shared.
The liability limits required by each state varies—for example, North Carolina requires $30K per person and $60K per accident for bodily injury liability and 25K for property damage liability. However, California requires only $15K per person and $30K per accident in bodily injury and only $5K in property damage.
Bodily injury liability pays out when the policy holder causes an accident, and pays only for the medical expenses of the other party if the not at fault driver or passengers are injured. Property damage liability pays if the insured causes physical damage to another person’s vehicle or property.
Even though $30K may sound like a lot of coverage, one must consider how expensive medical bills, cars, and property damage repairs can be. For example, an insured may have $30K in bodily injury liability, but what if the insured is at-fault in an accident that injures a family of four? Imagine if one of them is paralyzed for life. The medical expenses could add up quickly, and the average cost of spending just one night in the hospital is $5,180 according to the American Medical Association. Multiply that by four and add in other medical expenses. Now add in the cost of any judgment made from a potential (and likely) lawsuit filed by the paralyzed individual. Imagine $100K is awarded to the plaintiff—that would exceed the $30K policy. The at-fault driver is responsible for anything over that amount. If the driver can’t pay for it out of their own pocket, a judgment can be placed on any personal property or assets, and personal property could be seized.
Insurance companies that offer low premiums are often writing policies with only state minimums, and aren’t informing customers of what the implications of their choice may be. Customers can quickly end up under-insured — left without enough coverage to pay for any damage they cause.
Consumers can also be without coverage for themselves, another downside to cheap policies. Insurers will sometimes leave off physical damage coverage, which is comprised of comprehensive and collision coverage. Collision coverage pays for the insured vehicle if it’s damaged and the insured is at fault, and comprehensive coverage pays for vehicle damage if it’s from anything beyond the insured’s control, such as theft, vandalism, damage from animals, or weather. Without these, the insured will not have ANY coverage on their vehicle and would have to pay for repairs or replacing the vehicle out of pocket.
Similarly, if a customer DOES ask for comprehensive or collision coverage, the insurance company may quote the policy with extremely high deductibles, the amount the insured is responsible for paying in the event of an accident. Most are aware that higher deductibles can lower a premium, but not everyone wants to be responsible for a large deductible. In order to keep premiums low, the insurance company may often select a high deductible — once again leave the insured with the possibility of a large out of pocket expense.
In addition to writing liability only, insurance companies aiming for a cheap premium will also leave off optional coverage, such as towing and labor, rental car reimbursement, and even medical expenses, which pay for the insured’s medical bills if injured in an accident, regardless of who is at fault.
Unfortunately, the customers who buy these low-cost policies may be getting a cheap rate, but they’re also not getting very much for their money. They often have hardly any coverage at all. This is largely due to the fact that most people simply aren’t aware of what they’re even missing since most aren’t very familiar with auto insurance.
“The average customer does not always know the ins and outs of what they need to look for,” said Mayo.
That means the insurers are likely taking advantage of that lack of knowledge, and even if the insured does ask for a certain coverage level, some insurers may fail to explain what the policy truly means as well.
Getting the cheapest policy can also prevent drivers from getting possible discounts in the long run. Most insurance companies offer a discount for those who carry higher limits of liability, so drivers could end up missing out on a chance to save money in the future.
Even after signing on for a cheap premium, some policyholders may be in for an unpleasant surprise – the cheap policy may not stay cheap for long. Sometimes an insurer will charge a policy premium that’s only going to be in effect for a short time, and hike up the policy premium after the policy has started. This can happen in situations where the insurance company provides a quote but doesn’t rate something from the insured’s record at the policy inception, such as an accident, violation, or additional driver. The insurer could rate that missing element and increase premium mid-policy, leaving the insured driver sometimes stuck depending on the situation. This can be especially stressful if the policyholder has authorized the insurance company to make automated charges from a checking account or credit card.
Instead of buying a cheap policy just because of its attractive dollar amount, there are some things people should do to make sure they have the coverage they need while still getting a good price.
- Avoid buying policies from insurers who seem to use ‘cheap auto insurance’ as their calling card.
- When shopping for auto insurance, compare quotes from several insurers.
- Always get quotes with the same coverage and limits across the board for accurate comparison.
- Ask for an explanation of all the options available, what each one means, and what possible risks are by not having a particular coverage.
- Be honest and make sure all violations, accidents, and other information is accurate to ensure proper underwriting and rating so rates don’t suddenly change.
- Look for insurance companies who offer great discounts so policies with better coverage are still affordable.
- Ask about any surcharges or fees associated with the policy, such as being charged extra to pay premium monthly.
- Check out an insurance company’s reputation and financial strength by visiting AMBest.com as well as searching for any complaints with the Better Business Bureau and state insurance departments.
Mayo says the popularity of offering ‘cheap’ insurance policies, as well as buying these kinds of policies, is now nothing new.
“There really is a movement in this industry of going to the lowest possible payment no matter what and sacrificing coverage, and insurers not explaining what the coverage does and what it means.”
-Desiree Baughman, InsuranceQuotes.org, @DesireeDB
Facebook Comments