Ryan's Blog

Tuesday, October 11, 2005

Who are we kidding? Nobody really wants to buy car insurance. It's like raising a child: socially responsible but invariably complicated, costly, and boring. There's even a chance that your "premiums" (the insurance industry's way of saying "exorbitant yearly fee you pay us for the privilege of being completely at our mercy") will exceed the value of the clunker you're looking to insure. After hearing all those negatives, you may be thinking that you don't want to get car insurance after all. So, just for you, we've compiled a list of ways to avoid it altogether:

* Don't own a car. Or drive one. Ever.

* Borrow a friend's insured car. Then appear on Judge Judy to settle the score after you wreck it.

* Work for an insurance company in some department that doesn't deal with car insurance. Befriend somebody in the car insurance department using lascivious methods.

* Consider a change of lifestyle. The Amish do not need car insurance, nor do prison inmates, Eskimos, or contestants on Survivor!.

If these options don't seem particularly appealing, then you'd better read on. Soon you'll be informed enough to understand why your insurance agent looks away and giggles every time you mention your deductible.

1. Find out why you need it

Car insurance? That's for wusses! Maybe so, but there are many good reasons to be a proud car-insurance-owning wuss:

1. It's the law. Almost every state government requires that car owners have car insurance. The fascists. And even the states that don't require it by law insist that you provide evidence that you have the financial resources to pay a judgment against you if you should injure another person. So getting insurance is a good idea, even if you consider yourself a perfect driver.

2. Car insurance protects unlucky people that are the victims of accidents. Surprisingly, car insurance is guided by sound principles: if you put your car through someone's fence, your insurance pays to fix the fence and your car; if you hurt someone with your car, your insurance pays for the injured person's medical bills. And the same holds in reverse if someone puts their car through your fence, car, or part of your body. Now imagine that you got hit by a car, and the driver didn't have insurance… you'd have to pay for the medical bills out of your own pocket, even though it was completely somebody else's fault! So requiring people to have car insurance protects innocent people with bad luck. (We all agree that getting smooshed by a car is bad luck, right?)

3. Insurance companies can handle huge bills. Insurance companies work by charging customers periodic fees and then footing the big bills if any huge catastrophes arise. These big bills come from one group of people: lawyers. When someone gets in an accident, he immediately hires a lawyer who demands that his client receive compensation for "pain and suffering." So a car accident can potentially cost hundreds of thousands (or even millions) of dollars. Who has that kind of cash sitting around? If you have insurance, the company will pay. Then how do insurance companies make money? Because for every 1000 people that pay monthly fees, only a few will need huge amounts of money. The premiums that customers pay every month more than make up for the rare big bill.

Though insurance regulations can (and do) vary considerably from state to state, there are certain universal terms you'll need to know. These can be broken into two categories:

Types of coverage
General terms and phrases

Types of coverage

When you get in a car accident, there are tons of things that could happen: you hit someone, someone hits you, you hit a tree, a rock falls on you, someone breaks a window and steals your radio… As such, you might only want protection from certain types of disasters, preferring to have lower monthly premiums. Listed below are the five most popular types of coverage that people get.
Liability This protects you if you are found at fault in an accident by paying for damage to other people's cars and property, any medical bills they might have incurred as a result, as well as any "pain and suffering" the accident may have caused them. Far and away, liability coverage is by far the most important component of your insurance, as it is the only type of coverage required by law.
Collision Pays for your repairs up to the book value of your car regardless of who was at fault in the accident. Whether you were rear-ended or did some rear-ending yourself, collision coverage will pay to have your dents hammered out and the bumper put back on. If you are leasing or financing a new car, dealers will often require that you have this type of insurance.
Comprehensive Protects your pocketbook from wrathful acts of God by paying for the repairs of any physical damage caused to your car by anything other than a collision, such as fire, vandalism, theft, or hitting an animal (which, in our opinion, seems like a collision, but those crazy insurance guys don't see it that way).
Medical Unlike liability (which pays for the hospital bills of those in the other car) this coverage pays for the bills of you and your passengers. This is also known as "Personal Injury Protection."
Uninsured and Underinsured Driver Covers damages done to you, your passengers, and your car caused by uninsured or underinsured drivers as well as "hit and run" or other accidents caused by unidentifiable vehicles.

General terms and phrases
Deductible The amount of money you're willing to shell out before the insurance kicks in. The higher your deductible, the lower your monthly insurance bill. Here's how deductibles work: Say you have comprehensive collision insurance with a deductible of $500. You're driving along and you see a stunning man/woman sauntering on the sidewalk. Your eyes meet and he/she smiles, obviously intrigued by your evident charm, right as you drive smack into a telephone pole. Fortunately, the damage to the car is minimal: $600. You will now have to pay $500 of the damages and your insurance will kick in the last $100.
No Fault A type of insurance (currently only in 13 states) created to thwart wily lawyers, and consequently lower insurance premiums, by requiring each driver's insurance to pay only for repairs to his own car, regardless of who was at fault in an accident. It didn't exactly work as intended, though, and most states still require that your insurance pay for the damage you do to another car in an accident where you are found at fault.
At Fault This means you are responsible for an accident in the eyes of the law. Fault is described in percentages established according to certain arcane standards that are part of your state's traffic code. If you have 51% or more of the blame, you're at fault.
Umbrella Policy

An insurance metaphor for a general insurance policy that covers all of your property (car, home, etc.).

You are now equipped with the vocabulary to understand the intensely fascinating process of acquiring an auto insurance policy. Creating a policy that's right for you is similar to deciding what options you want to purchase when buying a car. If you can live without a leather interior, then it would be silly to spend money on it when what you really want is a CD player. Similarly, when buying insurance you need to establish your priorities. To help you, we've broken down the process into the following easy steps:

1. Select your mandatory coverages
2. Select your optional coverages
3. Set your deductible

1. Select your mandatory coverages

We're assuming that you already own a car or will shortly. After registering your car with the state and getting your personalized license plates (LV NSYNC), you must familiarize yourself with your state's auto insurance regulations. Whooh-hooh! We're assuming that you already own a car or will shortly. After registering your car with the state and getting your personalized license plates (LV NSYNC), you must familiarize yourself with your state's auto insurance regulations. Whooh-hooh! When an accident occurs, an insurance company must be willing to pay up to a certain amount of money to foot the bills -- this is called the minimum liability coverage. Why is minimum liability coverage important? Let's say you get hit by a car. If the driver's liability coverage is for $7, his/her insurance company will cover your bills up to $7.

Most debilitating accidents will set you back more than $7. So each state requires that all drivers have liability insurance that at least goes up to a reasonable number (though it can be more if you want). New York, for example, requires a minimum liability of 25/50/10:

* The first number is the maximum amount (in thousands of dollars) the insurance company will pay for any one person (in the other car) injured in an accident.
Ex.: $25,000

* The second number is the maximum amount (in thousands of dollars) the insurance company will pay for all parties (in the other car) injured in an accident.
Ex.: $50,000

* The third number is the maximum amount (in thousands of dollars) the insurance company will pay for any car/property damage (again, done to the other car) due to an accident.
Ex.: $10,000

Insure.com offers a handy guide that outlines the minimum coverages required by law for each state. You can also contact your state insurance department to get this info.

While many drivers elect to go with their states' minimum liability requirements, insurers often recommend going with a higher amount, especially for customers with a substantial net worth. Remember, other people's pain and suffering are costly propositions, especially in the hands of a talented lawyer.

Also, it's important to remember that if you're leasing or financing your car, it's likely that the dealership will require you to get higher liability coverages than the state minimum. This, of course, will cost you.

2. Select your optional coverages

Here are some optional coverages that you might not need:

* Collision/comprehensive. As we discussed earlier, these coverages pay to repair your car. Paring down your collision/comprehensive coverage (or skipping it altogether) is a surefire way to save money, as these coverages tend to be quite expensive, but we don't recommend this if you've just purchased a spanking new car. Also, if you're leasing or financing a car, then you must get comprehensive and collision as required by the dealership. If you're driving a coughing Pinto that can barely make it around the corner, then you should completely forego collision insurance and use the money to buy another car after the Pinto spontaneously combusts.

* Medical insurance for your passengers or drivers that aren't listed on your policy. Not buying medical coverage for yourself if you already have health insurance that will pay for your hospital bills in case of an accident is a good way to lower your premium.

* Extension of your coverage to rental cars.

* Extension of your coverage out-of-state.

* Substitute transportation coverage. This coverage pays up to a certain amount per day towards a rental car if your car is in some way incapacitated (up on cinder blocks in the front yard is unfortunately an invalid criterion).

* Towing and labor coverage. This pays a certain amount towards the cost of having your car towed if it breaks down. If you own a new Mercedes convertible that purrs like a kitten and never breaks down, chances are you're wasting your money on this.

3. Set your deductible

Like we said before, lower deductibles mean higher premiums (the insurance company has to pay more if you have an accident), so weigh your options carefully. If an expenditure of $500 will break the bank, then stay low, but if you can muster that amount at short notice without too much trouble, consider higher deductibles.

Car insurance premiums are affected by various factors:

* Your age, sex, marital status (insurance for single folks is higher than for married ones), and where you live. Unless you know a really good surgeon or are willing to get married or move, there's not a whole lot you can do about these criteria.

* The year, make, and model of your car. Driving a luxury, "classic" (a '76 Pinto doesn't count) or sports car-all favorites among auto thieves-will hike up your premium.

* The intended use of the car (business, commuting, travel, or personal; insurance agents get annoyed when you say "driving") and the yearly mileage you expect to put on it. The less you drive your car, the less you'll be likely to have an accident, the less your insurance company will charge you to insure it.

* Where you keep your car. If you park your car in a covered lot, your insurance will be lower than if you park it on the street. We recommend not calling behind the gravel pile in the yard a "garage," as insurance companies can refuse to pay your claims if they find that you have lied to them in any way.

* Passive restraint. Safety features like automatic seatbelts and airbags make insurers happy, and when they're happy, they charge you less.

* Car alarm. The louder and more obnoxious, the less you'll pay. Keep in mind that alarms that set themselves automatically offer a higher discount than those that must be physically turned on by the driver. Some companies offer discounts if you have "The Club."

And because we're so nice, we're going to offer you a few lesser-known "insider" tips that may help you save money:

* Consolidate insurance policies. If you have health insurance, home insurance, and car insurance, chances are that if you buy them all from one company, they'll offer you a good deal.

* If you're a teenager, successful completion of drivers' ed can save you 10% or more.

* If you're over 65 or 70 (exact age depends on the state), successful completion of a defensive driving course could save you a bundle. In certain states, drivers of all ages are eligible for the defensive driving discount.

* If you're a student, get good grades. Conscientious students make conscientious drivers (so the reasoning goes).

* Maintain good credit. Insurance companies like proven responsibility.

* If you commute to a metropolitan area, use public transportation. Less rush hour driving lowers your premium.

* Maintain a good driving record. Many states "award" surcharge points for every moving violation. These points go into an algorithm most likely designed by those pesky actuaries that helps determine your premium.

* Try to avoid filing claims. If you knock off a bumper or bend someone's fender, it's usually better to pay for these minor repairs than to involve your insurance company, which with the least provocation will deem you an unsafe driver and hike up your premium.

Now that you've envisioned your ideal policy, write it down and scour the Yellow Pages and the Internet for insurance companies to contact. Make a list and start getting quotes over the phone and/or off their web pages. The web boasts insurance search engines like InsWeb that will let you compare quotes from various companies in one fell swoop. However, speaking to representatives on the phone is always preferable filling out online forms.

When talking to insurance agents, don't be afraid to ask about options they don't mention. Also feel free to ignore some of their suggestions if they contradict your financial priorities. Remember that they are SALESPEOPLE; the more you spend, the better they do. There are two objectives you should keep in mind when shopping for car insurance:

1. Make sure it's affordable
2. Make sure it's dependable

1. Make sure it's affordable

News flash: Different insurance companies have been known to charge very different rates for the exact same coverages. These variations in price are often the result of the way in which a particular company actually sells their insurance. Insurance companies sell coverage in one of three ways:

1. Directly to the consumer over the phone or the web. This method is the cheapest, but the companies that use it, like GEICO and Amica Mutual, tend to only accept drivers with near perfect driving records. Sometimes these companies have divisions that cater to not-so-good drivers, but these rates tend to be much higher.

2. Through agents of the company itself. State Farm, Allstate, and Farmers all use this method to sell insurance, which falls in the middle range on the price scale. This is a good option for those with average driving records.

3. Through independent agents who act as intermediaries between various companies and the consumer. They generally provide the most thorough information regarding possible options, but - being middlemen - they tend to be the most expensive. You can find agents in your area through the Independent Insurance Agents of America.

2. Make sure it's dependable

What good is a $200-a-year policy if after you pay your premium you never hear from the company again, and every time you call their toll-free number you get a recording of a woman panting and whispering things that have very little to do with insurance? Absolutely none. Shopping around for car insurance involves finding a happy balance between the service you'll receive and the price you'll pay.

Once you've narrowed down your list of possible providers, check up on their track records with consumers. Consumer Reports, SafeTnet, and Insure.com do extensive research on consumer relations with insurance companies, so giving them a visit would be a good start. Besides that, just use common sense. If an insurance company is unhelpful and unfriendly on the phone when you call for a quote, chances are they won't be much friendlier when you file a claim with blood gushing out of your skull.

So you should now be set! And if you happen to get a "huge cash settlement," please remember to give us a cut of the action.


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