Making the right decision on what car insurance policy to buy is important for your peace of mind and also your pocketbook. When it comes to shopping wisely for a car insurance policy, perhaps the number one rule to keep in mind is the age-old adage about not being a penny wise and a pound foolish.
Cliched as that expression may be, buying too little coverage is one of the consumer mistakes most frequently cited by insurance professionals.
Unfortunately, it’s just one of the many things consumers do wrong when shopping for what can be a particularly critical insurance policy in your portfolio of coverage. Each year there are millions of vehicle crashes in the United States. In 2017 alone, there were about 4.5 million crashes that involved property damage and about 1.9 million that caused injuries.
Mistake No. 1: Carrying Too Much or Too Little Coverage
Finding the right balance between purchasing too much and too little coverage is an important part of the process when signing on for a new policy.
Carrying coverage you don’t need is simply a waste of money, says Tony Arevalo of Carsurance.net.
“Collision insurance for an old car is a perfect example,” said Arevalo. “Such a vehicle is cheap enough to repair or replace that you will end up in the long run paying more for insurance than the car’s value.”
Often consumers will have overlapping insurance coverages as well. For instance, some people’s health insurance policy protects them in the event of a car accident, said Arevalo. If that’s the case, there’s no need to pay for medical expense coverage through your auto policy.
Carrying too little coverage is even more dangerous, continued Arevalo.
In Florida, consumers can choose a policy with only $10,000 property damage liability, he explained. Those who opt for such minimal coverage may end up paying a significant amount of money out of pocket in the event of an accident.
Jo Ann Fisher of Premier Insurance Groups says state minimums for bodily injury and property damage are outdated and are no longer enough to protect anyone.
“They were put into place when incomes and prices were so much lower than they are today,” she said. “People need to make sure they have enough liability coverage to protect their assets, including their income.”
In most states, if your car insurance has paid the maximum that a policy stipulates and that amount is not enough to cover all of the damages you may have caused as part of an accident, there’s a possibility you will be required to pay the difference.
Mistake No. 2: Not Shopping Around
Another critical mistake consumers make when buying car insurance is not exploring the market and the competition, says Arevalo.
“The prices and the quality of insurance vary significantly based on the insurer,” Arevalo said.
As an example, State Farm charges about $251 monthly for full coverage in Long Beach, Calif., according to Carsurance’s own market research. Wawanesa, on the other hand, charges $118 for the same service.
“On top of that, Wawanesa is the second-best Californian auto insurance company in customer service, according to the 2018 J.D.Power rankings, while State Farm is tenth,” said Arevalo. “This illustrates how much variance an average customer may encounter. That’s why shopping around and requesting quotes from at least five insurers is paramount.”
Mistake No. 3: Buying Road Service Coverage
Unless it’s packaged with other coverages you want or need, experts often recommend skipping the road service coverage with your auto policy. Here’s why.
“You may find that you already have this coverage with AAA, through a credit card perk, or as part of your vehicle’s new car warranty,” said David Miller, vice president client executive for personal lines at Plexus Groupe.
The savings associated with not including such coverage on your auto policy may be minimal, but filing a road service claim on your car insurance shows up on your Comprehensive Loss Underwriting Exchange (CLUE) report, explained Miller.
“All of your insurance claims show up on this report, and the data is shared amongst insurance companies when you shop for coverage. More and more insurance companies are starting to look at the total number of “incidents” on your CLUE report, rather than just at-fault accidents, so you want to avoid making towing claims on your insurance policy if possible,” he said.
Mistake No. 4: Carrying Collision Coverage on an Old Car
As Arevalo mentioned, collision is an area where some people overspend if they own an old car. To avoid doing this, it’s a good idea to measure the cost of your collision coverage against the value of your car.
Sites like Edmunds or Kelly Blue Book can provide estimates of your car’s value. You could also check websites like CarGurus to determine what dealers are charging for cars similar to yours.
If you determine that the cost to provide collision coverage is 20% or more of your car’s value, you may want to do away with the extra coverage, said Miller.
“For example, let’s say you’ve done your research, and your car would sell for about $3,000 retail,” Miller said. “The cost for collision insurance on your car is $500 a year and you have a $500 deductible. If your car is totaled, your insurance company will pay you $2,500, which is the car’s $3,000 value less $500 deductible. Your $500 premium represents 20% of the value of your car. Over the course of five years, the amount you pay in premiums will equal the value of your car and that’s assuming your car retains that value over the course of five years.”
Mistake No. 5: Not Updating Your Policy to Reflect Life Changes
Everything from moving to buying a home can impact the amount you pay for car insurance. Yet many consumers forget to call their insurance provider and notify them of such updates.
“For example, shortening your commute means you could qualify for lower rates,” Fabio Fashi, property and casualty team lead at Policygenius. “Or if you’re transitioning from being a renter to a homeowner, updating your auto insurance policy to reflect this change could earn you a discount.”
Owning a home generally represents a better financial situation, explained Fashi, which is why it can translate into a preferred rating from insurance companies. The discount will vary based upon the carrier you choose, but is typically around 5%, he said.
Mistake No. 6: Not Getting the Premium-Versus-Deductible Balance Right
Often, to save money, consumers opt for a policy that offers lower monthly premiums in exchange for a higher deductible in the event of an accident. This approach may not always be wise, said Fashi.
“It may not pay off to have lower monthly payments if you can’t afford what you have to pay out of pocket when filing a claim,” he explained.
“The balance between deductibles and premium payments is related to how much money you have in the bank, and if you’d prefer to pay more or less at the time of an accident,” Fashi continued. “For example, if you frequently have less than $1,000 in savings, you probably wouldn’t want to have a $1,000 deductible.”
Conversely, if you have a solid rainy day fund, it’s more likely that you can afford to opt for the reduced monthly premiums and higher deductible.
Mistake No. 7: Paying for Gimmicks Like Accident Forgiveness
Some auto insurance providers are starting to offer a variety of gimmicky add-on coverage options for policies, and not all of these new products are necessarily worth the cost.
One of the most popular examples is what’s known as a deductible savings bank.
“When a deductible savings bank is added, the client earns $50 towards their deductible for every six-month policy term that they don’t have an accident or violation,” Miller explained.
Policyholders can use the money in their “bank” to pay down a collision or comprehensive deductible. Often, such an option can only be added to a policy if the collision and comprehensive deductibles are set at $500 or higher, said Miller.
“I have a quote for a new business client… without the deductible savings bank, the premiums on his cars are $722 and $899 every six months. If I add the deductible savings bank, the premiums increase to $738 and $922,” Miller explained. “So, for an additional $39 every six months, the client gets a benefit worth $50, but it’s only good if they remain ticket- and accident-free for that six-month period.”
You’re basically pre-paying for an accident you might never have or a ticket you may never get, Miller pointed out.
Additional examples of gimmicky new add-ons include accident forgiveness and deductible dividends. As part of accident forgiveness, an insurance company typically will not charge the policyholder for the first accident occurring after the coverage is purchased.
Deductible dividends meanwhile, are similar to a deductible savings bank. They increase your monthly payment in exchange for a credit on your deductible if and when an accident occurs.
Mia Taylor is an award-winning journalist with more than two decades of experience. She has worked for some of the nation’s best-known news organizations, including the Atlanta Journal-Constitution and the San Diego Union-Tribune.
Frequently Asked Questions
How do I know if I have the right car insurance coverage?
This answer isn’t as cut and dry as it seems. Each person needs to tailor their car insurance coverage to their specific needs, which vary wildly from one situation to the next. The best way to make sure you have the right car insurance coverage is by thoroughly examining each part of your policy.
Take a close look at your deductible, premium, coverage limit, and your state insurance laws to make sure you’re complying with the legal requirements while covering yourself fully in case of an accident. Each state has different requirements for auto insurance coverage and it’s wise to start there.
Once you’re sure you are state compliant, figure out how your coverage breaks down and whether that specific equation works for you. Don’t forget to make sure the amount of coverage you have is equivalent to the amount your assets are worth.
If your policy covers everything you need it to cover while offering a deductible you can afford, you probably have the right car insurance coverage for your specific needs. If it doesn’t, get on the phone with your agent or another professional and ask questions to find out how to fill in the gaps.
What is the right car insurance deductible?
The short answer is: what you can afford to pay in case of an accident. The average deductible is $1,000, but can be lower or higher based on your policy. If you opted for a high deductible but can’t afford to shell out that amount, you won’t be able to pay for your part of the car repairs when and if you get in an accident.
As a rule of thumb: if you get in a lot of accidents, you’ll want a lower deductible. Don’t choose a higher deductible simply because it lowers your monthly premiums. If you can’t afford the monthly premium, shop around or ask your provider about discounts you may qualify for instead.
The Bottom Line
Knowledge of car insurance (or any other life necessity) is power. At the end of the day, you’ll be in good shape if you educate yourself on the ins and outs of car insurance, and make sure you keep these common mistakes in mind.
7 common costly car insurance mistakes:
- Carrying too much or too little insurance
- Not shopping around
- Buying road insurance coverage
- Carrying collision coverage on an old car
- Not updating your policy to reflect life changes
- Not getting the premium-vs-deductible balance right
- Paying for gimmicks like accident forgiveness