Why You Might Not Want the Cheapest Auto Insurance Quote
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UPDATED: Apr 29, 2019
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You’ve probably heard the phrase “you get what you pay for.” It is one of those common idioms we use to illustrate the fact that, with many products and services, quality and price are intrinsically connected.
It certainly is true with auto insurance, to the extent that it’s not always the wisest idea to choose the cheapest auto insurance quote.
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The cheapest auto insurance policies will provide you with at least minimal protection in the event of an accident. There are even some relatively inexpensive policies that will give you slightly more than just minimum coverage.
But before you settle on the cheapest possible policy, you need to consider some very important things.
Without understanding of how the insurance business works, you could find yourself needlessly suffering because you have the wrong kind of policy.
The Cheapest Policy around
In the world of auto insurance, there are three basic categories under which all of the different coverage options fall. They are:
- Liability insurance
- Collision and comprehensive coverage
- Extra coverage
Beginning with minimal liability insurance, most of us carry it as a matter of mandatory state law.
With the exception of Iowa, all of the states require drivers to procure some sort of proof of financial responsibility in order to legally operate a car on the public roads.
Some states offer options like posting a bond, making a cash deposit, or self-insuring.
Most of us meet the legal requirements by simply purchasing a liability policy.
An auto insurance policy covering liability only is the absolute cheapest policy you can purchase. How much coverage a policy provides depends on the laws of the state where you live.
Using Indiana as an example, its law lists the minimum liability amounts as follows:
- $25,000 per accident for injury to, or the death of, one person
- $50,000 per accident for injuries to, or the deaths of, multiple persons
- $10,000 per accident for the instruction of personal property
Collision, Comprehensive, and Extras
Minimum liability laws in some states also include personal injury protection (PIP) and uninsured/underinsured motorist (UM) coverage. Where these options aren’t required they can be added to a liability policy without having to add anything else.
Other extras include glass coverage, mechanical breakdown insurance, and coverage for custom or high-performance parts.
Collision and comprehensive coverage are two types of insurance many of us have by virtue of the fact that we take out loans to purchase brand-new cars.
According to the National Association of Insurance Commissioners (NAIC), your bank may require you to carry both coverages as a means of protecting their investment in your vehicle. You may notice such language in your sales contract or loan paperwork at the time of your purchase.
Collision and comprehensive policies pay to repair or replace your vehicle under just about any circumstances. This is important to the bank because, without such insurance, an accident could leave you without a vehicle.
It could also leave your bank without something to sell in the event you default on your loan.
Some banks stipulate that drivers who fail to get comprehensive and collision could be forced to pay for a bank policy by way of larger monthly payments.
After Your Loan Is Paid off
Once your loan is completely paid off you should be able to drop your collision and comprehensive coverage.
Yet, doing so may not always be the best course of action.
For example, let’s say you pay off your loan in four years, but your car is still worth well over $10,000. Unless you have that much money lying around to replace your car, you probably want to keep your collision and comprehensive in force.
Another reason why you might continue with this coverage is to protect a customized car. If you’ve added a lot of costly, high-performance parts, had a custom paint job done, or added expensive wheels, you may not want to take the risk of going with liability only.
As a general rule of thumb, if the Kelley Blue Book or NADA resale value of your car is more than $5,000, you should consider keeping collision and comprehensive as part of your policy.
Protecting Valuable Assets
In the vast majority of U.S. states (38), all car accidents are subject to civil litigation for the recovery of financial damages.
For example, if you live in South Carolina and cause serious injury to another person, that person could take you to court to recover money spent on medical care, plus additional amounts for pain and suffering and loss of work.
If you have the cheapest auto insurance with just minimal liability you would be forced to pay any award above and beyond your policy amount out of your own pocket.
That means it’s a good idea to increase your liability limits if you have assets such as real estate, securities, or collectibles you don’t want to lose.
The Texas Department of Insurance recommends that, based on the cost of modern healthcare, most drivers should consider increasing liability amounts. You might also consider an umbrella insurance policy.
In the 12 states where some measure of no-fault insurance is used, the ability to sue another driver is somewhat limited. For example, in New York State the no-fault laws only allow an accident victim to sue for damages if their injuries meet a certain set of criteria.
Those who qualify are likely to be given a sizable award should the court side with the plaintiff. Because of this, you might want extra coverage if you own valuable assets.
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Yet another situation in which you might not want the cheapest auto insurance is if you own a classic vehicle. Assuming you have invested the time and money into restoring this vehicle, it’s unlikely you would be able to replace it using the cheapest car insurance you could find.
Comprehensive and collision notwithstanding, most classic car owners invest tens of thousands of dollars in their vehicles.
It’s simply not reasonable to expect cheap auto insurance to cover all of it.
Fortunately, there are a handful of insurance companies around America specializing in classic car insurance. If your car is simply a showpiece that you transport from one venue to the next using a trailer, you can get a pretty inexpensive policy.
But if you drive that vehicle on the roads the price goes up exponentially.
If you’re so inclined, you can get a top-of-the-line policy that covers everything from minor fender benders to complete loss — and everything in between.
When the Cheapest Insurance Is Appropriate
We’re not trying to dissuade you from purchasing the cheapest auto insurance; rather, we’re simply suggesting you to put some careful thought into the decision. There are times when a cheap liability policy is appropriate.
For example, a first-year college student planning to live on campus should purchase such a policy.
In all likelihood, that student will not need the vehicle for moving around campus on a day-to-day basis; she’ll walk or take campus buses.
That means her car will be relegated to the parking lot, except when she leaves campus on nights or weekends. That limited amount of mileage equates to less risk simply due to the fact that the car is not being driven.
By the same token, most college students in these circumstances will be driving older, used vehicles given to them by their parents or purchased locally. In most cases, they will have clean titles with no outstanding liens or loans.
Finally, the age and quality of these cars mean they don’t have a very high resale value.
These things combined suggest you don’t need to carry anything more than the minimum liability coverage.
Similarly, adults who have low-value vehicles with clean titles can also benefit from cheap auto insurance.
It all comes down to evaluating your net worth, what you’re willing to risk, and how much you’re willing to pay in deductibles.
There really is no way to say how cheap is too cheap, or how expensive is overkill. This is a decision left up to individual drivers and their families.
One last thing to consider is the subject of deductibles. A deductible is the amount of cash you must contribute out of pocket as part of an insurance claim.
For example, a $500 deductible means that, if you file a $5,000 insurance claim, you pay the first $500 and the insurance company picks up the remaining $4,500. The size of your deductibles does affect your annual premiums.
You can reduce your premiums by increasing your deductible amounts. This is certainly a risk on your part, given the fact that it could cost you more after an accident than you pay into your policy.
But assuming you’re a safe driver with a limited number of accidents in your lifetime, it might be a good idea to trade the risk of a high deductible with a lower premium.
This is not a good idea if you are prone to getting tickets or having minor accidents.
Sometimes the cheapest auto insurance is the right option. Sometimes it’s not. Be careful to evaluate all of your needs before determining what the best policy is for you.
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