- Personal Finance»
Save on Auto Insurance by Ditching Full Coverage
"Actually lowering the cost of insurance would be accomplished by such things as making it harder for lawyers to win frivolous lawsuits against insurance companies." -Thomas Sowell
One thing you will never hear an agent say proactively: "You don't need full coverage."
Most agents get paid based on how large a premium they can charge the customer. So agents talk customers into paying higher premiums for services and coverage they don't want or need. It is part of the whole "Sell Value Not Price" sales model that has been around since the 70s.
Today, however, the internet and rapid access to information have created a new kind of customer who not only has more information but also more access to quick decision making. Most insurance companies have yet to fully adapt their sales models and scripts to reflect this new change in the consumer base. It is insulting, and at times unethical, if they are talking people into coverage that may put them in a situation to pay more for something they really don't need.
Myself, when I work with customers, I talk them out of full coverage in many circumstances if it doesn't make financial sense. I take the time to explain the logical consequences of their purchase, provide an alternate plan (e.g. saving that money in a separate account), and let them make the final call. In my mind, my job is to provide service and education to the customers I touch, not take advantage of the trust I am trying to build.
Have Your Auto Insurance Rates Gone Up This Year?
Full coverage is great for newer vehicles that are more expensive to fix. Parts and labor on newer vehicles are usually higher and it makes better sense to have this protection in place to offset the cost of repairs to your asset. Full coverage, however, only protects your finances and your car, it has no bearing on your liability when you damage another's vehicle. Also, full coverage only protects what is attached to the vehicle. Thus, if someone steals something out of your car (like a laptop), it most likely won't be covered, as a stolen car stereo would be. Most people don't know these facts and many insurance people don't take the time to explain them properly.
Keep in mind that most of the massive rate increases seen nowadays are on the full coverage side and are due to the increased cost of car repairs. Whatever losses are absorbed in the previous year are adjusted for in the premium you pay on your auto policy, which is why you see random-seeming premium increases. Insurance companies are in it to make money and if they lose money, you can bet they are going to raise prices to make everyone else pay for it.
A good rule of thumb I use is my 10-year rule. If your car is over 10 years old AND doesn't have a lien on it—that is, you are through making payments—ditch the full coverage and put that money back in your budget. If you are driving a 1998 Honda Civic that you paid $1200 for, why pay $30+ a month for full coverage when the payout for the vehicle may only be $800 from the insurance company, or even less depending on your deductible? Why not put that money in a savings account and hold on to it to help replace the car in the event that it is totaled out?
Parting with full coverage could put hundreds of dollars a year back into your pocket and bring your insurance premium down significantly. One of the best ways to find the savings you need is to remove this coverage from vehicles that are old and carry a low cost to replace. Don't let an over-zealous insurance salesman try to talk you into coverage that doesn't make financial sense.