By Carl Lachman, MBA, CFP®

What would an expert say?

Recently I asked an insurance agent what mistakes he sees people make when they buy auto insurance. Eric Evans owns the Chrysalis Insurance Agency in Costa Mesa and is someone I have known for about 8 years. Below are the auto insurance mistakes he has seen many people make.

#1 - Purchasing insurance based solely on price.

Sure, no one wants to pay too much for auto insurance and it is important to get a couple quotes, but if you just look at the price, you may not get the coverage you need or want. For instance, there are websites that will let you “name your own price” for auto insurance, but this usually just drops the insurance limits to give you the price you want. “If the limits on your policy are too low, you could have a serious hit to your finances in the event of an accident, whether you cause the accident or not,” said Evans.

Also, if you just focus on the cost of the insurance, you may miss the fact that an insurance agent has purposely quoted a much lower annual mileage than you actually drive. Your insurance will start out at a low price, but as soon as your higher actual mileage is noted at your renewal with the company, your cost will be significantly higher.

Evans says there are numerous “tricks” that an insurance agent can use to adjust a policy so that you think you are getting a good deal, but the coverage isn’t what you want or need.

#2 - Insufficient coverage for uninsured or underinsured motorists.

If you are hit in an auto accident and the other person caused the wreck, what happens if they don’t have insurance – or have very little insurance – and they can’t pay for all of the damages and your medical bills? If your auto insurance policy has good coverage for this un-insured or under-insured motorist, then your insurance company will pay the bills. But, if your policy has very low or nonexistent uninsured and underinsured coverage, then you will have to pay the bills out of your own pocket.

In Orange County, one injury attorney told me that over 75% of the drivers on the road have lousy insurance or no insurance at all, so you can’t count on your bills being paid when you are hit in an accident. You need to have auto insurance that covers you well in both the case that you cause an accident and in the case that you are the victim in an accident. Eric Evans says, “Uninsured motorist (UM) coverage is very inexpensive and there is no need to jeopardize you or your family’s coverage in the event of a UM claim.”

#3 - Having a gap in coverage.

Unfortunately, the value of a new car drops very quickly as soon as it is bought and driven off a car lot. Because of this, it is not unusual for a car to be worth less than is owed on a car loan. This gap between the actual value of a car and the outstanding balance on a car loan can really make an auto accident hurt. You will have to pay a large amount of cash to your auto loan company and your auto insurance won’t cover it.

However, a good insurance agent won’t let this happen to you. They will make sure your policy covers this problem. “Gap coverage” will pay the difference in value between the amount of the car loan and the fair market value of a vehicle in the event there is a total loss. 

#4 - Choosing insurance based on a brand name.

Just because you recognize the name of an auto insurance company, doesn’t mean you will get good insurance coverage. There are a few auto insurance companies that are highly advertised, but will just sell you what you want without any guidance about what coverage you actually need. The 800 number agents are compensated to sell a lot of policies when you call, but they don’t have a good incentive to make sure you get the insurance you need.

When it comes to insurance brand names, you also might have an unjustified loyalty to your current insurance company’s brand. Many people think that if they are loyal to an insurance company, the company will be more loyal in return, but that is just a myth. There is no loyalty, and your insurance company is not going to treat you any better than the next guy, even if you have been with them for 20 years. Instead, state regulations require your insurance company to pay the claims of a 20-year customer the same as a 6-month customer.

Finally, having undue loyalty to one insurance company doesn’t give you any options when rates go up or your rating as a driver changes. You are stuck with the rates from that company. But, if you use an independent insurance agent to do the work for you, then they will have motivation to seek out alternatives for you. Evans points out that, “Brand names are not a guarantee of the best available coverage or the best available coverage options.”

#5 - Letting an 18-year-old purchase their own policy.

Even if an 18-year-old pays for their own auto insurance policy, it doesn’t mean the parents are off the hook in an accident. For an 18-year-old to be solely responsible with their auto insurance in an accident, they would need to be 100% financially independent of their parents, living separately, earning their own income, and paying all their own bills. However, there are some cases that a judge has still ruled those parents are at least partially responsible for such children. Eric makes the point, “In spite of an 18-year-old being able to get a tattoo, vote, get married, and enlist in the military, if they have an at-fault accident that exceeds the limits of their insurance, and are defined as dependent of their family by a judge, the family may be held liable for the damages to an auto and to an injured party.”

Rather than letting your son or daughter choose their own insurance policy – which will probably have low limits that they can afford – it is better to keep them on the parent’s auto policy with proper limits, and then have the child reimburse the parents for a share of the cost as appropriate.

#6 - Putting a classic car on a regular auto policy.

“If you insure an antique vehicle or classic car on a regular policy, it may only be insured at the fair market value and not the actual value of the vehicle. In the event of a claim like a fire, it is difficult to assess the actual value of the vehicle,” according to Eric Evans. Your auto insurance may only compensate you for a portion of what you think the car is worth.

Instead it is better to use a specialized insurance policy for an antique or classic car. Such a policy uses a coverage value that is agreed upon in-advance when you purchase the policy. In a total loss, you know in-advance what the insurance company will pay you for the destroyed car. In some cases, special underwriters are used to write such a policy for very rare or unusual cars.

While this specialized policy may sound like it will be more expensive, it might actually cost less because the car is probably driven much fewer miles per year than a normal car.

#7 - Doing it all by yourself.

It’s true that insurance agents get a sales commission that is based on the insurance you purchase and one is right to be wary. Are they selling you what is best for you or what is best for them? You might think that you are better off picking the policy and policy features all by yourself.

However, when it comes to auto insurance, the industry has used commoditization and call centers as a way to compete for sales, regardless of what is the very best policy for an individual customer. It’s a “cookie cutter” or “one size fits most” approach. If you try to do it yourself, you could very easily buy a policy that doesn’t really fit your situation very well.

If you want to get a customized policy, you will need to use a local insurance agent that can take the time to understand your particular circumstances and will make appropriate recommendations. Evans makes an important point that “the California Department of Insurance has defined responsibility for the proper limits of one’s insurance as being the responsibility of the insured – YOU. Not the insurance company! If you are using a website to quote and purchase your insurance, then you are 100% at fault in the event your insurance limits are inadequate at the time of a claim.” If you use a good insurance agent, you will lessen the chances of being underinsured.

At Eclectic Associates, we often review our clients’ auto insurance policies and coverage limits. Our comprehensive financial planning approach includes this service – and many other services – in our all-inclusive fee-only structure. If you would like to learn more about how we help our clients or get an auto insurance question answered, we would be happy to chat with you on the phone. Make a phone appointment here.