Car insurance is the most common spend that, if you own a car, you can’t live without. Even though it is a necessary spend just like food you purchase from grocery store or eating out, most of us actually don’t look around the prices for car insurance like we do for other spends. When we don’t like food in one restaurant, we switch and find another one, however, very often, we stick with the car insurance despite of potential savings or better services out there.
What is a car insurance policy?
An auto insurance policy is a contract between clients and insurance company where clients pay for premium and insurance company to agree on limited payout in case of accidents.
How does auto insurance make money?
Auto insurance works like a bank. They take in premium from clients as cash inflow, with calculated risk, they pay out for claim and invest the cash with a return, i.e. invest in an interest earning vehicle.
Insurance company collects premium and limits its liability or pay out back to client. With this limit, insurance is able to have a risk controlled portfolio to ensure it generates net cash inflow while leveraging average daily balance to generate return on investment.
Let’s take an example. If someone gets into an accident and the pay out from insurance is $2,000 for the accident. The premium collected from this very client in the past few years totals to $1,200. Insurance company is paying $800 more than what this client has paid to the insurance company. However, there are two other resources insurance company has to ensure the profit in business. One is that there are other clients paying for premiums without incidents and the returns on investments that insurance made using premiums. With this portfolio management, insurance company stands to make a profit.
How to lower your auto insurance bill?
To lower your insurance bill for covered loss, we need to understand what factors auto insurance use to determine the premium for you to pay.
Deductible: the higher the deductible, the lower the premium. If you don’t run into incidents often and consider yourself a safe driver, this is the most direct way of saving. Choose a higher deductible can significantly lower your insurance premium.
Limit comprehensive coverage if your car is old. For an old car especially when car total value is very low, the insurance will often to chose total the car. It makes sense to chose fewer or even drop the comprehensive coverage.
Bundle with real estate and other insurance. The more insurance types you bundle, the more bargain power you have. If you own a house, it makes sense to bundle with auto insurance to get multi insurance discount.
Co-brand or affiliate savings: Many insurance companies choose to have a co-brand with other merchants and offer discounts. For example, if you purchase insurance with Ameriprise while being a Costco member, you will have a membership discount.
Take defensive driving class. Most insurance companies will provide a discount if you finish a defensive driving class because it is a sign that you are mindful about driving. Defensive driving typically takes 6 hours online course and can lower auto premium quite a bit.
Shop around. How frequent do you change your insurance company? Are you sticking with your insurance company because you had a great experience 3 years ago or because you just simply did not think of changing? Shop around for a lower premium every few years is a direct way of saving opportunity.
Why insurance company increase premiums sometimes?
Sometimes you get a notice that your premium is increase despite of no accidents. There are two major reasons for insurance company to adjust premium:
Inflation: Inflation impacts insurance company operation expense including employee salaries. The increased premium is used to cover pay increase and other overheads etc.
Investment loss: remember we mentioned that insurance company uses premium collected to invest for an interest or other financial returns? Sometimes the investment can incur loss too. When there is a loss, insurance company would pass it to the clients for premium increase. This is why you want to shop around especially when you have to pay higher premium for no faults. Chances are you might find a cheaper premium given your good driving record.
Auto insurance will most likely to be increasing over time due to inflation, but there are ways you can find to save money. Hopefully the understanding of how insurance company works can help you understand why they would charge premiums differently from one company to another. Don’t stick with an insurance company due to some experience long time ago or even decades ago. Talk to other companies might give you some surprises.