Table of contents for Myths
Insurance is one of those things we have to have but don’t necessarily understand fully. We have life insurance, auto insurance, property insurance, business insurance, liability insurance and so on. Insurance myths come about due to this inherent lack of understanding of the insurance industry. Some of these myths are so prevailing that until I started to study insurance and got a better understanding of the industry I believed them myself.
Red Cars Are More Expensive to Insure
This is probably the most common myth about car insurance, until a few years ago I too believed that red cars cost more to insure. The fact is that insurance companies do not pay any attention to the color of the vehicle and often do not even ask about it. When it comes to car insurance companies care about the make, model, year, body type and engine size of the car; they do not care about the color.
If Someone Driving My Car is in an At-Fault-Accident I Will Not Be Responsible
Wrong! If you lend your car to someone you will be lending your insurance along with it, if they cause an accident it will stay on your insurance record and insurers will rate you for it. The policy covering the vehicle is considered the primary policy and is liable for the damage, in some cases if there is insufficient coverage (maybe a deductible difference) than the driver’s policy may kick in to cover the difference. This may vary from province/state to province/state.
Auto Insurance is Not Regulated, Companies Can do As They Please
This could not be any further from the truth. Although it may feel like insurance companies are ripping you off and can do as they wish, this is not true. The insurance industry is highly regulated and every company has to file their rating system with the appropriate regulatory bodies, they cannot randomly increase rates on individuals.
If My Car is Totaled, Insurance Company will Pay Off the Lease/Loan
False! If your car is totaled the insurance company will only pay you the actual cash value of the vehicle, this is the value of the car before the loss occurred minus depreciation. If the amount you owe is more than this then you will be responsible for the difference. Often when the vehicle is leased/financed brand new you can purchase a “depreciation waiver” in which case you would receive the actual purchase price of the car without any depreciation.
You believe any of these myths? Any other myths you’d like to shed some light on? What is the most common myth you have heard?
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Article by Ray
Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.
Ray has written 271 articles.
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{ 11 comments… read them below or add one }
A lot of times you will either be required to carry or can opt to carry GAP insurance. Gap insurance covers the difference between fair market value and the outstanding loan principle on a vehicle. This way you are assured your insurance will pay for the full value of your loan in the event of a total loss.
I work for an auto insurer, so I really liked this article. I’m going to add:
“My credit score has no effect on my insurance rate.” In some states, credit is a major factor in how much you’ll pay for car insurance.
“Men are better drivers than women.” Women actually get in fewer accidents than men do.
As you said, the insurance industry is highly regulated, and any rate changes must be justified.
@ Kyle thanks we do not have GAP in Canada and I was not fully aware of it works. thanks!
@Daniel good point! more and more insurers are checking credit scores now
“If Someone Driving My Car is in an At-Fault-Accident I Will Not Be Responsible”
I have to admit, I have always been a little unclear about that one (never been in an accident), but I do lend my car out a lot, so I need to be more careful I guess.
I’ve always had a sort of amazement of how insurance companies rate people based on their demographics. It’s not that I’m bitter about paying more or less (I realize the laws of averages are at work), I just honestly find it fascinating.
For example, someone shared with me once that their insurance went up because they were a female OVER 35 (I forget the exact age) and more likely to be distracted by driving with kids. I mean–who would think of that? Lol Insurance companies, I guess.
Awesome post, and a great, great series you have going.
@ Wojciech Kulicki I doubt they were able to pinpoint the cause exactly, but I’m sure that females over 35 or whatever were more likely to be distracted by kids, and they increased the rate because of this. My guess is that this is an educated guess. The reason behind the poor driving doesn’t matter, as long as there are numbers to back up the rate changes.
@Daniel – Yeah, I guess the WHY is kind of irrelevant to insurers, as you say “the numbers back it up.” For me anyway, the fun part is trying to understand the stats and why certain groups are more likely to crash, etc. I think it’s fascinating. And I’m sure it’s never just one factor, but it’s just my nature to try to figure it out anyway.
Thanks for chatting!
Then you’ll appreciate this: all things being equal, the best rates go to actuaries – apparently they are the most conscious of the way they drive and how much it would cost them if they got in an accident!
I’m not surprised.
It makes sense that insurers don’t take into account the colour of a vehicle, but I’ve heard that insurers do take into account speeding tickets and that red cars get more speeding tickets. If both of these things are true, then red cars would cost more to insure even though insurance companies ignore colour.
A few more based upon my personal experience –
1. “No-fault insurance” means it’s not my fault (it actually means that your insurer will pay for your treatment no matter who’s at fault)
2. The Government decides my insurance rates (The State Insurance department only regulates the rates your company sets. The calculation of your premium is actually based upon your age, sex, marital status, laws of the State you reside in, your credit history, driving record etc.)
3. I’m covered for hail, windstorms, deer and theft even though I do not have a comprehensive coverage! (Collision coverage only insures you against a collision. Period. To cover your car adequately you should go for at least both collision and comprehensive, but not if your care is very old!)
An important point made is that when you let someone else drive your car you are still on the hook for the insurance. If they get in an accident you have a problem. The insurance is with the “car” and not necessarily the person. Watch out.
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