We take precautions to manage risks in our lives. And buying car insurance is no different. Insurance is the best way to avoid the risk of a major financial loss if we’re involved in an unfortunate car accident. But purchasing an auto insurance policy involves more than simply buying the cheapest policy you can find.

Companies advertising “huge savings” may be selling policies which don’t offer much protection. Buying such bargain policies defeats the purpose of having insurance in the first place. Unfortunately policy owners don’t always realize this until after they’ve been involved in an accident. That’s when they’re reminded of all the things their policy won’t be paying for.

It’s also when they realize—too late—that the amount they saved on car insurance doesn’t begin to cover their new out-of-pocket expenses. Either their deductibles were too high or their liability cap too low…or both!

The Best Car Insurance Company is the One Whose Math Fits You

The auto insurance industry is highly competitive, and in order to get business they must market themselves a certain way to a certain target audience. Often that means advertising low-cost premiums. But why are some insurance companies able to offer lower rates than others? Simple. One way is to offer less coverage, as mentioned. But another factor is that they calculate risk differently. And these are two very important distinctions.

Like their very customers, insurance companies must manage their own risk in order to succeed (i.e. make a profit). So they take certain “risk” variables into consideration and then decide how much of a risk it is to insure a particular customer.

For example, a driver named Gayle calls Company X. She tells them she’s got a bad driving record with lots of tickets, but she’s never been in an accident or filed a claim. The agent at Company X reviews her information and decides that, based on statistical data, Gayle is more likely to have an accident at some point…which means she is more likely to file an insurance claim in the future. Gayle is not a safe bet. So, based on that variable, Company X lumps Gayle into a policy group along with similar “risky” policyholders.

Your Risk Profile Affects Your Premium

Obviously insurance companies are willing to take on risky clients. But they lose money when they have to pay out a claim. So the riskier a customer is, the more that person is going to be charged, based on which group policy they fall under.

But if Company X charges Gayle too much, they’ll lose her business. So one way to offset that higher premium cost is for the agent to reduce Gayle’s specific liability coverage amounts and increase her out-of-pocket deductibles.

In other words, instead of Gayle getting $500,000 in liability coverage, the policy can be made less expensive by dropping her down to just $250,000. And instead of her having a $500 out-of-pocket deductible, Company X can increase hers up to $1,000…meaning Gayle is now responsible for the first $1,000 of any repair. Now they can sell her a policy she can afford. But it is not really a “savings” for her if the company is simply cutting down its own liability and putting the financial risk burden on the Gayle! Company X has mitigated their own risk by increasing hers.

However, what one insurance company considers a risk, another might not have a problem with. This is how to truly find the best savings.

Let’s say that, with all other variables being the same, Toby goes to Company Z. He’s got the exact same driving record as Gayle–numerous tickets for speeding, obstruction of traffic, things like that. But, like Gayle, Toby never reported an accident or had an insurance claim. And his agent, based on the data Company Z uses, decides not to consider Toby much of a risk. He gets put into a lower-risk group. His premiums end up costing the same as Gayle’s, but for his money he’s getting more coverage and a lower deductible than her. Why? Because of the way the two companies assess risk differently for the same variable…in this case, the driving history of the customers.

The Factors That Affect Your Savings

There are many variables which agents must take into consideration, many of which have nothing to do with the drivers themselves. What type of auto is being insured and is it paid for? What will the vehicle be used for, and under what sort of conditions will it be driven? Other factors which can impact premium rates include things such as a driver’s age, gender, occupation, credit score, physical address where they reside, and in some cases military background, educational level, and prior insurance coverage. Company X might consider some areas risky whereas Company Z doesn’t. Or Company Z might offer discounts based on certain variables, while other companies don’t.

The bottom line is that buying auto insurance is not like buying a physical product, where it is quick and easy to compare prices. It takes a bit of time. But it’s worth it! The last thing we want to worry about after an accident is a stack of bills because of insufficient insurance coverage.

Take the time to talk to agents. Finding not just the “best price” but the best value for you is the key to selecting the right car insurance, because no two drivers have the exact same situation, and no two insurance companies calculate risk the same. So it pays to avoid the marketing trap of simply going for the fastest, cheapest rate out there.

Determining and investing in the right amount of coverage for your situation will protect you against potential future losses in the event of an accident. Meanwhile finding appropriate savings and discounts which don’t impact your coverage amounts will help free up money for savings!

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