Personal Finance Tips

Looking around the US, all but three states mandate drivers to carry liability insurance. Some states have no-fault schemes. Others add in a requirement to buy a personal injury protection policy. As the healthcare reform bill was signed into law, many asked whether all insurance mandates were unconstitutional. This is a fun debating topic which sounds possible but will get nowhere. States have always had the right to impose conditions on people’s voluntary activities. If you want to drive, you have to carry liability insurance to pay compensation to anyone else you may injure. A more interesting question is the amount of the minimum requirements imposed by your state’s lawmakers.

Most of these minimums have not been changed for thirty and more years. For example, in 1972, Maryland set $20,000 for a person injured subject to a maximum of $40,000 for losses arising out of a single traffic accident. This was intended to cover medical treatment, loss of earnings while recovering, and so on. In 1972, the average annual salary was $12,000 and most hospitals charged no more than a few hundred dollars for treatment. Most new vehicles cost less than $4,000 to put on the road. You could easily buy a new home for less than $30,000. Looking back now, you wonder how we managed on so little money. Prices have risen fast for medical treatment. Injure the wrong person and the claim against you for loss of earnings is going to be frightening. Why should this matter?The liability coverage only pays out the minimum. You get to pick up the bill for all the other losses. So any savings or property you have may be taken to satisfy a judgment against you.

Should states increase their minimums? Many are thinking about doing so, but the politics of actually making new laws is difficult. During the recession, people are under financial pressure. Forcing them to spend more on vehicle insurance is not going to be popular among the poorer sections of the electorate. For the middle classes, there is the option to buy more coverage including an uninsured and underinsured policy. This is the American way. Those who have money can use it to protect themselves against losses. Those who are poor must take life as it comes.

In Maryland, the legislators have just increased the minimums to $30,000/60,000. This is curiously unreal. An increase to match the rate of inflation since 1972 should make the minimums $100,000/200,000. But, the political situation does not permit the lawmakers to restore the value of the minimums overnight. The answer was annual increases to inflation-proof the amounts. We would have arrived at $100,000 without anyone being too upset about it. But we have grown used to accepting the cheapest solutions even though millions of people across America actually lose money because of it. Why millions of people? These are all the victims of bad driving who never recover anything more than the minimums and suffer major financial losses as a result. This is injustice on a massive scale. And it will never be cured because it would cost too much to make the necessary increases. The only people who come out of this smiling are the investors in the auto insurance industry. Their profits and dividends have been rising steadily despite the recession. To protect yourself, always get auto insurance quotes from this site to find the most affordable coverage. Insurance may be mandated but you don’t have to pay excessive premiums.

The business of insurance is called underwriting. The company enters into a contract (called a policy) and agrees to indemnify a group of people like you against defined losses. So it uses some heavy duty math to work out the probability of the losses being incurred. It’s called risk assessment and relies on a complicated use of statistics. For vehicle insurance, the companies collect the details from every reported traffic accident in the US looking at the age, sex and occupation of the driver, the make and model being driven, the time of day, the road conditions, and the extent of the damage. The insurers share the information on the current costs of replacement parts and the labor to fit them.

They also manage to talk the health insurance companies into sharing their current costs on medical treatment for those injured in traffic accidents. With all this information, they can make good estimates of the cost of loss, i.e. the total amount they may have to pay out if they insure, say, 100,000 drivers. They take this estimate, add the cost of running the insurance company and a profit margin. This total is then divided between all the 100,000 as their premiums. Some companies divide the total equally so the good drivers subsidize the bad. But the majority adjusts the individual amounts based on the driver’s safety record. That way, each policy holder pays more or less depending on how well he or she drives. This is more fair.

But, to cut costs, some insurance companies make more general assumptions about the likelihood of losses. Instead of personalising the risk assessment, they focus the assessment on generalities. The most common is the use of the zip code. In some areas of a town or city, there are higher levels of vehicle theft and vandalism. Some areas have more people driving while intoxicated or impaired through drugs. Because of the design of the local road system, there may also be a higher number of accidents. The insurers therefore charge everyone living in those areas a higher premium. Apart from the unfairness at an individual level, some lawyers believe it is active discrimination because many of the zip code areas loaded with higher premiums have higher concentrations of particular racial or ethnic groups. California has formally prohibited insurance companies from using zip codes, credit scores and other factors not directly relevant to the assessment of driver safety. In those states, insurers continue to trade and make a profit. It has not been the end of the world they predicted.

So, depending on the US state in which you live, your premium may either be calculated based on your personal driving record, or it may be based on your zip code and credit score. Either way, the task of finding the cheapest car insurance remains the same. You have to shop around the companies licensed to sell policies in your state and find the best deal. If there is active competition between the insurers, the premiums will be lower and you will find cheap car insurance without too much difficulty. But if the state is unregulated and insurers do not compete, it will be more difficult to find a cheap policy.

When it comes to paying the premiums vehicle insurance can give you a very bad headache, especially if you have a costly vehicle to insure. And “costly” doesn’t necessarily mean “expensive”. You may ride a cheap car that will cost you hundreds of dollars more to insure than a large SUV. It may seem illogic at first, but you will have to understand the way insurance companies asses risk in order to find the perfect car to lower your insurance costs with.

Insurance companies analyze a set of elements regarding each car make and model before giving you a quote. It’s not that insurance providers have prejudice against certain makes. Each car is analyzed and evaluated by how risky it is to insure. The factors that will influence a car’s insurance rating include: passenger safety; damage and injury scores; theft rates; repair costs. These factors vary significantly between car types and within types as well. So let’s look closer at these elements.

Passenger safety. It’s evident that if a car has low passenger safety it will be costlier to insure. Why? Because the insurance company is more likely to pay for the injuries a passenger (or driver) will sustain in this car and they want to cover their risks respectively. So before you buy a new or used car, take some time to analyze its crash test scores and if they are low don’t even bother buying it, no matter how cheap it may be. Besides saving your life you will also free yourself from high premiums with such a ride.

Damage and injury. Somewhat similar to passenger safety, this factor also analyzes how much damage the car is likely to deliver to another vehicle, its passengers or infrastructure. That is, if a car is quite big to ruin a concrete wall or total the other car it had collision with it is likely to be more costly to insure. That’s quite often the other side of the coin of having a big SUV car that is safe for the people who are inside it.

Theft rates. Quite obviously, if the car is likely to be stolen in your area your auto insurance company will charge you more for insuring it. So if you are dreaming about a luxury car that you will have to hire a swat team to guard – forget about cheap auto insurance. Ask your insurance agent about theft rates according to car makes and models in your area and choose a vehicle that is very unlikely to be stolen if you want auto insurance quotes.

Repair costs. Different cars have different costs when it comes to repair. And the insurance company won’t be quite happy to pay thousands of dollars every now and then for repairing your car at the body shop. If you want to find a car that is cheap to repair and doesn’t needs frequent services you might want to ask a local repair shop for a little information. You can also check magazines and the Internet for a comparison of different car makes and models with respect to repair rates. Do this before you buy your car, or otherwise you will have both constant visits to the shop and high insurance rates.