Tuesday, November 22, 2011

Super-Cheap Car Insurance and Poverty-Think

People pay a lot of money to insure cars, when they don't have to.

I have written about car insurance before, and it is one area in my life where I have cut costs dramatically, saving thousands of dollars a year.  I pay about $180 a year per car to insure my two BMWs, and another $200 on top of that for an umbrella liability policy that provides $2M in coverage.

You read that right, $15 a month to insure a BMW M Roadster.  How is this possible?

The key is to understand where you real risks are.  Most people worry about denting a fender, which may cost a few hundred dollars - or losing their car entirely, which might cost a few thousand.  But the real risk is in being sued for running someone over or being at-fault for a horrific accident.  And yet, most folks have tons of collision insurance and very little liability insurance.  Collision insurance is expensive and profitable for insurance companies.  Liability insurance, on the other hand, is fairly cheap.

How can you save a ton of dough on car insurance?  Here are some simple tips:

1.  Clean license:  Drive the speed limit, or not very far over.  No, you don't get anywhere faster by doing 80 mph in a 60 zone.  You just get a ticket.  We learned this when driving our very slow motorhome from Virginia to Florida.  A car would zoom by at 80.  An hour later, they would zoom by again, at 80.  And then the next day, they would zoom by at 80.  Driving fast saves very little time, really.  It just wears on your car and racks up points on your license.

2.  Dump Collision and Comp:  Pay cash for your car - and buy cars you can pay cash for.  If you can't afford to pay cash for a car, you can't afford the car - plain and simple.  If you can't save up money to pay cash for a car, get your finances in order - because they are out of order if you have to borrow money all the time.  Buy a car you can afford to walk away from if it is wrecked.  If what is parked in your driveway is so dear to you that you'd freak out if you lost it, you own too much car for your income level, plain and simple.

3.  Dump uninsured motorists insurance:  This insurance basically allows you to sue your own insurance company.   Yea, it would be nice to get a payout if you are hit by a bus.  But then again, it would be nice to win the lottery, too.  The joke is, to get enough uninsured motorists insurance to really be worthwhile, you'd have to spend thousands of dollars a year on this long-shot bet.  Buying a "little" uninsured motorists coverage is just worthless.  You get hit by a hit-and-run driver and are in a wheelchair for life - what good is $25,000 going to do you?  Not much.

4.  Dump junk coverage - rental car,  towing, glass, etc.  If your car is wrecked, getting a "free" rental car is nice and all, but then again, wrecking your car should not be like an all-expenses-paid vacation.  Getting a new windshield for free is nice, but how many windshields have you had replaced in your lifetime?  For me, zero.  And what I would have paid for glass coverage would easily buy several windshields by now.  Towing coverage is nice, but if you belong to AAA, you already have it.

5.  Add umbrella liability:  You real risk is in being sued - a simple umbrella policy can cost only a couple hundred dollars and provide millions in protection.  If you have no assets, even this coverage is not necessary.

A friend of mine has a $5000 Toyota Pickup (like the one pictured above) with collision insurance, uninsured motorists, towing, glass, rental car insurance, etc., and can't figure out why it costs him $1500 a year for insurance.  So I explained the above to him.  It was like explaining the theory of relativity to a dog.

"But," he says, "If I don't have collision, and my truck is wrecked, what do I do?"

"Buy another truck," I reply.

"But, where would I get $5000 to buy another truck?" he pleas.

"The same place you are getting the $1500 a year you are spending on full-boat insurance on what is a nearly a junker car."

"But I don't have $5000!" he says.

And I give up at that point.  You can lead a horse to water, but you can't get a poor person to stop thinking poor.  Obsessed with losing a clapped-out old truck, he spends what little money he has insuring it - failing to realize that, over time, the amount he spends insuring the fenders will more than pay for another truck.

And that is the deal right there.   Insurance companies are not idiots.  If you insure a $5000 vehicle, they will charge premiums that will exceed the value of the vehicle, which, after deductible is $4500.  They know, from their databases, how often you might get into an accident (11 years, on average) and they also know that an automobile declines in value every year.

So while $500 a year to insure a $5000 pickup might seem like a "good deal", in fact, it is a raw one. 

But it illustrates the nature of poverty-think and how poor people, obsessed with losing what little they have, end up losing it all through bad decision making.

There are other types of poverty-think as well, and here are some typical examples:

1.  The fellow who gets a "low deductible" health insurance plan and pays $12,000 a year in premiums, because he "can't afford" a $10,000 deductible plan.  Somehow, he can afford the premiums, though, and he fails to see that, if he doesn't get sick, he comes out way ahead, and if he gets sick, he breaks even at best. 

2.  People who live in bad neighborhoods and buy guns, bars on their windows, alarm systems, viscous dogs, and chain-link fences to "keep out the bad guys" are often spending thousands and thousands of dollars on security in order to protect only hundreds of dollars of consumer goods.  Living in a less crime-ridden neighborhood is always a better bet, particularly for your kids.  Owning less crap, an even better idea.  What is worth stealing in anyone's home today?  A $500 television?  A $200 computer?  This is worth spending $1000 on an alarm system?  Poverty-Think.

3.  People buy "Credit Protector" loan insurance on their car loan, so that it will be paid off if they die or are disabled!  Or they buy "Identity Theft" protection, for only $35 a month - so they won't get ripped off!  They fail to see they are being ripped off by more than $400 a year, guaranteed.

Yes, there are risks in life.  But trading off a long-shot risk for a monthly payment is only taking a possible negative outcome and exchanging it for a guaranteed one.  You bleed to death, slowly, over time, paying high insurance premiums.

A better approach is to just not own so much crapola, not worry about losing it, and end up accumulating wealth instead of dissipating it.