Monday, August 27, 2012

Car Insurance and Teenage Drivers

Friends of mine in High School drove cars like this to school at age 16 or 17, yet lived in the poorest of neighborhoods.  How could they afford it?  Or is there a connection here?

A reader writes:
"How about teenagers and cars for teenagers and insurance for teenagers - or do you feel unqualified to comment without real experience?  Lawsuits seem to have ruined the entire "Can't wait 'til I'm 16" driving experience, at least for parents. 
My wife and I are pretty well off (at least compared to most of America) and if our son gets a couple of tickets or has a fender bender I don't know how we can cover it.  Which means, how is everyone else in America doing it?  (Driving without insurance?  Minimum 10,000/20,000 liability coverage - do they still allow that?)
Who decided that teenagers couldn't drink until 21 but were entitled to drive at 16 anyway - wouldn't it make more sense to reverse those ages?  (Or at least make the driving age 18.)  At my sons high school, which is admittedly on a busy road, you're only allowed to leave by bus or in a car - they consider walking too dangerous, there being no sidewalks 
 Isn't this crazy?  And I don't think anyone in our metropolitan area at any age is allowed to ride a bike to school (Norfolk/Virginia Beach, VA)."
Good question.  Car insurance for teens has always been prohibitively expensive.   And yet many parents go out and buy new cars for their kids, or give them late-model hand-me-downs.  When I was a kid, the poor kids in town all had nice cars, but lived in crappy houses.  Their parents subscribed to the model that you bought a brand-new car (a crappy Dodge or other cheaply made American car) every three years.  When their kids reached driving age, instead of trading in, Dad would hand over a three-year-old used car to Junior, who would drive the Satellite Sebring to school.

My dad, on the other hand, wailed long and loud about the cost of car insurance for two teenagers in the house.  He agreed to pay for the insurance, provided we bought our own cars.  As a result, my brother and I ended up with a succession of $50 and $100 clunkers that we cobbled together, in order to get around.  While it was not a fun way to ride, we did learn about how to keep an older car alive.

And of course, we lived in a better part of town and lived in a fairly expensive house.  But perhaps that is the point.  My parents spent their money on their home, which appreciated in value, as opposed to a string of new cars, which end up in the junkyard after ten years (if that, back then), and also invested in stocks and bonds, both of which would be alien to my friends' parents with the new cars.   In other words, poor folks become poor by spending and rich folks become rich by saving - and investing wisely.  The road to middle-class poverty is paved with new car payments.

And when I look back at it, my Dad was remarkably cheap about cars.  Maybe that is where I get my cheapness from.  He had a company car, which was leased by his company and paid for and insured by his company, and he bought a succession of fairly cheap cars for my Mother - a Fiat, a Vega, and an Aspen, the latter of which was leased, which turned out to be a huge mistake when my Brother wrecked it.  But overall, his auto expenses were fairly minimal, compared to most families.

And since we drove cheap cars, the insurance was cheap, at least from a collision standpoint.  I wrote before about collision insurance for young drivers - it is astronomical, particularly if you get a few tickets.  And I got a few, to say the least, as a young driver.  Most do.  The cost of my car insurance exceeded the monthly payments on my car, which was just insane, from my point of view, but logical from the insurance company's point of view.  From their perspective, it was an even bet I would wreck a car before the payments were up, so they collected twice on the cost, just to cover their expenses.

And that is about the odds, particularly for young men, when it comes to accident rates.  Chances are, your kids will wreck a car between the ages of 16 and 25.  You just have to hope they don't kill themselves or someone else, doing it.  And sometimes, those deaths are just that - concealed suicides - the classic car-leaving-the-road at a high speed and hitting a bridge abutment.  It happened to a friend of mine's older brother, but no one likes to talk about that, except insurance company actuaries.

So, you have two teenage kids, reaching puberty and driving age at about the same time.   And your insurance bill comes and it is staggering - thousands and thousands of dollars a year.  What can you do about it?

Well, to begin with, you need to talk to your kids and stress how even one or two speeding tickets can mean that the whole deal is off - that the cost of insuring them will be staggering.  And the problem is, if you have teenagers in the household of driving age, your rates go up, regardless of whether they drive or not.

The second thing is to examine your coverage.  Chances are you are spending a ton of money insuring the fenders of your 10-year-old Honda, and not spending enough to cover your real risk - your liability.  A friend of mine, with a kid coming of driving age, made the conscious choice to keep their old Honda Accord until Junior was 21 and off at college with his own car (bought and insured by weekend Dad, thankfully).   Once he was out of the house, they could trade-in the Accord, which of course, was that much worse for wear.  But the insurance costs during those teenage driving years were far less than that of a new car.

I have written about this before, again and again.  A simple umbrella liability policy for a million dollars can cost as little as $200 a year.  And if your kid wrecks the family car and kills someone else, such as a passenger in that car, you will be glad you had that umbrella liability policy, and you won't give a damn about the wrecked Honda.

Most Insurance Agents sell you policies that include liability, medical coverage ($10,000), uninsured motorists, property damage, and collision and comprehensive.  Then they try to throw in rental car coverage (to give you a rental car when yours is in the shop) and towing.  These latter two are junk coverage, in my opinion,   The Medical Coverage thing, I think, is also junk, as $10,000 isn't bubkis, and most people have medical insurance that will cover them if they are in a wreck.

Uninsured motorists is also a conundrum.  To get enough to make it worthwhile, it costs a fortune, as it is ripe for fraud.  Buying $25,000 worth, on the other hand, seems kind of pointless.  You lose a limb, what is $25,000 going to do for you?

But the big enchilada is Collision and Comp, as the insurance company figures that your kids are going to wreck the family car (or whatever clapped-out POS you give the kids to drive) and price the policy accordingly - adding hundreds per month to cover the cost of the car that they will have to pay for.  Dumping Collision and Comp is one way to save a bundle.

And in order to do this, you have to own cars that are (a) paid for, and (b) inexpensive enough that you can afford to take the risk of not insuring them for Collision and Comp.  This means that when your kids turn 16, it is a bad time to go out and buy a brand-new BMW, as your insurance rates will be murder.  You are better off, for this short period of time (when your kids are age 16 to 21 or so) to drive an older, paid-for car, as well as have your kids drive paid-for cars as well.

If you can do this, you can dump excess insurance coverage from your policies and at least minimize the cost of having teenagers in the house.  And you can then afford that umbrella liability policy, which will protect you from your real risk and exposure - that your kid will injure or kill someone with his car.

But, like I said, others choose differently.  Many people won't make such sacrifices, but instead go out and buy new cars, oblivious to how having a 16-year-old in the house will affect their insurance rates.  Their rates go up, and they sit there like deer in the headlights, wondering what happened.  Of course, the idea that they might be able to drive older, paid-for, cheaper cars, is just not on the table.

And that is one reason why many poorer folks have the nicest cars - for every member of the family - parked in the driveway (often five or six) and yet live in a house not worth as much as the cars parked out front.  They choose poorly, and invest in depreciating scrap metal instead of their homes.

But what if your kids gets a string of tickets or a DUI?  What can you do then?  It is difficult, and at one time, my poor Dad was faced with this problem as my Brother had a DUI and I had about five speeding tickets.  His solution, which I do not think was legal, was to have me get a New Jersey Drivers License and claim to be living with my Grandmother.  I am not sure how he came up with the idea, but it seemed to work, at least for a while.  It meant that I was no longer a "resident" in his household, so I did not appear on his insurance records.   Like I said, I doubt that was legal.  But it goes to show you how having two rambunctious teens can really jack your insurance rates.

A lot has changed since then.  I finally realized that driving as fast as possible everywhere wasn't saving me any time, and costing a lot of money.  Today, I pay $15 a month for car insurance through GEICO, and I drive the speed limit all the time - and I have a clean license.

Others choose differently.  On a recent trip through the Adirondacks, I noticed that most people like to drive fast - but rarely get anywhere faster.  Someone passes me on a road out of town, and we meet up with them at a traffic light at the next town, 20 miles later.  They drive 5-10 miles-per-hour over the limit, but don't really make any more progress.  But they spend more on gas, and no doubt spend more on insurance.  They live in fear of the red-and-blue lights of the State Trooper, as they know they are constantly breaking the law and are subject to fine and arrest at any moment.

And for what?  To go a little faster?  But again, it is one of those things that takes a long time to learn, and often bad habits are learned in the cradle.  My parents were both speeders (and their tickets no doubt exasperated their insurance difficulties) and taught me that driving 5 mph over the limit was sort of the minimum speed you were expected to do.  Unlearning that was hard.

Which gets me back to the first point.  Your insurance rates, with teens in the house, will be murder.  If they get tickets (or you have some) or an accident, it will be murder to the second power.  Driving carefully and within the speed limits is the best thing you can do (and it is a CHOICE, not a necessity, to speed) and also teach your kids a lot about driving.

My parents rarely said much about driving, or gave much in the manner of driving instruction.  Well, there was the one time my Dad gave me pointers about how to drive carefully after you've "had a few drinks" to avoid getting a DUI.  But I am not sure that is a good example of good parenting or driving instruction.