Much like stories about the Bermuda Triangle, the ways car insurance companies determine rates are steeped in misinformation. It’s time to put these myths to rest.
Myth: #1. New cars always cost more to insure (Not necessarily)
The truth is, new cars generally cost more to insure. The make and model carry more weight in calculating rates. If you drive an eight-year old Corvette versus a new, family minivan, you’ll pay more. Also, if your car is a popular target for car thieves, that will affect your rates as well.
Myth: #2. Credit scores don’t affect car insurance rates (Not necessarily)
Only if you live in California, Hawaii, or Massachusetts, otherwise the other 47 states can consider your credit score in calculating your rates. Except for these three states, where using credit scores are banned, car insurance companies use credit-based insurance scores to help determine risk. According to research, those with lower credit scores tend to get into more accidents.
Myth: #3. After a claim, car insurance rates automatically increase (Not necessarily)
This depends on several factors:
- Severity of the incident (Cost of the claim)
- Your driving history (A minor fender bender may not affect your rate at all if you’ve had clean driving record for an extended period of time)
- Customer loyalty (If you’ve been with your insurer for several years with a fairly clean record, you may not see any increase after a minor incident.
- Who’s to blame (Spoiler alert: this doesn’t apply in no-fault states).
- No-fault or not – no matter who’s to blame, your insurance company will probably have to pay some part of a claim, making it more likely that your rate will increase.
Myth: #4. A lapse in car insurance coverage won’t affect your rate (Don’t count on it)
Maybe you dropped your car insurance when you were rebuilding the engine on that classic T-Bird or your significant other forgot to mail in your payment. No matter, a lapse in coverage is going to hurt the next time you apply for insurance. Car insurance companies view individuals who have a lapse in coverage, even for a one day, as higher risks than those who maintain their policies without a break in coverage.
Myth: #5. Car insurance follows the driver (No)
Contrary to common belief, if you lend a friend your car and he has an accident, you could be liable for damages. Car insurance follows the car — not the driver.
Myth: #6. If my car is totaled, my car insurance will pay off what I owe on my loan or lease. (Not unless you’ve got gap insurance)
If your car is totaled, your auto insurance policy will pay you the actual cash value of your car, minus your deductible. Actual cash value is the amount your car was worth at the time of the accident, after allowing for depreciation. You are still responsible for any amount outstanding on the loan or car lease. The only means to cover the difference between the amount owed on a loan and the car’s cash value is to buy gap insurance.
Myth: #7. Red cars cost more to insure (Not true)
Car insurance companies determine rates based on the year, make, model, body type, and engine size. The car’s color has no bearing on rates.
Are you aware of any other car insurance myths? Feel free to share your thoughts in the comments section below!