Cheap Car Insurance: Is it Too Good to Be True?

Fran
Dani Milton
September 15, 2020

Most car owners have seen the flashy television commercials from insurance companies. These companies argue their cheap car insurance can save drivers a lot of money when they switch their plans. They also say they’ll deliver outstanding coverage at rock-bottom rates. But are these claims too good to be true? In this article, SmartFinancial will teach you how to find the cheapest car insurance coverage for your budget. We’ll also share some tips that will help you find the lowest-price auto insurance in your area.

Six Factors that Determine Auto Insurance Premiums

Insurers not only use someone’s driving histories to determine insurance rates; they also base premium rates on other factors. They rely on personal data, claims information and other metrics to assess the risks their company will assume when they insure you. Some insurers use credit scores to develop their premium rates, although states like California, Hawaii, and Massachusetts have banned this practice. Although it’s unpopular, insurance companies generally charge higher premiums when people have lower credit scores. Research suggests these individuals file more claims than those with better scores. According to a 2015 Consumer Reports special report, single people with good credit paid $526 more than those with the best credit scores.

Other things that can significantly influence your car insurance rates include:

The automobile’s year, make, and model – Drivers’ premium rates may increase when they own newer, more expensive car models. Insurance companies typically investigate whether certain cars have more car accident claims compared to other models. They will also examine the cost of repairs, theft rates, and safety records for your vehicle.

Zipcode – Insurance companies also use an insured driver's region to determine how much they’ll charge since areas have different risks. For instance, certain regions have higher rates of car theft or accidents.

Age – Researchers have found that insurance companies consider these factors when determining insurance premiums for drivers. Rates usually decrease as you age and gain more driving experience until you reach your 70s.

Gender – Your gender may affect your rate. For instance, a U.S. News and World Report study found a single 25-year-old woman may pay $1,037.67 for their car insurance premiums on average. Her 25-year-old male counterpart will pay $1,094.44.

Marital status - Being married will also lower your rates. Studies have found that people adopt safer driving behaviors after marriage or parenthood. Additionally, insurance companies may give them additional discounts because married couples buy multi insurance policies. A married 35-year-old woman will pay $823.10 on average, versus $767.97 for 60-years-olds. Married 35-year-old men will pay $817.91 on average while 60-year-olds pay $767.08.

Your mileage – Another metric that insurers use is how many miles you drive to work, errands and other areas.

Driving history – Insurers offer safe driver discounts to people who have a clean driving record.

Compare Premiums to Get the Cheapest Car Insurance Rates

Insured drivers can save a lot of money on their premiums if they shop around for the best rates. One study found that customers who used insurance comparison apps, like SmartFinancial, saved an average of $1,647 on car insurance premiums for a full auto insurance coverage policy. Most customers saved an average of 178% each year when they compared car insurance quotes from different carriers. Drivers should shop around and compare car insurance quotes from three to five companies to find the lowest, most affordable insurance rate. The study also found that state residents who could save the most money by shopping around include:

Companies that Provide the Cheapest Average Annual Rates in 2020

U.S. News and World Report tracked the average annual rates for 2020. They include the following companies:

  • USAA: $885
  • GEICO: $1,168
  • State Farm: $1,234
  • Travelers: $1,267
  • Progressive: $1,373
  • American Family: $1 391
  • Farmers: $1,682
  • Nationwide: $1,864
  • Allstate: $1,880

What Is Cheap Minimum Auto Insurance Coverage?

Some insurers advertise cheap rates to drivers; however, most of these bare-bones policies only provide liability coverage to meet the state’s minimum requirements. These policies pay off accident-related property damage and medical bills that insured drivers have caused to a third party. They don’t cover damages to the insured driver’s vehicle. Experts recommend that drivers should purchase liability coverage that is equal to or more than their net worth. They offer coverage for:

  • Bodily Injury Liability – It pays for physical injuries that an insured driver causes to a third-party. They offer this coverage per person per accident.
  • Medical Payments or Personal Injury Protection (PIP) – It compensates insured drivers for medical expenses they experience after a car accident.
  • Property damage (Physical Damage Liability) – This coverage pays off property damage for third-party drivers.
  • Uninsured/Underinsured Motorist Protection – It reimburses an insured driver for damages after an uninsured driver hits them. Some regions not only require liability policies; they also mandate drivers to carry uninsured and underinsured motorist insurance.

Liability auto insurance usually comes in increments of threes. For instance, you may see 50/ 100/500, 100/300/100, and up to 250/500 /250 in typical policies. A 50/100/50 policy would provide:

  • $50,000 Bodily Injury Liability
  • $100,000 Total Bodily Injury Liability
  • $50,000 Physical Damage Liability

Why Cheap Minimum Car Insurance May be Pricey in the End

Drivers can’t prepare for every scenario on the road. When people cut corners on insurance premiums, they may save a few dollars, but it can place them in a risky financial situation. If drivers don’t have enough coverage, they may pay an enormous amount of money out-of-pocket.

1. You may endanger your assets and future earnings when you don’t have enough coverage.

States require drivers to carry liability coverage, but it may not provide enough financial protection when an accident occurs. For example, an insured driver may hit another motorist, who suffers severe injuries during an accident, and their hospital bills total $300,000.

The courts find the policyholder responsible for the accident; however, they only have a policy that has a $50,000 bodily injury liability limit. The insurance company would pay $50,000 for the pedestrian’s hospital bill; the driver would be responsible for the rest ($250,000!).

The judge could order the courts to take an additional $10,000 from the driver’s savings account or garnish wages. They could also ask liable drivers to sell their cars, homes, or other assets to pay off judgments. Paying extra money on your insurance premiums can protect drivers from this scenario. For instance, only $25 more can increase liability coverage limits three higher than the state’s minimum requirements.

2. Cars can cause expensive damage that can cost money.

Drivers should have enough liability coverage to protect themselves, even if they own an inexpensive, older model. Any vehicle, regardless of age or make, can still cause substantial damages in an accident. For instance, the insured driver could cause a serious accident with another driver. If the other driver suffers life-threatening injuries, their medical bills could exceed the $50,000 liability limits on the bare-bones insurance policy. If the insured driver totals their driver’s more expensive vehicle, its replacement costs may also exceed the policy’s limits. Having enough coverage can prevent policyholders from paying for these bills alone.

3. Dropping uninsured motorist coverage may create coverage gaps that cost money.

Liability-only coverage may not provide drivers with adequate coverage, especially if an uninsured or underinsured motorist crashes into them. It can leave them with major expenses that the insurance company won’t cover. Purchasing uninsured motorist insurance (UM) and underinsured motorist coverage (UIM) can protect them. These policies reimburse drivers for any damages they suffer because of an uninsured driver, regardless of fault. This coverage is mandatory in some states.

Ten Companies that Provide the Cheapest Minimum Coverage

Here is a list of the companies that provide low-cost minimum coverage based on a 2018 survey.

What Is Cheap Full Coverage?

Although insurance companies use the term “full coverage” when selling auto insurance, these policies don’t exist. Insurers haven’t reached a consensus about this term; however, it refers to a combination of coverages that offer more substantial protection to insured drivers, not just the third-party’s vehicle. These policies differ depending on the carrier and zip code. This insurance is generally more expensive than minimum coverage. You’ll need to shop around to find companies that offer the best rates. Full coverage car insurance may include:

Bodily Injury (BI) Liability: It pays for medical costs due to injuries or deaths that the policyholder caused during an accident.

Property Damage (PD) Liability: It covers repair costs for property-related damages that drivers cause in accidents.

Uninsured Motorist (UM Coverage) –These policies cover medical costs for insured drivers after accidents with uninsured motorists. Twenty states and Washington, D.C., require UM coverage.

Underinsured Motorist (UIM) Coverage – It reimburses drivers for repair costs when an underinsured person hits them.

Collision coverage – It covers at-fault insured drivers for damages that result from a collision with another vehicle or object (such as a pole, guardrail, or tree).

Comprehensive coverage – It insures against damages or theft caused to an insured car by an incident other than a collision. These include floods, vandalism, hail, falling trees, and other hazards.

Medical Payments or Personal Injury Protection (PIP) – It repays the medical expenses of the insured driver and their passengers when they suffer accident-related injuries in an accident, regardless of who is at fault.

How Much Is Full Coverage Insurance?

The national average cost for full insurance in 2020 is $1,427 per year for a 40-year-old driver with good credit. The national average rates for full coverage car insurance are:

  • $1,427 for a good driver with good credit
  • $1,781 after a speeding ticket
  • $2,146 after an at-fault wreck
  • $2,506 for a good driver with poor credit
  • $2,531 after a DUI

According to a 2018 study, ten companies provide the cheapest car insurance rates. They include:

  • USAA - $1,023 (Only available for military servicemen and their families)
  • GEICO - $1,198
  • American Family - $1,233
  • Nationwide - $1,349
  • State Farm - $1,511
  • Travelers - $1, 528
  • Progressive - $1,766
  • Liberty Mutual - $1,778
  • Allstate - $1,834
  • Farmers - $1,865

Tips to Find the Cheapest Insurance

SmartFinancial has several tips that drivers should keep in mind when searching for cheaper car insurance rates.

1. Don’t assume that a single company offers the lowest rates

Even though an insurance company may offer cheap premiums for one person, it might not be the lowest-priced premiums for everyone. Compare each carrier’s coverage using SmartFinancial to ensure you’re getting the lowest rates from insurance companies in your area.

2. Don’t ignore local and regional insurance companies

Four insurers handle more than half of the nation’s auto insurance business. These companies are Allstate, Progressive, State Farm, and GEICO. When searching for cheap auto insurance, drivers don’t have to buy a policy through major insurers. There are smaller regional companies that may provide similar coverage for lower rates. These companies include Erie Insurance, Country Mutual, Auto-Owners Insurance, and Acuity. Additionally, these regional insurers often have higher levels of customer satisfaction and lower premium rates.

3. Ask insurance companies about discounts

Drivers can also obtain lower rates by asking their insurance company about additional discounts. Here is a list of discounts for customers may qualify for:

  • Military personnel and veterans
  • Active or retired federal workers
  • People who’ve taken defensive driving courses
  • Full-time students with good academic records
  • People who have multiple car insurance policies
  • Individuals with clean driving records
  • Drivers who pay their entire six-month premium at once or use automatic payments
  • Agreeing to receive documentation online
  • Individuals that own cars with anti-theft or safety features (airbags, antilock brakes, anti-theft systems, daytime running lights)
  • Members of specific professional organizations or affiliates.

Even though an insurance company may offer discounted rates, it still may not have the lowest rates. Drivers should shop around before committing to one insurer.

4. Maintain a Good Credit Score

Credit scores can significantly affect car insurance rates. Having poor credit can increase people’s car insurance rates by hundreds of dollars a year. For some insurers, a FICO score of 579 is considered poor credit, but many insurance companies have a specific cutoff rate.

5. Check average auto insurance costs when making a new car purchase

Drivers may want to select top-selling vehicles that have the cheapest insurance rates in the country. Also, take into consideration the average fuel efficiency, repair costs, and insurance premiums for each model.

6. Skip comprehensive and collision coverage for an older or lower-value cars

Collision and comprehensive are two coverages that insurers use to cover repairs or reimburse a car’s value after an accident. Collision coverage can provide protection when another person physically hits the insured driver’s vehicle. It can also protect them during a single-car accident. Comprehensive coverage can protect drivers when someone steals your vehicle. It also reimburses drivers for damages after non-collision events like theft, natural disasters, and contact with animals. Auto loan lenders require this insurance when drivers lease, or finance, their cars. Owners of older, lower-value cars may not need collision and comprehensive coverage. Additionally, drivers who paid off their loans can consider skipping this insurance.

7. Raise your deductible

Another way you can save money on your policy is to consider raising your deductible on these policies. There are generally no deductibles on liability insurance, which pays for the damage you cause others in an accident. Before you make your decision, look at your current vehicle’s book value, using Edmunds.com or Kelley Blue Book. Compare what your vehicle’s total worth is now versus how much your annual deductibles and premiums cost.

8. Consider usage-based or pay-per-mile insurance

If you drive less than 10,000 miles a year, you may be able to save money by enrolling in a usage-based or pay-per-mile program. Several insurance programs track how much you drive each year, including Metromile, Allstate’s Milewise, and Nationwide’s SmartMiles. These programs are only available in a select number of states. Other companies offer usage-based discounts. You can consider these if you’re a safe driver who doesn’t drive much. These include Allstate’s Drivewise, Progressive’s Snapshot, and State Farm’s Drive Safe & Save. These programs allow insurers to analyze your driving behavior on the road. Are you searching for affordable car insurance in your area? You can trust SmartFinancial to help you find a policy that fits your budget. You only need to fill out a simple application, and you’ll receive quotes from multiple local agents with the options to buy online, over the phone, or in person. SmartFinancial provides smarter insurance products powered by technology.

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