My Personal Finance Blog

Lets start off with a simple explanation of how insurance works. In the good old days before those kind men got together in the Lloyds coffee shop, people were responsible for their own losses. If the horse pulled their cart into a ditch and this broke the wheel, the owner had to put his hands into his pock’ets (which fortunately had already been invented) and pay someone to repair the wheel. But once people could share the risks, life was suddenly better. If you gather together a big enough group of cart owners, each will only have to pay a small amount into the central fund to cover the losses of the few who have accidents. Those men at Lloyds were on to a winning business formula. Moving into modern times, the idea of spreading the risk is the same and, with thousands of people in each group, the cost of loss is divided into small premiums. But, with profits under pressure, the insurance companies came up with a new variation on the old theme. Suppose they could persuade their customers to accept the risk of some of their losses. This would then become self-insurance for part of the risk. The rest would be paid by the insurance companies. So the deductible was born. You agree to pay the first portion of any loss. In the case of traffic accidents, most of the fender benders are minor and don’t cost much to repair. That means you pay for most of the repairs yourself and the insurance companies get richer. Ironically, if no-one opted for the deductible, the increase in the premium for everyone in the group would be trivial.

So let’s get to an actual example to see how it works. If you agree to accept a deductible of $1,000, you will be given a discount on the premium. Say you save 10% over the year. Now that’s a good saving if you manage to get through the year without having an accident. But suppose your luck is not good and you have an accident. The bill for repairs is $900. You put your hand in your pocket (pockets are such useful things – always seeming to have money in them) and pull out the dollars. Was your 10% saving over the year more than $900? If not, you are making a loss, not just on the insurance policy but, if you had to use your credit card, on the interest added to the $900 until it is paid off. What would happen if your run of bad luck continued and you had a second accident in the year? Do you have another $1,000 as savings or available to borrow? Perhaps we should not be so pessimistic. Worst case scenarios are always better applied to other people and never to you.

The higher the deductible you accept, the more of the risk you are accepting. Cheap car insurance is a wonderful thing to have so long as your luck holds up. But if your luck fails, the maximum deductible is going to empty that magic pocket of yours. And here’s the thing – you can be the safest driver in the world, always super careful, always following all the rules, and then you meet a dork behind the wheel of another vehicle and suddenly you’re wrapped round a tree. So look for cheap auto insurance, but always look at your cash position and ask yourself how well you would cope if the worst happened. Deductibles are good for people with a margin of financial safety.

Remember, the general rule always has exceptions. So when everyone tells you insurance companies load up the premiums of the inexperienced drivers and the drivers who have a bad safety record, that is true as a general rule. But this does not mean it’s impossible to find reasonably cheap insurance. All it means is you have to work harder to get results. So the first rule is, “Never give up hope!” There are always ways in which you can save on the premium and find reasonably good coverage. Who are you? You may:

• be a new driver;
• have been involved in multiple traffic accidents;
• have been convicted of driving while under the influence or other serious offenses; or
• have had you license suspended and/or your previous insurance cancelled.

The second rule is always to tackle the problem honestly. It is pointless to lie about your record. Even if the lie goes undetected when you buy the policy, every company makes thorough checks once a claim is made. If your dishonesty turns up, the company will cancel the policy and you will be left with no indemnity against the claim. Be open about your high-risk status and get two sets of quotes using the online search engines. You should aim to compare the prices on general policies with the premiums charged by the companies offering special policies for drivers with poor records. The bad news is the majority of general insurers will refuse to quote or quote high premiums. These are the companies only writing policies for people aged between 25 and 70 who have never had an accident in their lives. The quotes you get are still useful because you find out which is the lowest of the high quotes. The good news is there are a small number of companies offering a specialised service to high risk drivers. Ask for high risk auto insurance or nonstandard auto insurance and get their quotes.

The third rule is to improve your driving ability and record. If you are a new driver or have recently had a serious accident, go through one of the advanced driving courses approved by local insurance companies. Successful completion usually entitles you to a discount. You then have to put all you best driving skills into practice and drive without collecting tickets and getting into accidents. The longer your license stays clean, the lower your premium will be. Sadly, it takes years to remove the negative marks from your record but, once you have proved you are a good driver, you will be rewarded.

The final rule to find every possible discount to bring the premium down. Drive a low-powered vehicle only at low-risk times of the day and avoid driving long distances. Fit safety features to your vehicle and store it off the road at night. You may not end up with really cheap auto insurance, but it should be reasonably affordable. In any event, cheap auto insurance is often bad value for money. It’s always better to find good coverage at a price you can afford.

Holy cow, Batman, it’s winter again. Sadly, Robin probably never said this to Adam West’s Batman and the lyrics from the song by The Band are not quite right. Which brings me to a Scottish group appropriately called Snow Patrol and their lyrics to Holy Cow include the fabulous line, “The telegraph pole knows where you live.” Yes, friends, it’s that time of the year again. Let’s start with a fact you do not want to hear. Claims arising from traffic accidents in snow are 40% higher than from the accidents when the road conditions are dry and the visibility is good. As you sit behind the wheel of the vehicle with that sense of absolute powerlessness, remember Holy Cow. You can turn the steering wheel this way and that. You can pump the brakes for all you are worth. But if that telegraph pole wants to get you, it will.

So what can you do? Let’s start with pre-snow planning. One of the worst things to happen is walking to your vehicle at night and finding it will not start. Always have your engine retuned to improve cold weather starting. Otherwise you can find yourself stranded waiting for help to arrive. This brings up several pointers. Is your cell phone always charged? You need to be able to make calls for help. Have you programmed in the numbers of your garage and a towing company? Or have you joined a club like the AAA. There are some good emergency roadside assistance packages out there. Look for the best value given the number of times you are forced to drive in poor weather conditions. Is there an emergency kit in your vehicle. You need a blanket to keep you warm and hazard flares to warn other drivers. Finally, check the windshield wipers to keep maximum visibility in sleet and snow and either fit snow tires or have good all-season tires with chains to clip on to the wheels if conditions worsen unexpectedly.

Now the driving itself. The most important rule is not to drive unless it is absolutely necessary. If you cannot avoid going out in icy conditions with snow forecast or falling, always drive slowly, keeping the maximum possible distance between you and the vehicle ahead of you. Expect everyone else to be out of control and about to crash into you – given the accident statistics, this is not an unrealistic expectation. So be prepared to stop or get out of the way of other drivers. Apply these rules and you should arrive at your destination in one piece. The aim should be to avoid making any claim on your car insurance policy and facing the usual increase in the premium rate – insurance companies like to stay in profit and react when you claim. The ability to drive safely in winter also grows with experience. As a new driver or someone moving north from the eternal sunshine of the south, the car insurance quotes are likely to reflect this lack of experience. Be prepared for the worst. The premiums will start and stay higher until you have survived one or two winters. That said, the basic technique is to drive defensively, always assuming the worst of the road conditions and other drivers. Let’s hope you can learn how to survive without too many crashes on the way.

Unless you retreat into a cave to sleep through the winter, you cannot have missed one of the most recorded Christmas songs of all time. Every mall in the country plays “Winter Wonderland”, usually the Bing Crosby and not the Ozzy Osbourne version, until you wish it was Spring. The myth of happy white Christmases is completely misleading. Unlike the southern states where the only problem is the dazzling sunshine, the northern states experience the annual covering of their roads with ice, sleet and snow, closely followed by the misery of melting slush then freezing over as the next cold front moves in. Trying to drive safely on the roads at this time is a nightmare. Nobody is ever prepared. Somehow, there is a mass amnesia as we all forget those defensive driving skills. That way, when the first snow falls, we can all panic as we move sideways across the road, pumping at the brake pedal without any effect.

Talk to an insurance company at this time of year brings depressing news. The number of claims arising from traffic accidents rise by nearly 40% in December through February. There is a spike on the first days of real snow in each area and people suddenly remember all the things they forgot. So what should you do to prepare for this annual festival of destruction on the roads. Well, the first and most basic rule of all is simple. If the journey is not essential, do not make it. The safest place on the first days of winter is in the safety of your own home with your vehicle safely parked off the road. Remember, if you have your vehicle parked on the street, it is a target for any other driver to crash into. Leave it with your friendly mechanic and take the chance for a few maintenance chores. If the snow looks set in, fit snow tires. If not, then have all-season tires with good treads to maximize the grip on the roads and carry chains with you. To improve visibility in sleet and snow, you need new windshield wipers. Have the brakes and steering checked, and retune the engine to give the best chance of it starting in the lower temperatures – there’s nothing worse than being stuck with a vehicle that will not start. Finally, pack an emergency kit and keep it in the vehicle. That way, if the worst happens, you can keep warm and warn other drivers away from you with hazard flares until help arrives. Ah yes. To speed the arrival of help, program the numbers of tow truck companies and garages in your area so you can be rescued. Membership of one of the clubs like AAA can offer good rates on emergency roadside assistance.

And you should care because, with collision and comprehensive coverage in place on your newish vehicle, the auto insurance company is not going to sit quietly if you suddenly file a number of claims this winter. Your premium rates will rise. When it comes to getting auto insurance quotes, the rates will also be higher than you expect if you are an inexperienced driver or moving from a state where it is summer all year round to one with four seasons. Everyone has to learn how to drive safely in snow.

It’s easy to say what the law is – legislatures must write it down and publish it for all to read – but harder to live with its consequences. Looking across the US, all but three states have laws setting mandatory insurance levels for all vehicles on the road. Almost without exception, all these states also have laws making it a crime to drive a vehicle on a public road without a valid policy in force. This gives all drivers a simple choice. Either carry the minimum insurance or risk fines and, in some states, the confiscation of the vehicle. All these laws are a compromise between the interests of drivers and the interests of people who may be injured in traffic accidents. The more Libertarian view is personal responsibility. If you do something, you should be prepared for the consequences. That would mean every driver having enough cash in the bank to pay out every time their driving injures someone else or damages their property. But not everyone can afford to pay the medical costs for treating those they injure. This would be seriously unfair. Suppose you were walking along the sidewalk and a car knocks you down. Surely you should not have to pay your own medical costs? The answer is mandatory insurance so there is always some money to pay out to the innocent victims.

Most people agree this is a good idea but there’s a problem. Almost all these states set the mandatory amount forty or fifty years ago. What was an adequate amount then is a drop in the ocean today. So this February, Wisconsin bit the bullet and increased the mandatory rates both for liability insurance and for insurance against uninsured or underinsured drivers. The governor signed the bill into law and everyone sat back and awaited the results. The mail boxes have recently experienced a flood of renewal notices showing significantly higher premiums for the mandatory minimum cover. Needless to say, the Republicans are now promoting a bill to repeal the law making liability insurance mandatory. As it stands, about 14% of all drivers are uninsured. These premium increases during a recession are likely to increase this percentage significantly.

This review of the minimum amounts after forty years was perfectly reasonable. Most other states will have to follow Wisconsin’s example sooner or later. It’s just not acceptable to have such low minimums when medical and repair costs have risen so sharply. But the timing is unfortunate. Insurers had invested their funds in the stock and bond markets. When the recession hit, they lost a hefty slice of their capital reserves. There’s another law requiring insurers to have enough capital in hand to pay out all the expected claims. To build their capital back up to the required levels, all insurers are therefore raising their premium rates. Each state’s insurance department is insisting on putting more money into the reserves. This means you must shop around. Get auto insurance quotes from as many companies as possible to find the best prices. Not all companies lost heavily. Equally, the smaller companies will have to raise the cash from smaller groups of policy holders, i.e. more from each individual. So get the maximum possible number of auto insurance quotes to survey the market before buying.