Everyone I know hates insurance. Having to pay for a product you may never use can be frustrating, especially if you notice your premium increasing every year. I’ve worked in the insurance business as an auditor for three years and insurance was always explained to me as a ‘promise’. It is a promise that if some unprecedented, unforeseen, catastrophic event happens you are financially covered (of course within the terms of your agreement). If you own a car, an apartment, or a home you probably have insurance. And if you have full time employment, you probably have some type of health or life insurance. Unfortunately, insurance is not a common dinner subject and can be confusing to many, thus leaving room for misinformation. In this post, I debunk the 5 most common insurance myths.
You Don’t Need It
This is the most popular myths I’ve heard about insurance. Trust me, you NEED it! While certain types of insurance are relatively expensive, the cost of not having insurance can result in financial ruin. Imaging getting into an auto accident without car insurance. This could leave you vulnerable to not only cover the cost of repairs, but also the medical cost of anyone injured in the accident. And these are only short-term costs. Long term, you could see damage to your credit score. How? Well auto accidents can be very expensive. You may be forced to borrow a personal loan to cover the cost of damages, thus leaving your credit at risk.
Your Credit Score Does Not Affect Your Insurance
During my research, I found that many people did not know that your credit score can impact your insurance. Depending on your state, your credit score can determine how much premium you have to pay your insurance provider. Insurance carriers use a score called Credit-Based insurance score that is unlike your FICO credit score. The difference between the two is that they consider different factors. The Credit-based score used by insurance providers take into account factors such as payment history and total debt to asset to determine your risk level. Those with a high score are perceived as less risky than those with a lower score. All else being equal, the lower your score the higher your premium is likely to be.
All Damages Are Covered
This is false. For any type of insurance, you’re only covered according to the terms and condition of your contract. Your insurance policy is your contract with your insurance provider. Usually, these documents outline, in detail, what is included in your coverage and what is excluded. For example, if there is a severe hurricane in your area and a tree falls on your car, this damage may not actually be covered under your collision insurance. If this is the case, you will have to pay out of pocket for the damages.
You Only Need The Minimum (Required By Law)
If you can only afford to get the minimum coverage required by the laws of your state, get it. Having the minimum coverage is better than no coverage at all. But, if you can afford more than the minimum get a coverage with higher limits. Personally, I think it’s better to have it and not need it than to need it and not have it. Remember, you get what you pay for. If you pay for the minimum coverage, you’ll get just that regardless of the total of your loss. For example, if the limit on your car insurance is $5,000 and you get into an accident that causes $8,000 in damages, you’ll now have to pay $3,000 out of pocket.
You Insurance Provider Will Pay For A New Car
Haha! I wish this was true. You may have heard the phrase ‘as soon as your car is driven from the lot it loses half its value.’ This statement may be exaggerated, but it is somewhat true. I bought my car for ~$13k in 2018. According to Kelly Blue Book, my car’s value in good condition is now ~$6,000. So, if I had $7,000 balance left on my car loan and I totaled my car today (knock on wood), the insurance company would only pay $6,000. Why? Because insurance companies will only pay for the market value of your car and not the balance of your loan. In this case, I’d would be left with a $1,000 bill.
Insurance can be complicated for many, but now you know better. If you hear any of the above common myths about insurance, be quick to debunk them and pass your knowledge on.
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