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Kick The Tires on Car Insurance To Understand What You Get (#GotBitcoin?)

Experts say we tend to overpay to cover small known costs, while going without protection against the really big risks. Kick The Tires on Car Insurance To Understand What You Get

It’s easy to go off course when picking car insurance, especially if you don’t fully understand what you are buying and what affects the price you pay.

Designed collectively to mitigate financial risk, many policies will have the same basic structure—a total value, with out-of-pocket costs and regular payments.

Budgeting for your own risks requires a balancing act between knowing what kind of cost, or premium, you can afford and what kind of coverage you’ll need.

As you consider the latter part of that equation and ask yourself to evaluate your own level of risk, remember that it is an emotional question. It can leave you vulnerable to mistakes in judgment.

“After 30 years of teaching risk management, I have concluded that most people just don’t understand insurance,” says Olivia Mitchell, a professor at the University of Pennsylvania’s Wharton School. “This repeatedly leads them to pay way too much to cover small known costs, while going without protection against the really big risks they face.”

Getting the “right” amount of coverage starts with knowing a policy’s different parts, which can be confusing—especially if you don’t have much experience. From there, you can see how changes to those coverage areas, in conjunction with your rates, can raise or lower your bottom line.

There are several components of a typical car insurance policy, each accounting for common financial scenarios that result from an accident. The coverage is split between protecting you and protecting those on the other end of an accident, if necessary.

Under the umbrella of liability coverage are protections both for injury and damage to property of other people involved. On the other side, your policy may cover your personal-injury bills and your car damage. It can also include built-in protections if another person involved in the claim is uninsured or underinsured.

Comprehensive coverage can even protect you against noncollision-related incidents, such as theft or damage other than from an accident.

To an extent, you can control how much coverage you have in each area that your policy covers, but the biggest variable in the price of any policy is you.

Your driving record is, of course, the most telltale sign for an insurer of what kind of risk you are. The kind of car you drive, how far you travel and where you live also can affect your policy rate, according to State Farm.

As car makers employ new technology to digitally record your driving habits, the calculation around your driving record gets even more holistic.

But beyond your behind-the-wheel habits, insurance companies have long used personal data in the equation. Your age, gender, occupation and even credit score may be factors that inform the rates they’ll offer you. While there has been some pushback against using that data in the calculation, insurance companies argue that more data points help actuaries give people more personalization in their policies.

“Drivers less likely to incur losses should pay less for insurance than drivers more likely to incur losses,” a spokesman for Allstate said, about factors the firm uses when determining customer rates.

The formulas used by the largest insurers to determine your rate, similar to a credit-score calculation, are closely protected by the insurance companies, which can make comparison-shopping especially difficult.

However, recognizing which parts of your policy will need the most coverage, and which personal factors will affect your rate, can give you a good idea of what your costs might be before you get a quote.

Even after you determine how your rates intersect with your coverage level, identifying the policy that’s the most financially sound can still be an uphill battle.

“Deductible bias,” for example, can make one policy look better than another due to the way we think about money and risk.

A study, albeit about health insurance, in the Quarterly Journal of Economics found that when presented with two identical plans with varied deductible and premium amounts, people frequently chose the plan that ultimately cost more if the deductible was lower.

The plan options below were equally popular with participants, even though one is a better deal financially:

1) Plan A, which has a premium of $1,400 and a deductible of $500

2) Plan B, which has a premium of $800 and a deductible of $1,000

The second plan would have saved the person $100, whether there was an incident or not over the time frame of the policy. While that’s a simplistic example, those kinds of differences can hit your bank account hard if you continue to make the same mistakes. That same logic can be translated to car insurance policies.

When you consider car insurance policies, recognizing the types of situations where you’re most exposed financially and avoiding the behavior that will work against you behind the wheel can help ensure you get the best rates along with the proper coverage.

And as always, advice from an insurance professional never hurts.

Related Article:

Should Health Insurance Be Like Car Insurance?

Your questions and comments are greatly appreciated.

Monty H. & Carolyn A.

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