Car insurance is a unique product when it comes to marketing: everyone must purchase auto insurance to drive legally in the U.S. (in every state but one), insurance isn’t a particularly thrilling purchase (for most people), and the auto insurance industry is incredibly competitive. Furthermore, it’s easy to switch insurers without financial penalty, even if you’re in the middle of your policy period, and in fact shopping around and even periodically switching companies has been shown to be good for consumers’ wallets.
We don’t envy marketers who must find alluring ways to sell a product that’s a need-but-not-necessarily-want commodity. Those folks earn their keep. And yet, the lengths some auto insurance advertisements go to setting their company apart from the others can be baffling. If you’re confused by some of the “great deals!” and “one-time offers!” touted by sensible-seeming, cardigan-wearing car insurance spokespeople, then you aren’t alone — and it isn’t because you don’t understand insurance. In fact, it turns out that a lot of the special products auto insurance companies advertise aren’t quite what they seem.
The Zebra’s resident auto insurance expert Neil Richardson explains what all those exciting-sounding offers really mean:
1. What’s a Vanishing Deductible?
A vanishing deductible (sometimes called a disappearing deductible) sounds enticing: with most insurance companies that offer such programs, customers who “drive safe” (they don’t get into a wreck and don’t make any claims) will have their deductible reduced by a certain amount for each year they continue their streak. So, if your deductible is $500, you might have it lowered by $100 for each year you stay claim-free, and by the fifth year, you wouldn’t have to pay a deductible at all if you got into a wreck and needed to make a claim. Sounds great, right?
Well, it’s not so simple. Customers add these types of programs to their policy—meaning you’ll pay extra to be a part of it each year. “You likely pay much more than $500 over the course of those 5 years for the added option,” says Neil. “You’d be better to just save $100 every year in case you had to file a claim.”
Another big problem with a vanishing deductible is that if you decide to jump ship for a better rate, you’ll have wasted all the money you paid inching your deductible toward zero.
Perhaps even more financially concerning: vanishing deductible programs work over several years, meaning you’d be beholden to the insurance company, which could leave you open to controversial practices like price optimization. Most experts recommend you at least shop around for a new policy every year or two, and always after major life changes, just to make sure you’re getting the best rate you can. Entering into a vanishing deductible situation would seriously limit your possibilities.
2. What is Accident Forgiveness?
According to Neil, this is a feature added to an auto insurance policy that gives the policyholder, and often other drivers on the policy, a rate accommodation if they’re involved in a wreck.” So, the first time you have a crash and make a claim, your rates won’t go up.
We’ll admit this one sounds enticing: we hear so much about how any little claim is likely to astronomically increase our insurance rate and it can feel like a lot of pressure. The idea of having a mulligan, just in case, and not seeing our rate shoot sky high at the first sign of trouble can ease the tension.
But the problem with this kind of coverage, explains Neil, is that it costs extra. “You are paying more on your policy so that the insurance company doesn’t increase your rate after your first accident.”
So… kind of like an insurance policy for your insurance policy, which doesn’t really make great financial sense. “The cost of the additional coverage isn’t as much as you might see your rate go up after a crash, but as time goes on the potential rate increase outweighs the cost savings benefit,” says Neil.
Again, another big problem here is you’re tied to the insurance company year after year because if you leave the insurer, you also leave behind the money you invested paying for a feature that would keep you from paying a higher rate if you got into a wreck.
3. What is New Car Replacement?
It’s pretty commonly known that cars lose value the minute they’re driven off the lot: take a moderately priced Nissan with a true market value of $29,873. In the first minute that Nissan is off the lot, it’ll lose over $2,500 in value, plus another $5,000 over the first year, and the value will be down nearly $10,000 by the end of the second year. If your car is totaled two minutes after you drive it off the lot, a regular insurance policy would only reimburse you for $27,373. But not so with new car replacement. Adding the feature, insurers say, would mean you’d get the full $29,873.
For new car owners, the fear that they will total their car shortly after purchase and they’ll end up losing a lot of money is real, and an insurance feature guarding against such a possibility can feel like a relief.
However, there are a few catches to the feature. Neil explains:
- You must be the original owner of the car (so, used car owners need not apply).
- There are year, model, and mileage stipulations and they vary by company (some only allow coverage within the first year of ownership and only up to 15,000 miles, others extend the feature to three to five model years).
- Some (not all) companies charge you for this additional coverage.
- You must purchase comprehensive and collision coverage as part of the requirement for new car replacement.
- If your vehicle is damaged but not totaled, you don’t get any extra benefit.
Even crazier, there already exists a safeguard against wrecks that happen when a new car is valued less due to depreciation than the owner needs to break even: GAP insurance.
The bottom line with all these shiny features: many of them sound comforting but don’t make financial sense for most people. When deciding which policy features to add, it’s important to look at costs over multiple years, and always remember that shopping around for insurance (even if you end up sticking with your current insurance company) is the best way to ensure you’re getting the best price available.