The Planner's Perspective: Learn From My Mistake
By Paul Morrone CFP®, CPA/PFS, MSA
Contrary to many of the advertisements on TV, the quality of your home, auto and liability insurance is not determined by paying the lowest premium. Saving X% or more doesn’t guarantee that you’re getting any better coverage. Buying insurance directly from a lizard, general or celebrity may validate that a company’s marketing campaign works, but nothing more. The bigger question is, how does it affect you as the policyholder? I can speak personally to this one as I’m sure many people reading this have done exactly what I did when I was fresh out of college and bought my first car. Looking back, I was foolish (maybe naive is a better word) and am fortunate that I didn’t have any issues during the time when I purchased auto and liability insurance with inadequate limits.
I needed coverage quick and was excited to take delivery of my new (used) car and was able to get a policy in force in 15 minutes. After plugging in my license information, the vehicle's VIN and some of my demographic data I was provided with an online quote. The premium seemed reasonable and I’d seen the insurer on TV hundreds of times, it had to be good, right? I had just purchased an individual auto policy with a $100k/$300k split limit, which I didn’t understand whatsoever. I was an aspiring CPA, not an insurance whiz, and cared more about picking up my car than making sure I had bulletproof insurance.
An older, wiser, me would have cringed at the thought of buying this policy. The carrier wasn’t the problem, but the level of coverage was. I had received zero education as to what I was buying, all I knew is that I needed a valid insurance card to provide to the dealer to pick up the car. While each state has a minimum requirement for auto insurance, here in Connecticut the minimum auto coverage is an abysmal $25,000 /$50,000 per person/incident. This laughable minimum is barely enough to cover the financial burden that could arise from nothing more than a fender-bender in your local grocery store parking lot, and that’s assuming no one is injured in the process!
As with most types of insurance, auto insurance is one you should always have (or may be legally required to have) but would hate to have to use. Had I been at fault in an accident with my old policy, the financial fallout could have been life-changing. Legal costs, liability exposure and settlements can cost hundreds of thousands of dollars, if not millions, depending upon the severity of the claim and the number of people involved. Had I been sued and the victims been awarded $1,000,000, I would have been ruined. My insurance policy would have paid no more than $300k (maybe only $100k depending upon the details of the claim), leaving me to shoulder a judgement that could exceed $700k. Being a recent college graduate, I had nothing to my name to settle the damages. In response, the court could have ordered wage garnishments from my future earnings which would have materially altered my ability to save, pay down student debt and move up in the world. It would have also jeopardized my credit score, ability to obtain financing and start a family.
In my opinion, the risks are certainly not worth the reward of a cheap premium with a potentially cut-rate insurer. Had I been educated as to the type of policy that was appropriate, I would have selected a much higher level of coverage and included an umbrella policy on top of the base auto limits. While it’s always easier to assess the potential damage looking at the rear-view mirror, our suggestion is to address these issues proactively and speak with an independent agent regarding these matters. In many cases, there will be no cost to you other than your time and a good agent will spend the time to educate you as to what types of coverage are offered relative to what you need. If you’re going to spend the time rate shopping online or on the phone with an 800 number, why not leverage the knowledge of a qualified professional?