Disclaimer: This is not financial advice and you should carefully consider your needs and personal suitability when choosing automotive insurance products. Always carefully read the Product Disclosure Statement from your insurer on your policy before you commit to it. The following is my opinion and how I go about selecting appropriate and cheap car insurance.
With the disclaimer out of the way, realistically you should only insure against things which are going to destroy you financially, like your house burning down. Driving your car into the back of a $300,000 Ferrari is going to be a bad day; but with appropriate third party property insurance it’s not going to ruin your life.
By now you know that I advocate only spending less than two months wages (after tax) on a good quality, appropriately sized second hand car. Did you know that on average new cars depreciate by over 20% per year. So let someone else pay for the depreciation over the first couple of years, and then swoop in on a bargain! How’s that for a rate of return?! (Not even a smart investor would call that performance investing, maybe unless they were Warren Buffet!)
This neat auto hack lets you drive really nice cars for a fraction of the purchase price, but also saves you a lot over the long term. When you’re not concerned about writing off your $70,000 brand new car, you can opt for cheaper third party insurance policies and crank your excess right up to reduce your ongoing premiums (this is why you have emergency savings!). These two little factors can save you several thousands of dollars a year in car insurance alone!
So, first of all you probably have a few questions about car insurance. What kind of policies are out there, what kind of insurance do I need, what are premiums, what is an excess, and what is a rating one? I will try to answer all of these as quickly and simply as I can.
What kind of insurance contracts are there?
There are four main types of automotive insurance policies
- Fully comprehensive
- Third party personal liability
- Third party property liability, plus fire and theft
- Third party property liability
As the name suggests, fully comprehensive insurance should cover pretty much everything – damage to both cars, regardless of if you are at fault or not. A comprehensive policy is the most expensive type of policy, and is the only type of policy to insure your car in most scenarios – there are exceptions of course and we will dive into this later.
Third party personal (medical)
Third party personal liability insurance is insurance to cover medical costs. This may be included in your car’s registration but it also may not, and you might need to take out a separate policy. Some states require you to hold this policy by law before you can register your vehicle, called compulsory third party insurance or a CTP slip.
Third party property liability, plus fire and theft
Third party property liability, plus fire and theft (sometimes just called third property fire and theft) is a policy which covers OTHER people’s cars when you are at fault in an accident, but not your own. The fire and theft cover insures you against your car being stolen or torched, which might be a set price or market price.
Third party property liability
Third party property liability, will just cover other people’s cars in an at fault accident. If you write your car off you will just be getting the scrap value from the wreckers.
Premium – the cost of the insurance contract
A premium is the ongoing cost of the insurance policy. This is always paid to the insurer as a yearly contract, but some insurers provide payment plans so that you can choose to pay monthly, fortnightly or even weekly. But don’t be fooled – these payment plans are often advertised as month to month contracts, but if you need to make a claim you will have to pay out the whole year’s worth of premiums before you get anything. Also, paying on a month to month basis is going to be more expensive, so it’s much cheaper to pay annually.
Having a history of making claims, being in a statistically accident prone demographic (such as a young male), driving a high powered car or living in a dodgy neighbourhood will all push your premiums higher.
The excess – what it costs you to claim
The excess is what it is going to cost you to claim. This can be thought of as the co-contribution, and it is the insurers way of discouraging you to claim for smaller damage.
The excess can usually be negotiated; a lower excess will result in a higher premium, so cranking it right up to the maximum means you’ll be paying less ongoing premiums, which means you can be investing the difference towards FI.
Be aware that many policies feature higher excesses for certain situations, hidden in the fine print. This is why it’s very important you to read your PDS and understand your policy. I most often see additional excesses listed for:
- Unlisted drivers (drivers not specifically mentioned in the insurance policy)
- Drivers under 18, under 21, or under 25. These are common ages which insurers use to discriminate based on statistical risk of accidents
- Types of damage: for example windscreen or window
- Learner or Provisional drivers
Agreed versus Market value
The value of your car is really only appropriate for comprehensive insurance, as third party fire and theft is usually required to be market value or sometimes they are a non negotiable baseline figure e.g. $2000.
For comprehensive policies you can choose to be paid out at either market value such as that estimated by redbook.com, or an agreed upon value that you and the insurer set together. Choosing market value will usually always result in lower premiums, but some people want the piece of mind of an agreed payout value and are happy to pay more (hint hint – these people are not smart investors, they have low risk tolerance and they probably own lots of fixed interest like treasury bills, convertible bonds and premium bonds!)
A rating one is also called a no claims bonus. This is a reward the insurer gives you for essentially giving them money for many years and not trying to claim any of it back. Some insurers will actually provide a cash back option, and some will provide additional services or even discounted policies as long as you maintain the history of never actually making a claim. This has the effect of instilling fear in the consumer (fear of losing the rating one) which leads to more profit for the company. Don’t let fear delay your path to FI – a rating one doesn’t put food on the table or pay your rent, but the dividends from stock you invested with your savings will!
So what do I need…?
The reality is, most accidents are just fender benders or minor scrapes anyway, and you’re probably not even going to get your insurance involved. The time, paperwork and excess cost just isn’t worth it; neither is losing your ‘rating one’ (which is a scheme invented by insurers to stop you from making a claim). A small bump or scrape doesn’t really bother most people, it doesn’t effect the way the car drives or impact its safety – and can be easily buffed out or sealed at home to prevent corrosion.
Any larger damage such as replacing broken headlights, windows or panel beating can be done using a local private mechanic or garage for a fraction of the cost of what larger dealerships charge. The trick is to be savvy and shop around getting multiple quotes.
But you still need to insure against the catastrophic case; car write offs, prangs with luxury cars and serious injuries. You need to make sure you are protected against these potentially financially catastrophic and potentially life changing events. If you are not and an accident happens, you could be liable for millions of dollars in damages and could potentially never reach financial independence.
- Personal liability, often called third party personnel insurance. Sometimes this is included into the cost of registering your vehicle in your state, but you need to check the contract to make sure you know what’s included
- Property liability, also called Third party property insurance. This covers you for the cost of repairs to other people’s property in an accident, such as rear ending the $300K Ferrari we talked about earlier.
I can’t stress this enough – it is really important to check your Product Disclosure Statement, and ask very direct questions to salespersons about exactly what your policy covers. Most people hate doing this, and many assume when they take a policy out that they are fully covered when actually they might not be. Personally I love doing this, putting salespersons on the spot with scenarios can be quite fun when they don’t even understand the product they are selling… ok now I’ve said it, it does sound a little cruel.
How to get the cheapest insurance
Ok so by now you know about the types of insurance, some of the lingo and what kind of policy you need. Now this next part is where the rubber hits the road, and you cash in on your savings.
The best way in today’s day and age is to check out a discount online insurer. By interacting with the insurer over the website, they are able to reduce their cost overheads significantly and can pass the savings on to you: no cost of renting an office, no cost to employ salespeople etc. Online businesses can maintain very low footprint call centres and small management teams.
Make sure you check the feedback and reviews for the insurer, Choice offers a very good service for its members but there is a wealth of free information out there just a Google search away. Test their customer support by ringing them and checking out the service before you take out a policy.
As alluded to earlier, the cheapest policy type that will cover you for catastrophic accident and financial ruin is simply third party personnel and third party property.
I pay $200 per year for third party personnel (compulsory third party) insurance, and $220 per year for third party property insurance.
Since you know you’re rarely going to claim (if ever) and you are only insuring against catastrophic accidents, crank this bad boy as high as it will go. I’ve always bumped it up to the highest I could go.
For my most recent renewal I increased the excess from $500 to $3,000, which was the highest I could take my policy up to at the time; doing so halved my premiums. Since I haven’t made a claim on my car(s) in the thirteen years I have been driving, I figure the estimated $2800 savings has already ‘self insured’ me for the extra $2500 expense if I ever do smash into a Porsche.
It sounds odd, but the garaging address of your vehicle impacts your premium. If you have a locked garage, or store the car in a compound, then tell your insurer as this could drive down your premiums. If you live in an apartment complex or garage the car in a compound with multiple surrounding streets, it’s worth giving the insurer a few options for this address and see how it impacts your quote.
Don’t auto renew; bitch or switch
One of the strange idiosyncrasies of the insurance industry (and many other services like telcos) is that they don’t tend to reward ongoing customers. Obviously a business wants to make money, and due to rising costs and general inflation they like to increase their premiums every year. This means if an existing customer tries to ‘set and forget’ their insurance on autopilot for several years, they are likely to be penalised with higher premiums year after year.
Ironically, these same companies advertise new discount policies every year in a desperate bid to attract new customers. So the obvious solution is not to auto renew, and to instead bitch (complain and ask for a discount) or just switch to a better deal with a different company. Simple, and the savings can be in the hundreds of dollars for something as little as an hours work ringing around and changing insurer.
Whatever you do, DO NOT LIE
Whatever you do, don’t lie on your insurance application. Be 100% truthful, otherwise you risk voiding your contract or policy. The insurance company will be all too happy to take your premiums, knowing full well that if you do make a claim there will be an investigation which may void your contract meaning they won’t pay out. They take the money – you take the risk (perhaps unwittingly) – seems like a good deal for them?
This means giving an accurate representation of the car and its current state (i.e. don’t hide previous hail damage etc), an accurate garage address and accurate driver details including any previous claims, any demerit points or driving offences.
Who do I insure my car with?
I insure my car with Budget Direct. They tick all of my boxes, and provide a rock bottom yearly premium. I was able to call and negotiate an even lower price than what was advertised online, and the next cheapest insurer is over 20% more expensive.
I’m happy with the level of customer service I get, and they haven’t tried to sting me with any renewal premium rises. The best online insurer for you will depend on your location, but for those of you looking in the land down under, it’s worth giving Budget Direct a look.
I just want to point out other than having a personal insurance contract for my car with Budget Direct, I have no affiliation with them at all and don’t make any money by recommending their product – it’s just the best deal around at the moment and I will switch the instant I find a better deal.
At the end of the day, most people over insure their assets. They think this is a smart move, but really it is a dumb move. A smart investor will actually have very little in the way of insurance; they only insure against catastrophic life changing events.
Over insuring hurts you over the long term because of much higher premiums, which mean you have less money at your disposal for investing into the stock market. This means you get paid less dividends, and experience less compounding return! By the way, this is exactly what insurance companies do with your premiums – they are investing them into the stock market to chase dividends and capital growth to make profits for shareholders.
Insurance companies are not stupid, and encouraging the dumb behaviour of over insuring helps to maximise their profits. Like most aspects of personal finance, you need to budget and save money where you can if you are serious about financial freedom and achieving FI – and this is a perfect example!