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blog (coffee shop)
by I recently dealt with a large (50%) auto insurance premium increase as a result of an accident (which was my fault). I'm frustrated with making insurance payments for years and years without asking for a penny, and then when I actually need the insurance company to do what I pay them for, they penalize me. I understand the need to establish benefits for good drivers, but ~$1,000 in claims over four years must qualify me for the lowest risk category - unless they're including a $0 group, which would seem almost dishonest. (If there's a zero risk group, then they wouldn't need insurance.)
I try to be constructive, though. So, instead of just feeling used, I came up with how I think the system should be run - or at least an alternative. Rather than paying up front based on how the insurance company estimates the risk of insuring you, why not just borrow money when it's needed and then pay it back at a specified interest rate?
This would have to be contingent on the credit of the insured, of course - something probably reflected in the interest rate and maximum loan amount. Also, perhaps the program would only be available for those above a certain credit level. In any case, it would simplify so many things. Why worry about specifying the details of your coverage (e.g., rental car, deductible, etc.)? Why be burdened with providing evidence to be sure you get the coverage you need? Just specify how much you want to borrow and take care of things.
In fact, why involve an insurance company at all? If you can get pre-approved for a bank loan (based on your home equity or something else) that is large enough to meet the minimum coverage requirements (e.g., in Texas: $25,000 for bodily injury or death to one person per accident, $50,000 for bodily injury or death to two or more persons per accident, $25,000 for damage or destruction to other property in an accident) why couldn't that be enough to be considered self-insured?
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2 Nerd-Its
I agree
It seems lately I am having a lot of experience wondering why I pay for several of the things that I pay for. Your situation adds to that. What about this possibility:
Instead of paying an insurance company every month, put that same amount into a high yield money market account/savings account. I pay about $350 per 6 months for my insurance but used to pay over $600 (before I was 25 - another ridiculous insurance practice). So, imagine I had just put all that money into an account ( I bought the car in 2003). Doing some quick Excel work shows that if I had been putting all that money into a 3% interest savings account, I would have about $5700 right now. In 2004 a deer ran into the side of my car causing $2700 in damage and that is the only claim I've ever made. So, I would still be in the black.
This idea has obvious problems like - what if I total my car, or what if I incur damages that are wildly more than the money I've saved? Well, you're SOL with this plan which is why there is a market for insurance in the first place. It just seems to me that most people will end up putting way more money into car insurance than they will ever take out over the course of a lifetime and that is pretty annoying.
I think the loan idea falls into the same category as my plan. It would be fine if you never were responsible for a high cost claim. For example, if you were responsible for an accident that totaled someone's Rolls Royce, would you really want to take out a loan to pay that back?
So maybe this: according to a specified timeline (or aspirational time-horizon), you could withdraw a percentage of the money you have paid into the insurance plan. If you make a claim, you are not eligible to withdraw for a certain time period (depending on the size of the claim, maybe a long period of time). So in your case of causing the accident, your rates would not go up, you would just lose the chance to withdraw your percentage at the end of the year (or the end of a two-year cycle or...), which is only fair since you were responsible. I know the insurance companies would never agree to this but it sure would make me feel like less of a sucker.
This comment has 3 replies.
5 Nerd-Its
Different risk profiles
The problem with the loan idea is that the interest is likely to be exorbitant.
When considering the chance you'll pay back a mortgage or car loan, the bank gets to take into consideration the fact that if you don't pay, they get to take the property to try to recover some of the loss. For the kind of loan you propose, there's nothing against which to place the lien. So you're talking about an entirely unsecured loan for $50,000. Damn few banks will offer that to anyone.
In fact, about the only way to get a loan for $50k is to show that you own some real property worth at least that, so the bank can put a lien against it. But, if you can do that, then Texas will allow you to declare yourself to be self-insured, and you don't need to buy that minimum coverage. I've a friend in Austin who self-insures that way.
But it doesn't really stop there. The minimum insurance is what the law requires - but your actual liability isn't capped at $50k. You could potentially be found liable for much more than that. Your insurance would only pay the first $50k, but then you'd need to seek loans or whatever to cover the remainder. For most people, that means bankruptcy.
The purpose of insurance is to address the rare case - your kid throws a tantrum and spills your coffee into your lap, causing you to swerve into another lane of traffic on the interstate, resulting in a twelve-car pileup. Situations like that can happen even to the most careful driver - it's not about being careful, it's just a danger inherent in operating a machine that travels at high speeds.
Insurance exists to spread the cost of those situations around. It probably won't happen to you in your whole life. It probably won't happen to anyone in your neighborhood. But in the time you live there, it probably will happen to someone in Houston. That's just statistics. So you take the cost of that, divide it by the number of insured drivers, amortize it over time and call it an "insurance premium". Voila - if it happens, the damages are covered.
This comment has 6 replies.
1 Nerd-It
insured to death
You could be so bogged down with loan repayments for unforeseen incidents that you never see the light of day again. Thus affecting all other aspects of borrowing money - for a home, education, etc. Just how many loans do you think you can handle?
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Bond by Anonymous :: NR0 :: Show
This is just something I heard, but I though it was possible to take out a bond or something for the amounts you listed and that would satisfy the insurance requirements.