Okay, so this article may not be as exciting as the TV show but it is certainly more relevant than the myths busted or confirmed (with exception of the episode that confirms you can actually slap sense into someone – click here for proof).
A common insurance myth is that, over time, auto insurance rates should decrease along with the value of the vehicle. This myth, despite making sense on its face, is busted by looking at a few simple facts.
First, an auto policy provides much more than just physical damage coverage for a vehicle. In fact, on the average auto policy, only 53% of the total premium is related to physical damage coverage. The remaining 47% is made up of liability coverages, medical coverage, wage loss coverage, Michigan Catastrophic Claims Association fees, etc. Therefore, even if premiums did decrease with the value of the insured vehicle, the decrease would not be nearly as drastic as many people expect.
Secondly, the cost to repair a five year old vehicle is no different than the cost to repair a two year old vehicle. In fact, it may be slightly more expensive for the older vehicle as replacement parts become less readily available. But what about instances where the vehicle is totaled? Won’t the insured receive less of a settlement for the five year old vehicle than the two year old vehicle? Yes, they will. However, according to the Insurance Information Institute, the average physical damage claim results in payment of just $3,160. This amount of damage will not total many cars and is consistent with our Agency’s estimate that less than 5% of physical damage claims result in the vehicle being a total loss. Therefore, the fact that an insured will receive a lesser settlement for an older vehicle in the event of a total loss is not heavily factored into the cost of auto insurance.
Lastly, the cost of health care, which affects an auto policy’s premium for liability coverage (for injuries you cause to others) and medical coverage (for injuries you sustain), has increased well beyond inflation. According to the Insurance Information Institute, the general cost of living increased by 17.6% from 2006-2015. Over that same time span, the costs of medical care and hospital services increased by 32.9% and 68.6%, respectively. Michigan auto policies provide unlimited medical benefits, so these increases have a substantial impact on the premium.
Michigan auto insurance often gets a bad rap for being expensive. While I can’t disagree, it’s important to remember that an insurance policy is strictly a legal promise to pay for certain costs. In the case of auto insurance, most of those costs are increasing beyond inflation.
This article was written by Derek Boer. Please email Derek with questions or comments at firstname.lastname@example.org.