Should I Buy Auto Insurance Online?

Our founder, Scott Boren, worked in leadership for both GEICO and Esurance and believes the internet has positively impacted insurance. He’ll always tell the employees that there is nothing wrong if a consumer wants to buy auto insurance online. However, he’ll argue, that the consumer needs to know what they are buying first.

If you’re considering buying auto insurance online, you need to consider if it’s a good choice for you. Will the product offer the right protection, not just the same limits of liability and deductibles? Is the company reputable and financially strong? There is more to auto insurance than the numbers on the declarations page and a splashy user interface.

Let’s dispel a few myths about price and walk through the pros and cons of buying auto insurance online.

Is it cheaper to buy auto insurance online?

The main reason folks look to buy auto insurance online is the perception that there are savings in the do-it-yourself model. However, they’re looking for a deal, not “cheap auto insurance.”

That being said, it’s true that you can save money when you buy auto insurance online.

If everything were equal between insurance companies, then just by simple arithmetic, online carriers should have a lower price. Direct-to-consumer distribution models, regardless of the product category, are only created because they can control the costs of distribution and/or new customer acquisition. In insurance, they reduce new customer acquisition costs because they don’t have recurring commissions paid to insurance agents.

How does this work?

Well, they load up the first term with advertising and marketing expenses hoping the policyholder sticks around for a long time. The gamble is that a large advertising expense plus a modest increase in service center costs to handle customer support will be cheaper than agent commissions over time.

If the insurance company passes these savings on to the consumer there are potential savings. It’s hard to know if they would. These savings can also be directed toward greater profits. It’s most likely they give some of the savings back in pricing but hold most back for profits.

How much could I save?

Let’s assume the insurance company reduced rates equal to their full savings. In this scenario, the savings is actually modest.

Regardless if the insurance company sells through insurance agents or direct to the consumer, the claims loss costs, claims adjustment expenses, and taxes will be similar from company to company. This means the only difference is in operations expenses and acquisition expenses. Therefore, even if we assume huge savings in acquisition and only a moderate increase in operating expenses, the difference in overall budgetary differences would average approximately 8.8%.

So, if the average auto insurance policy costs approximately $770, you could expect to save approximately $68 per semi-annual term for the average policy. Any other difference you may see in the premium is the normal differences in pricing choices made by statisticians or actuaries, and not related to the distribution channel. These differences exist between all insurance carriers and aren’t related to how you buy your policy.

What does that $68 cost the consumer?

When you elect to buy auto insurance online, you are making a trade-off. You have chosen to purchase without a dedicated insurance agent. This is a significant choice and can influence the coverage selections you make, or the policy you choose. If you elect poor coverage, you may be putting your family’s financial plan at risk.

Let’s see what that $68 was actually paying for:

A dedicated licensed insurance agent

Insurance is complicated. Essentially, it’s a contract drafted by the insurance company, and it has very objective terms that control what is – and IS NOT – covered. Each section of the insurance policy has specific definitions and exclusions. In fact, the application forms can exclude specific behaviors or named drivers from coverage.

The policy contract, not the declarations page, controls your relationship with the insurance company. It defines how and when you need to notify the company about new vehicles, replacement vehicles, or when coverage applies to rental and loaner cars. It determines who is defined as an “insured,” and who is covered when driving your insured vehicles.

If you don’t have expertise in how the policy contract is written, it might be better to buy through an insurance agent.

Your time – it’s valuable

When you choose to buy auto insurance online, you may have committed yourself to many hours completing quote applications and online investigations. Why? Well, most direct carriers only offer one product, so you’ll need to shop with several insurance companies to compile enough data to make an informed choice.

When you start down this path, you will quickly find out that it takes just a bit longer than 15 minutes. Especially if you want to get the right protection. You never get that time back, and a few hours of your time may be worth much more than $68.

Sacrificing convenience

It may seem like online auto insurance companies are more convenient because they have slick user interfaces and awesome apps and websites. However, if you have to do all the research and due diligence yourself, that fancy website or app may not have all the answers. Moreover, many direct-to-consumer insurance companies only offer one product, and one line of business (often auto only). If you have to bundle home and auto insurance, you’ll have to do this all over again.

The personal touch

Frequently, a local insurance agent lives in your neighborhood. They are closer to your situation than a remote corporation selling through an app or call center. An insurance agent, if they are good, will offer you ancillary benefits, like education information, and additional financial services (eg Life Insurance, Annuities, or investment opportunities).

So, if you’re going to buy auto insurance online, you need to think about these trade-offs and make sure that the savings – IF you’re even getting them – are really worth the modest difference in premium.

There is too much focus on the price

It seems like whether it’s a direct-to-consumer or agency company, the focus too often is on price and not protection. We get it, insurance isn’t a tangible product, making it harder to appreciate the expense.

Somehow we need to redirect that focus. Price is important. Nobody wants to get a bad deal. But if you’re buying cheap auto insurance, you may not be getting the coverage – the protection – you need.

It’s that simple.

Just like there is a difference between BMW and Kia, Apple and Asus, or McDonald’s and In-N-Out, there are differences between insurance companies. Insurance has its low-cost, low-quality brands just like other product sectors. The difference for insurance products is that cheap options typically mean less coverage. The options, protections, and exclusions in an insurance policy vary like the raw materials, or quality of ingredients that go into consumer packaged goods.

Honestly, most of the bad rap that insurance get comes from consumers buying a stripped-down product and being disappointed when it doesn’t perform. You want the comfort, performance, and luxury of a Mercedes Benz, but you bought a Gremlin.

The bottom line

If you still want to buy auto insurance online, it’s a valid choice. Just make sure to do your research, and look for tips to help you buy auto insurance.

If you want to compare the rates of our auto insurance carriers, you can start your shopping journey at ComparisonQuote.com.

If you elect to shop elsewhere, make sure to ask a lot of questions, and don’t buy if you feel uncomfortable with the level of detailed explanation you’re provided. Buying auto insurance online is not bad, but it does require that you spend some time, do the research, and make informed choices. And remember, there may not be any difference in price if you elect to work with an insurance agent … so don’t be bashful, give an insurance agent a try … you may just be impressed.