The Ten Myths about Insurance People Believe

Insurance Myths

As a young man fresh out of college, I didn’t see myself working in in the insurance industry in any capacity, let alone as an insurance agent. It’s not because I thought it beneath me, I just wasn’t very familiar with how insurance worked or the opportunities.

In hindsight it’s easy to understand why I was so ill-informed, there isn’t much education about insurance in our intermediate or higher education system. Americans simply don’t fully understand how insurance works, or the importance it plays in our economy.

When you factor in that insurance isn’t the sexiest topic, there is little chance that the average person is going to pick up a risk management book as self-study, or breakdown the intricate finances of the modern insurance company.

So, as a society, I guess it’s safe to say, we’re not going to improve our understanding of the insurance we purchase for our personal or business interests.

Is what we know real or simply myths about insurance?

Recently, insure.com conducted a survey to identify popular myths people believe about their insurance products, and no surprise, there are some severe myths people believe about their insurance.

What was also fun to note ... and as a fella I hate to admit it ... the ladies win a gain. Men were found to be far more gullible when it came to understanding their insurance products.

According to Insure.com they surveyed 2,000 adults, half women and half men, from all regions of the country, asking them whether 10 insurance-related statements were true or false. All the statements were false.

In reviewing the questions, they are pretty simple, so it's easy to believe that if those surveyed were asked more complex questions, the extent of the belief in fallacy would be much higher.

So, without any further ado, here are the top 10 insurance myths people believe are true:

Myth 1: My home insurance coverage is based on the real estate market value of my home

Survey results: 52% of consumers actually believe this myth is true (45% of women and 55% of men).

Reality: When selling a home insurance policy it's not uncommon for the insured to feel uncomfortable when the replacement cost estimates for the dwelling coverage to be less than the market value. The replacement cost isn't considering the value of the land, the market value of the school districts, low crime rates, or your view. Replacement cost is simply the value of the raw materials, the labor and time to get the home repaired and back to the pre-loss condition. This can be much different than the market value of the home.

Myth 2: Red cars cost more to insured

Survey results: 46% think this is true (52% of women and 48% of men)

Reality: Car color doesn't factor into your auto insurance rates. When determining the factors applied to the base premium for the car you drive, insurance companies use what is called a symbol. To develop symbols, insurance companies use advanced statistical methods to determine the relative loss difference of vehicles based on the cars characteristics, like make, model, horsepower, and curb-weight. Most of the characteristics can be derived from the 16-digit vehicle identification number. Needlesstosay, the vehicles color is not one of the things you can determine a vehicle identification number.

Myth 3: If I cause a big loss, my insurance company can cancel me immediately

Survey results: 44% think this is true (50% of women and 50% of men)

Reality: In some lines of business a single, sizable loss, may cause an underwriting need to non-renew a policy, however, most regulations do not allow for an insurance company to take this action mid-term. Therefore, a policy typically cannot be cancelled mid-term for a server loss. In auto insurance, insurance companies have the capability to increase rates based on accident history, so even for his line of business, where insurance companies handle many, many losses, most insurance companies won't even non-renew a policy for loss history ... they'll just increase rates.

Myth 4: Small cars are the cheapest to insure

Survey results: 40% think this is true (42% of women and 58% of men)

Reality: Once again, the premium adjustment for a vehicle depends on it's relationship to its historic claims costs. Much like the answer provide for Myth 2 above, if a vehicle has low overall loss costs the rate changed for that vehicle is lower. The size of the vehicle can actually play against it's costs, in that the horsepower to curb-weight ratio may predict higher loss cost for liability coverages, on the other had, smaller cars are correlated with compact, low cost vehicles, which may result in less expensive cost to repair and lower collision rates. The reality is that each insurance company will evaluate the historic costs for all knowable vehicle characteristics and develop rates based on the experience. This may mean some smaller cars get better rates, and it may mean some get increased rates (and even high-performance surcharges).

Myth 5: The Affordable Care Act allows health insurance companies to base rates on medical conditions

Survey results: 36% think this is true (42% of women and 58% of men)

Reality: Our agency doesn't work in health insurance, so admittedly we are less expert in this area of insurance, but the one thing we understand and agree with the survey clarifications, The Affordable Care Act actually does the exact opposite. It prohibits insurance companies for basing rates on pre-existing conditions. This was one of the central benefits of The Affordable Care Act, and one of weaknesses of the former health insurance system, that prior to The Affordable Care Act, insurance carriers could use pre-existing conditions in underwriting, leaving many sick citizens without proper health insurance.

Myth 6: Comprehensive auto insurance coverage covers everything

Survey results: 32% think this is true (41% of women and 59% of men)

Reality: Your auto insurance coverage is broken down into several different coverages, each designed to handle different perils or hazards. Because of it's name, it's easy to see now non-insurance folks would think it comprehensive coverage is for everything, but this is a myth, much like the concept of "full coverage." The comprehensive coverage on you purchase with our auto insurance policy is optional, so you have to request it, and it is only designed to cover specific perils (eg. car theft, storm damage, animal collisions and vandalism). A basic way to think of this is that it's for things that aren't collisions, and frequently insurance companies will call this coverage "Other than Collision" to improve understanding. It's important to read your policy to know the proper set of perils that are covered by your comprehensive coverage.

Myth 7: Thieves prefer to steal new cars

Survey results: 29% think this is true (42% of women and 58% of men)

Reality: According to the survey, it was concluded that thieves prefer to steal older cars. This may be true given recent developments in newer cars (eg. ignition key chips and tracking devices), which make stealing a newer car more difficult. In reality, according to the FBI, vehicle theft has been down over the last two decades.

Myth 8: If my friend borrows my car and crashes it, their insurance will pay for the damages

Survey results: 25% think this is true (48% of women and 52% of men)

Reality: It's nice to see that only 25% of those surveyed believed this to be true. The reality, is that your auto insurance is the only insurance that will pay for damage to your vehicle (assuming there isn't a 3rd party who is liable for the damage). A basic way to think about your auto insurance coverage is that it "follows the car." It is true, that the liability you purchase for your auto insurance coverage, may follow you to a car you borrow, but it only does so as a secondary coverage, meaning the insurance for the vehicle you borrowed would have to pay their liability limit first, and those limits would have to be less than your limits, before your auto insurance would kick-in.

Myth 9: The Affordable Care Act requires me to take my employers health plan

Survey results: 19% think this is true (41% of women and 59% of men)

Reality:  Once again, we are not experts in health insurance, but it is our understanding, and the findings of the survey, that The Affordable Care Act does require most of us to purchase health insurance coverage, it doesn't dictate where that coverage is purchased.

Myth 10: Out-of-state traffic violations won't follow me to my home state

Survey results: 13% think this is true (34% of women and 66% of men)

Reality: This is definitely not true. Many years ago they various Departments of Motor Vehicles began to share data for the purposes of accurately reflecting violation histories. In fact, when I was younger I got a ticket in North Carolina and discovered the hard way that California and North Carolina were both early participants in national motor vehicle reporting.

Conclusion

It's easy to understand why many don't have a firm understanding of their insurance, it's actually pretty complicated. The typical auto insurance policy is approximately 24 pages in length, and despite the efforts of regulators to make the reading less sophisticated, it's difficult when you're dealing with complex indemnification.

It's important to ask a lot of questions of your insurance agent or insurance carrier prior to purchasing your policy, or prior to undertaking an activity that may seem outside normal. It's best to be safe than sorry.

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