No-frills car insurance is a popular option for people who are seeking to meet their legal obligation to obtain insurance while keeping expenses low. If this sounds like you, it is important to keep in mind that you generally get what you pay for. If you are buying a no-frills policy, you are essentially betting that you won’t have to use it.
Insurance is state-regulated, and each state has different minimum requirements on the type of auto insurance you must carry – so the definition of “no-frills” varies from state to state. To assess the potential hidden costs, you must anticipate what will happen if you actually have to use your insurance. Consider the following aspects:
- Higher Deductibles – No-frills insurance is likely to have a higher deductible, which is fine – but consider that if you have to use it, it is likely that the paying the higher deductible will wipe out the savings on your premium.
- Lower Liability Limits – Let’s assume your state minimum requirement is 25/50/10, which means $25,000 coverage per injured person for up to two people ($50,000 total) and $10,000 in property damage. It is very easy for an accident with multiple injuries to surpass that, not to mention the spiraling financial responsibilities in a multi-car accident that you caused.
It does not cost that much extra on a premium to raise your liability limits tenfold, and with the lower liability limit, you potentially place your assets in jeopardy from legal action. Liability should be based on the assets you have to protect, not on the amount of money you can save.
- Breakdown Assistance – With a lesser plan, the lack of roadside assistance and towing charges can put you in a difficult situation – you generally have little choice to negotiate your towing costs. If you require a long distance tow, charges can be prohibitive.
- Courtesy/Rental Cars – Less expensive insurance usually does not cover the cost of rental cars while yours is being repaired. If you have a second car, this may not be an issue – otherwise, rental car costs may offset your premium savings.
- Uninsured Motorists – Basic insurance will not usually cover medical costs you incur from injuries caused by an uninsured motorist, which could be substantial.
- Collision and Comprehensive – Failure to take either of these policies means you are on the hook for damages to your own car caused by collision, theft, fire, or flooding. You can live with cosmetic damages, but anything that renders the car inoperable or makes it impossible to pass inspection will clearly consume all of the premium savings from your no-frills policy – and then some.
There are other perks that come with more substantial car insurance policies, but you see the pattern.
Insurance is a matter of risk assessment by both sides. The insurance company sets your rates by the risks you pose. You in turn select your coverage on the amount of protection you are willing to pay for – in other words, the amount of risk you are willing to assume. With a no-frills policy, you are assuming the highest amount of risk the state will allow you to assume.
There are cases where no-frills car insurance is the best option. For example, those just starting out on their own with minimum assets to protect and limited incomes may realistically be better served with the state minimum policy. However, most people need to consider the true costs if they have to actually use the policy, and also evaluate the assets they are trying to protect from potential legal action – the most significant hidden potential cost of your car insurance.