Reader’s Question:

I have been looking around for car insurance companies and getting quotes just to see if car insurance is an option for me. The cheapest car insurance company I found seemed to be a good place to get a good deal, almost too good. I noticed though that they do not look very professional, is there anything I should look out for in this scenario?

Clay

Frankfort, KY

Well it looks like you are on the right track, but let us look at how car insurance systems work before you judge your situation for yourself. Often there is a reason why that is the cheapest car insurance company you found.

If you ever wondered how car insurance companies make money the answer lies behind 2 variables: the chances of your car getting damaged and the length of time it will take for your car to get damaged.

Why these 2 variables? Well you get insurance because you expect that there is a chance youre car can be damaged or can cause damage in the future. So you pay for a relatively small amount that insurance coverage for certain accidents that can happen to you. For as long as no accidents happen to your car the insurance company will not be liable to pay for anything regardless of the length of time.

Let us say you paid $500 for a policy that covers you from hail storms. If no hail storm happens for the next 3 years then the insurance company can consider your $500 as profit and may invest it to increase its value. By the time that you get your car into an accident they would have more than enough to pay for repairs.

Now consider the cheapest car insurance company you visited. Do you think they have been investing wisely?