Reader’s Question:

This new auto insurance company has just set up office nearby. They’ve been around for half a year now, and they’re offering great coverage for low premiums. Their premiums are even lower than what other older companies offer! They’re great! I wonder why the other insurance companies don’t match their price ranges.

Jack,

New York City, NY

Now you may be excited about the low cost of the auto insurance company’s premiums and the coverage they’re giving, but there’s always a rule of thumb that must never be forgotten.
If it sounds too good to be true, it probably isn’t.

There are plenty of so-called ‘companies’ that will set up shop for a year or two, offering unbelievably low premiums for excellent coverage. There are two possibilities with this sort of company: they are the sort that will either hide behind legal loopholes or will run with the money after a certain period of time.

You’re also making a gamble by signing up with relatively new insurance companies, even if they’re fully legitimate. The risk with new insurance companies is that they may not have enough capital to continue operations should they experience financial trouble. They may even fold, especially now that the global economy is sinking further and further. Older, more established insurance companies have a wider customer base and the experience to help them weather any financial turbulence that they experience.

The auto insurance company you mentioned may or may not prosper in the future, but it’s all up to your tolerance of risk. If you think it’s worth the risks of the company going bankrupt or being illegitimate, then go for it. If you want some assurance, stick with the older, more established insurance companies.