Rabbi Berel Wein tells a humorous story about the time his plane ticket was cancelled due to a mix-up. Twenty minutes before take-off, the airline quickly seated him in first class, next to the vice-president of TWA. The vice-president noticed him reading the Chumash in Hebrew. After a few moments, he leaned over and asked, “What language is that book written in?”
“Hebrew,” Rabbi Wein replied, sweetly. “You mean there are still people left in the world who read and write Hebrew?” he responded incredulously. “I thought it was a dead language.” "Well,” Rabbi Wein explained, “there are millions of people in the world who read, write, and speak Hebrew. In fact, your airline flies regularly to a country where Hebrew is the official language, spoken by millions of people.”For some reason the VP disliked the response. “I see that you and I have nothing in common,” he muttered, turning away.
“That’s not true,” the Rabbi countered. “We have an important matter in common.”
“What’s that?” he snarled.
“Neither of us paid for this first-class seat.”
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What does this little exchange have to do with car insurance? Well, folks, you know that airplane passengers may pay highly varying amounts for their flight. It’s like going to a supermarket and finding out that the guy before you in the check-out line and the one after you – all the customers, in fact – are paying different prices for the same products! Well, I came to the realization that this is true of car insurance as well. When I prepare taxes, I often ask clients how much they spent on car insurance that year – if they used their car for business, they can deduct a portion of their expenses – and I found that everyone seemed to be paying a different amount. So when I saw Consumer Reports’ recent exposé on how car insurance premiums are calculated, revealing some of the secrets, it was a revelation. This article is a review of that CR report.
We have all heard the radio ads claiming that a 15-minute phone call to a certain insurance company will result in lower premiums. Is it true? What is the consumer supposed to believe? One thing that is true is that it might be possible to arrange things so that you get a lower rate. Consumer Reports analyzed two billion insurance quotes! A key finding is that even more important than your driving habits in determining your rates is an analysis of socioeconomic factors. They discovered that your credit score plays a major role in setting your price, and matters more than your driving record! Consumer Reports seems to feel that this is not fair. Clearly, however, the insurance companies are not stupid, and they have discovered that these scores can and do predict future accidents. Apparently they indicate your level of responsibility, which affects your driving habits.
A little history: Insurance companies used to use your zip code. You paid more if you lived in Baltimore City than in Carroll County. That was because they had more claims in Baltimore City. Since the companies can no longer use zip codes, credit scores have filled the gap. People living in Baltimore City also have lower credit scores than people in Carroll County.
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Considering the importance of credit scores, here are some tips:
1) Pay your bills on time, pay online, and keep track of your log-in names, passwords, and due dates on an Excel file. This prompts you to not miss a payment. Pretty easy.
2) Ask if there is anything you can do to lower car insurance car insurance bill. I call this the economic law of the Arab shuk – meaning that some people drive a better bargain. The savvy customer will pay less, and the less savvy will pay more. Another application of this rule is when online stores have a special that requires you to put in a special code at checkout. The savvies are careful to insert the code, and the suckers overlook it. Same concept.
Are you a sucker? The insurance companies scrutinize you to see if you will notice a price increase. They can see if you overpay for other things, such as internet or cable TV service. If you are the kind of consumer who sticks with service even as the price goes up, they peg you as non-savvy. And don’t assume that you will be rewarded for longtime loyalty. CR found that some companies do reward you, but others actually charge long-term customers more! They think you will never leave.
3) Be prepared to switch. Ask your agent to get quotes from different insurance companies, and go with the one that gives you a better price.
4) Teen drivers are certainly a big issue in our community. CR found that adding a teen driver will increase premiums, on average, by 90 percent over what the parents were paying before! But here, too, companies vary. They raise rates by vastly different amounts, so shop around.
5) Ask if you are eligible for any discounts, like having home insurance with the same company, or if you have not had a ticket or incident in the last several years. Also make sure the company is aware of any changes in your status. Maybe your teenager is now in his late 20s, or has married and moved out.
6) If you are a somewhat sloppy driver, technology is your enemy. Try to reform. One insurance company put a tracking device in my car for a month to see if I drove in a safe fashion. This device informs the company if you do a lot of speeding and fast starts and stops.
If you do get a ticket for a moving violation, it pays to go to court. Even if you have to pay a fine, try not to get “points” on your record, which will raise your insurance rates. Discuss this with an attorney who is knowledgeable in this area.
8) Home insurance may be similar to car insurance. Check yours to see what is triggering the high premiums, and address those areas.
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Beyond Consumer Reports, another way to reduce your car insurance cost, in my opinion, is to drive an “oldie but goodie.” My favorite car is a 15- to 20-year-old Corolla, especially for short jaunts around town. It is great on gas, and since it is not worth very much, one does not need collision insurance. Dropping collision (and comprehensive) savings you money. Dropping coverage is a gamble, of course. (Your car might get stolen the next day.) But I did a calculation on one of my cars. I am paying $200 per year for collision. The Kelly Blue Book value of the car is about $2,500. I have a $1,000 deductible, which means that all I would get from the insurance company is $1,500. That is clearly not enough to replace the car.
To conclude, the purpose of this article is to give you some ideas that you should discuss with your broker. He will probably have even more suggestions from his years of experience. Frum families often have more than two cars, and insuring them is a large expenditure that goes on for years, so car insurance is an important issue. Dealing with it is one of those boring but necessary chores. Shopping for insurance does not take that long and might save you money. It is one part of addressing family finance that should not be overlooked.
Eli Pollock CPA can be reached at firstname.lastname@example.org.