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When you’re looking to buy car insurance the two options you most likely to think of are either purchasing a policy directly from an insurance company over the phone or online or using an independent agent with an office in your town. However, there’s a third option that many people don’t know about: using a discount insurance broker. The question is, are discount car insurance brokers worth the risk?
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Though we’ll take the time to discuss discount car insurance brokers and what they do, ultimately any option you exercise comes with some sort of risk. It’s the responsibility of the driver to know what kind of insurance he needs, how much he’s willing to pay, and what type policy he’s willing to purchase. Drivers who do their due diligence can find great deals regardless of their purchasing method.
The Difference Between Agents and Brokers
Let’s begin by talking about the difference between an insurance agent and an insurance broker. Suffice it to say they are not the same thing. The New York Department of Financial Services defines both agents and brokers in a way that’s pretty uniform across the country.
An agent is an individual who represents several different insurance companies among all the different lines insurance offered. An agent may work independently, representing up to six different car insurance providers, or he may be a captive agent representing only a single company.
An agent is nothing more than an administrator whose main responsibility is to act as an intermediary between the insurance company and customer.
A broker on the other hand, can sell insurance from as many companies as he wants, as long as those companies are willing to work with brokers. He actually produces the policies that are underwritten by the companies he represents, as well as helping to resolve claims, collecting payments, and so on. Because the broker’s responsibilities are much greater than that of an agent, licensing requirements are a lot more demanding in most states.
Defining the Discount Broker
Now that we know the difference between an agent and a broker, let’s talk about what a discount car insurance broker does. This type of individual may represent insurance companies of all classes, but he specializes in finding the cheapest policies with the most available discounts. These types of brokers are very popular in large urban areas with a high concentration of low wage earners.
Discount brokers sometimes offer policies from the big-name insurance companies, but more often than not their policies come from companies only licensed in a state or two, or who operate on a regional basis. These smaller insurance companies offer the discounted policies as a way of making money by volume rather than a higher value for each policy.
Often times discount car insurance brokers will also choose to focus on a particular demographic. For example, drivers who have been assigned to a high-risk pool because of repeated DWI offenses may find it difficult to purchase a standard insurance policy from big-name company.
On the other hand, purchasing insurance through a state-sponsored high-risk pool can be extremely cost prohibitive. A discount car insurance broker is a great position to offer policies to these drivers at a rate that is less than what the state offers.
Risks Associated with Discount Brokers
When you’re purchasing insurance from a discount broker, you are assuming certain risks you may not have with a local agent or a big-name provider. First, there’s always a chance you’ll get a policy that doesn’t provide adequate coverage for your needs. This is certainly a possibility no matter whom you purchase your insurance firm, but it’s a lot more likely with a discount broker due to the nature of his business.
The second major risk comes by way of a loss of customer service. If a discount broker is representing Insurance Company A when you purchase your policy, but then decides to no longer represent that company because he doesn’t sell enough of their policies, you may lose the customer service that broker provided on behalf of your insurance company. Any future dealings would be directly with them instead of your broker.
The third major risk when using a discount car insurance broker is that you’ll actually end up spending more money than you would have purchasing insurance another way. When this happens, it basically comes down to a scenario where you purchase a policy because monthly payments are very affordable. But when you add up those payments over the course of 12 months, you end up spending more in total for your insurance.
Knowing What You Need for Car Insurance
While you can’t do much to mitigate the risk of losing customer service from your broker, there’s plenty you can do to ensure you’re getting a policy that’s adequate for your needs. Start by checking with your state to find out how much car insurance is required by law. You can find that information usually through the state insurance department or motor vehicle department.
Just as one example, the North Dakota Insurance Department publishes car insurance requirements on their website. In that state drivers are required to carry three types of coverage: basic liability, no-fault, and uninsured/underinsured motorist coverage. The insurance department’s website makes it very clear that violating the law carries with it fines and other penalties.
You’ll need to know whether or not your bank or other lender requires you to carry comprehensive and collision insurance. In all likelihood they do.
Finally, you’ll need to make a realistic assessment of the value of your vehicle and your total net worth in order to decide whether to raise your minimum liability limits and purchase extra coverage. A financial advisor can give you good advice in this area if you’re not sure about evaluating your situation on your own.
Knowing What Determines Your Rates
When you choose to use a discount car insurance broker it’s important for you to know what goes into determining your rates. Otherwise, the best discounted policy you’re being offered may still seem to be more than you want to pay.
If you’re getting a really cheap rate despite the fact that you have multiple convictions and accidents, that’s cause for concern about what your policy really covers.
Alaska’s Department Of Commerce, Community, and Economic Development does a great job of explaining how rates are determined on their Division of Insurance website. They explain how insurance companies divide drivers into certain classes. Classifications are determined by number of things including driving record, age, make and model of vehicle, and so on.
Each of these classifications is ranked according to the amount of risk those drivers open their insurance companies up to. The higher the risk, the more expensive the insurance policies offered. When you purchase a policy from a discount broker knowing, what classification you fall into gives you better idea of how much you can expect to pay.
Don’t Spend More Than You Have To
In addressing the idea of spending more through a discount broker than you would directly from an insurance company, we have to think in terms of payment plans. What good does it do to get a discount policy if the surcharges and administrative fees added to your monthly payments end up costing more than a standard policy? Not much, obviously.
The key to making sure you don’t spend more than you have to is finding out the total cost of the policy based on all of your payment options. Consumer Action, a California-based consumer advocacy group, explains this principle in an easy-to-understand way. We’ll provide an example based on their explanation.
Let’s just say you have the option of purchasing a car insurance policy from a nationwide provider at a price of $750 annually. With a $25 discount offered to those who pay the entire policy up front you could pay as little as $725 for your insurance.
Then let’s assume you’ve talked with a discount insurance broker who can provide a comparable policy at a cost of $700 annually. He offers you monthly payments of $58 plus a $5 monthly surcharge for administrative purposes. You’re now spending $63 per month for a total annual cost of $756. In other words, you’re paying 5% more even though the policy itself costs $50 less.
You must always remember that the first responsibility of an insurance company is to earn a profit.
Otherwise, they wouldn’t be able to stay in business. So when they offer you discounted payment plans through brokers and agents they will always be adding surcharges to cover the cost of multiple payment processing and the fact that they have less cash on hand at any given time. That usually ends up meaning the consumer pays more in a long run.
At the end of the day, whether discount car insurance brokers are worth the risk really comes down to whether or not a driver fully understands how car insurance works. For those who do, a discount broker can offer a great way to save a lot of money. For those who don’t, it’s a good way to get yourself in trouble.
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