Should you be careful of very cheap car insurance?

You should be careful of very cheap car insurance rates that seem too good to be true. Just because a car insurance company offers you a low rate, it doesn't mean it's trying to scam you, you just might not be getting the amount of coverage you need. Before purchasing any type of car insurance coverage, learn about the different insurance types, research company ratings, and try to find the best combination of coverage, premiums, and provider. Start here with our free guide and get cheap auto insurance quotes with our comparison tool below.

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Tonya Sisler has a Bachelor’s Degree from the University of South Carolina in Journalism and has worked for 15+ years in management. She has also completed a proofreading certification and is currently a professional writer.

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Brad Larson has been in the insurance industry for more than a dozen years. He started out as a claims adjuster for a national carrier. He has since switched to the agency side of the business. Brad is licensed in all P&C lines.

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Reviewed by Brad Larsen
Licensed Auto Insurance Agent

UPDATED: Oct 30, 2020

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The short answer to this question is YES. You should absolutely be wary of cheap car insurance rates that seem too good to be true. However, just because a car insurance company offers you a low rate, this doesn’t mean it’s trying to scam you. There are some very good reasons that a company might offer you a low car insurance rate, and if it does so legitimately, you don’t want to miss out on a great deal. If you’re looking for car insurance rates, you can get them by entering your zip code in the box on this page, but you should read this article first to learn how to determine a good deal from a car insurance scam.

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Is the Car Insurance Company Licensed?

If you’ve gotten a car insurance quote that seems unbelievably low, you should check to make sure the company offering this cheap rate is legit. Often, a quick Internet search will convince you that a company is the real thing or it might be a company who insures some of your friends or family members. However if it’s a company you’ve never heard of it pays to dig a little deeper.

There are several sources of information on car insurance companies, the best of which is your state’s insurance commission or department. Insurance companies must be licensed by the department of insurance for each state in which they want to operate. If the company that offered you the quote is not licensed in your state, you shouldn’t even consider doing business with it.

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Is the Car Insurance Company Financially Solvent?

Just because a company is licensed doesn’t mean that it is financially stable. If your insurance company goes bankrupt (a rare occurrence), you might have difficulty getting your claims paid in a timely manner. This is unlikely to happen with a large, established insurance company, but if there’s a smaller, unknown company offering you low rates, this is a real possibility.

In order to get an idea of how financially stable an insurance company is, just look up the company’s ratings from Moody’s, Standard & Poor’s, Fitch or A.M. Best. These organizations assess companies’ abilities to meet their financial obligations. If the company offering you low auto insurance rates has a low financial strength rating, you should weigh the risks carefully before proceeding.

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Is the Car Insurance Company Reputable?

If you’ve determined that the company offering you low car insurance rates is licensed in your state and has a solid financial strength rating, the next step is to research its reputation among consumers. One way to do this is to consult J.D. Power and Associates’ 2010 Insurance Industry survey, which rates companies based on customer satisfaction with their pricing, billing, ease of contact and policy offerings.

However, if the company you’re researching is a smaller one, it’s probably not included in these surveys. If that’s the case, it’s a good idea to find out what the company’s Better Business Bureau rating is, and also determine whether the company has lots of unresolved complaints filed against it. If it has a low rating, or if it has lots of unresolved complaints, these are strong signals that you should proceed with caution.

Who are the top 10 car insurance companies by market share?

Does the Car Insurance Company Offer the Coverage You Need?

If you’ve answered “yes” to all of the questions so far, it’s likely that the car insurance company offering you unbelievably low rates is a legitimate, established insurer that will pay your claims promptly. However, before you pick up the phone to call and lock down that rate, there’s one more question you should consider: what type of coverage is this quote buying me?

While it is highly unlikely that any reputable insurer would offer you a quote for a policy that does not meet state minimum requirements, it is possible that the quote is for a bare-bones liability-only policy. This type of policy only covers events in which you do damage to a person, vehicle or property other than your own. If a tree falls on your car, or a drunk driver totals your vehicle, your insurance will not pay a dime for your repairs.

Liability-only policies are fine for some drivers, especially if you have an older car and you are trying to minimize expenses. However, it’s important to weigh the car insurance savings you get with a liability-only policy against the costs you might incur if your car is damaged or totaled. It’s also important to be aware of what the limits are to your liability-only policy. If the policy only covers $20,000 in damages, and you do $50,000 worth of damages, you could be liable for the difference.

Another reason that a car insurance quote might seem unbelievably cheap is that it comes with an unbelievably high deductible. Since you have to pay your deductible before your insurance company starts to chip in, it’s important to choose a deductible you can live with. If your deductible is $2,500, can you really afford to come up with that money all at once in the event of an accident?

Risks vs. Rewards

If a reputable car insurance company offers you a rate that seems too good to be true, there’s probably a good reason for it. It could be that you’re a young male who just turned 25 or got married, both of which will significantly lower your car insurance rates. However, it could be that the quote is low because it is for a policy that requires you to take on a lot financial risk in the form of high deductibles and liability. If you can handle the risk, it could be a good deal, but if not, you should tread carefully.

Before purchasing any type of car insurance coverage always shop around. Learn about the different types of insurance, research company ratings and try to find the best combination of coverage, premiums and provider for you and your family. Get started today by entering your zip code to find local car insurance companies.

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