Wednesday, December 1, 2010

Reading This Can Save You 15% On Your Car Insurance... Really!

It seems like everywhere you look, you are bombarded with ads for companies claiming to save you money on your car insurance.  If you take these claims on face value, you should be able to continually switch insurance companies and eventually drive your annual premium down to practically nothing!  Let's say that you are currently paying $1000/year to insure your car.  If you switch and save 15%, you'd expected to pay $850.  Switch again and now your premium is $722.50.  Do it again and now you are paying $614.13.  Rinse and repeat another 70 or so times and you are paying under a penny a year!  Obviously I am engaging in a little mathematical hyperbole here, but the point is that nobody truly can promise to save you 15% on your car insurance by switching.

Let's take a close look a couple of the common claims:

"People who switched to Allstate save an average of $348 per year.", or
"Drivers who switched this week saved an average of $494"

This is a common selling point of many companies.  Most people read this might think that if they switch to Company XYZ, they are guaranteed to save some money.  However, what the words actually mean is different in a subtle way.  They are saying that of the people who choose to switch, those people save money.  If you stop and think about it, that makes perfect sense.  If the insurance offered is more expensive, you wouldn't switch, now would you?  You would only switch if Company XYZ offers a better deal.  Those who end of paying more would decide not to switch, and therefore they would not be included in the average.  The average only includes people who save money. 

It's sort of like saying that the average height of people over six feet tall is higher than the average height of all people.  Of course that's the case because the average height of people over six feet tall includes only the tallest people.  Likewise, of course the average savings of people who switch is higher than what the average savings would be for the population at large, because only people who save money are switching.

A second common claim goes something like this:

"15 minutes could save you 15% or more on your car insurance"

Unless you have been living a cave, you've probably heard this claim before (although it's so ubiquitous that even a caveman has heard it).  Again, on the face of it, this sounds like switching will save you 15% (or more).  Sounds like a great deal to me.  However, notice the word could in the tagline.  Switching might save you 15% or even more than 15%;  however, it could also save you less than 15%.  In fact, it could save you nothing. 

The bottom line is that there is way of knowing what 15 minutes could save you, according to this statement.  They could have easily replaced 15% with 50%, and this statement would mean exactly the same thing!  Of course, some marketing genius probably assumed (and rightly so) that saving 50% would sound ludicrous but that 15% could sound plausible. 

The lesson here is that you have to take all of these auto insurance advertisements with a grain of salt.  By all means you should compare prices but understand that not all of these claims are what they are cracked up to be.

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