10 Common Insurance Myths: Setting the Record Straight
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Insurance misconceptions are more common than you probably realize – make sure you get the facts before making important insurance decisions.
Like any industry, insurance has insurance myths that get passed around. Whether you've heard them from your uncle, an acquaintance, or a TV show, these are the insurance "facts" that might have a kernel of truth but on the whole don't stand up to scrutiny (these are different than the Bad Insurance Advice You've Probably Received at Some Point).
It wouldn't be so bad if this were just trivial misconceptions – like that George Washington had wooden teeth or the fact that the word "peruse" doesn't mean what you probably think it means. But insurance myths can have serious implications when they lead policyholders to misunderstand their coverage.
With that in mind, let's set the record straight by busting ten widely circulated insurance myths.
Myth No.1: It Costs More to Insure a Red Car
This one seems silly on the surface, but the reasoning behind it sounds plausible. According to the purveyors of this myth, people who buy and drive red cars tend to be drive more aggressively and break the speed limit. All that added risk translates to a higher premium.
That makes a certain intuitive sense, but it's simply not true. Lots of things factor into your auto insurance rate. Your car's color isn't one of them.
Some features of your car will, however, come into play when insurers calculate your premium. The make and model, the engine size, the age of the car, its safety features are could all move the needle on your premium. But don't think a paint job is going to lower your insurance costs (learn about The Top 5 Factors that Affect Your Auto Insurance Premium).
Myth No.2: Your Landlord’s Insurance Policy Covers Your Belongings
It's true, your landlord has insurance coverage for the house or apartment you're renting from them. Too bad it won't cover any of your stuff.
Landlords mostly hold policies that will only protect the building itself and not the components in it. If your items are damaged, they will only be covered if you have a renter's policy (if you don't have one, check out these 6 Reasons You Need Renter's Insurance).
Myth No.3: Homeowners Policies Cover Flood Damage
Standard home policies cover water damage, but that doesn't mean it will cover damage from every kind of water. That's because the majority of insurance policies don't consider floods a form of water damage and it's usually excluded from coverage.
That's bad news if you live in a flood-prone area. If you do, you may need to purchase a flood insurance policy. You can get one through your current insurance company, or through the National Flood Insurance Program (NFIP), which is run by the Federal Emergency Management Agency (FEMA).
Myth No.4: You Get Brand New Stuff if Your Old Stuff Is Damaged
There's this idea that if your old, outdated, beat up stuff is damaged or stolen, your insurance company will essentially upgrade you to a brand new item in the latest model. That would be a great silver lining to losing your stuff but, unfortunately, it's rarely the case.
Content insurance covers personal items against loss, damage, or theft. Whether you get a new item to replace the old one will depend on the type of endorsement you hold under the content insurance policy.
A “new for old” policy will cover the total cost for the damaged item or pay out for a new equivalent item. An indemnity policy for a damaged item, however, will be reduced to take into account the item's lower value due to depreciation and wear and tear.
Myth No.5: Car Insurance Only Covers Accidents
Car insurance does not only cover accidents, but can cover a whole range of other risks, including:
- Natural catastrophes
- Damage in transit
Basically, if something can damage your car, chances are you can get coverage for it.
Myth No.6: You Can’t Collect on Life Insurance After a Suicide
This is one of those myths that's only kinda true. According to the National Association of Insurance Commissioners (NAIC), a life insurance claim for death by suicide may be denied if the policy has been in force for fewer than two years. This is enforced by a clause in the life insurance policy known as an incontestable clause.
But once the contestable period is over (normally two years after the policy was bought), the beneficiaries can still receive a claim if the insured commits suicide (find out How to Collect a Life Insurance Payout).
Myth No.7: I’m Not Driving the Car, So I'm Not Liable for the Damages
Policies and laws differ from state to state. However, if someone is driving your car and causes an accident, it's your insurance policy that will cover the damages.
If the vehicle’s limits are too low to cover the damages, the driver’s insurance may have to cover the remainder of the cost. But if it's still not enough, you may need to cover the rest with cash from your pocket.
Myth No.8: It Costs More to Insure Newer Homes
Newer homes are often nicer and more expensive than older ones. But your insurance company takes other things into consideration. Most will offer discounts and better premiums for homes that meet the latest safety codes.
Features like locking gates, locking swimming pool covers, state-of-the-art security systems, and gated entrances can also land you a nice discount. And what kinds of homes are more likely to have these updated features? You guessed it: newer ones (find out How Smart Devices Can Protect Your Home and Help You Save on Insurance).
Myth No.9: Getting Caught Driving without a Seat Belt Can Get Me a Ticket, But It Won't Affect My Insurance
Well, it depends.
If your driving record is good, a seat belt violation probably won't have any effect on your insurance rates. But if you have several violations and a ticket lands on your motor vehicle record (MVR), you might have to kiss your low insurance premium goodbye.
Some insurance companies won't treat a seat belt violation as a major risk and, as a result, your premium will stay the same. But why risk it?
Myth No.10: Every Time You File a Claim, Your Premium Goes Up
Filing multiple claims will most certainly raise your rates. Your insurance company may even decline to renew your policy. But there are some nuances here. For example, if you are not at fault or the accident was beyond your control (like a natural disaster), your rates could remain unchanged.
The Bottom Line
Just because you heard it, doesn't mean it's true. Get your facts right by checking in with your insurance company before you make any insurance decisions based on common knowledge.