Misconceptions about auto insurance put obstacles on the road to getting proper coverage -- from buying a policy to filing a claim, a new survey shows.
In fact, many Americans are misinformed about the basics of auto insurance, from how premiums are set to what a policy typically does and doesn't cover, according to an August survey of 1,000 adults conducted for insuranceQuotes.com by Princeton Survey Research Associates International.
That's not a surprise because most Americans aren't very financially literate, and that extends to auto insurance, says Rob Hoyt, professor of risk management and insurance at University of Georgia's Terry College of Business.
"Most people don't spend a lot of time and energy learning about insurance," Hoyt says.
While many consumers do understand how auto insurance works, others are mistaken in some pretty surprising ways. Here are five misconceptions about auto insurance revealed by the insuranceQuotes.com survey.
Misconception 1: Red cars cost more to insure.
Almost half (44 percent) of respondents mistakenly think driving a bright red car increases or decreases the cost of auto insurance. Drivers 18 to 29 years old were most likely to buy into this myth. A slightly higher number of consumers (46 percent) correctly stated car color has no effect on what you pay.
Fact: The color of the car you drive doesn't affect your insurance premiums, but the kind of car does. For instance, a high-end import car is likely to cost more to insure than a standard American vehicle, says Alex Hageli, director of personal lines policy for the Property Casualty Insurers Association of America (PCI).
Misconception 2: Car insurance doesn't cover you if you cause a crash.
Slightly more than half (56 percent) of respondents correctly stated that auto insurance covers you when an accident is your fault. But 37 percent of respondents overall (and 52 percent of those aged 18 to 29) incorrectly stated they wouldn't be covered if they caused a collision.
The confusion might stem from the fact that some consumers carry only liability insurance, which covers damage they cause to others if they're at fault in a crash, but doesn't pay to repair or replace their own car, Hageli says. In contrast, if another driver is at fault, his liability insurance pays for the damage to your car.
Fact: Liability insurance, required for driving in nearly every state, covers damage you cause to someone else's car or other property as well as medical costs for injuries when you're at fault in an accident. Collision insurance, which is optional, covers damage to your own car, even if the accident was your fault.
It's also smart to buy uninsured/underinsured motorist coverage, which pays for your own injuries or property damage if you get into a crash caused by a driver who's uninsured or doesn't have enough coverage, says Katie Brewer, a Certified Financial Planner professional and president of Your Richest Life Planning, a financial planning firm.
Misconception 3: If your car is totaled, your insurer cuts a check for the amount the mangled metal is worth after the crash.
Half of consumers know that if your car is totaled, the insurer pays you what your car was worth before the crash. But 28 percent mistakenly believe your insurer pays only the post-crash value of the car, and another 12 percent don't know.
Many policyholders aren't sure what happens when a car is totaled simply because it's a rare event, says Jack Hungelmann, an independent insurance agent in Minnesota and author of "Insurance for Dummies." He adds: "It might happen once in a lifetime."
Fact: Auto insurance pays the market value your car had before the crash, Hungelmann says. Some policies now offer new-car replacement, which means they'll pay the amount your car would cost new rather than the depreciated value.
For example, Liberty Mutual offers that coverage for cars less than a year old that have been driven less than 15,000 miles. But, generally, if you owe more than your car is worth, it's a good idea to have gap insurance, which pays off the remaining balance on your car loan after a total loss, Hungelmann says.
Misconception 4: Your auto insurer pays for mechanical repairs.
Overall, only 14 percent of respondents mistakenly believe that auto insurance covers car breakdowns and other mechanical problems. But younger respondents (23 percent of those aged 18 to 29) and those who make less money (23 percent of those who make less than $30,000 a year) were more likely to believe insurance covers routine car repairs.
Fact: Car insurance isn't designed to cover mechanical problems with your car, Hoyt says. So, unless that repair is covered under warranty, you'll have to pay out of your own pocket.
Misconception 5: Car insurance covers belongings stolen from your car.
About one-third of respondents (34 percent) incorrectly believe auto insurance covers items stolen from your car. Older consumers (47 percent of those 65 and over) were more likely to believe they'd be reimbursed by their auto insurer if a thief snagged their cellphone, laptop or designer sunglasses from the front seat.
Fact: It's usually renters or home insurance coverage that covers items swiped from your car, as long as they're worth more than the deductible, Hoyt says. So, if you had a covered $2,000 laptop stolen and your homeowners insurance has a deductible of $500, you'd get a check for $1,500, according to the Insurance Information Institute. If you do have items stolen from your vehicle, though, check with your auto insurer rather than assuming they're not covered, Hageli says.
Get up to speed on auto insurance myths
Lacking information about auto insurance can cost consumers -- either when they pay for coverage they don't need, fail to get the right coverage or don't know to file a claim for an incident that's covered. Here are three ways to get informed about auto insurance.
Get help from a pro. A good agent can explain exactly what auto insurance covers, Hungelmann says. Or, if you want to put in the time, you can do your own research to learn the ins and outs of auto insurance, Hoyt says, adding that most policies are fairly standardized.
Read the fine print. It's not fun, but it's smart to read your policy so you know exactly what you're buying. At the very least, read the declarations page that summarizes your coverage and make sure you're clear on the coverage and limits of your policy, Hoyt says.
Walk through scenarios. Don't wait until you've had an accident to learn how the claims process works. Instead, consider common scenarios ahead of time with your agent or on your own, Hoyt recommends.