10 Tips on Saving Money on Car Insurance

By Arlyn W. Cheng, LUTCF,CIS

Buying car insurance coverage is not as simple as selecting a commodity from a shelf. Studies have shown that people don’t shop around for insurance in the same way they shop for a new car. Whereas everybody is always excited to go through all the nitty-gritty of selecting the make, model, color, features, and accessories of the car, including its price, people rarely understand the value of paying the premiums for comprehensive insurance coverage for their car.

Accidents can happen to anyone. According to the Department of Health, road accidents are the 4th leading cause of death in the country today. If an unfortunate car accident claims the life of a person, it will result to emotional trauma and a financial headache for everyone involved.

There are invariably out-of-pocket expenses to pay for medical costs, burial, or property damages. This financial burden can be cushioned by understanding the insurance coverage you are buying. Faced with erratic gas prices, unemployment, and salary increases that hardly keep pace with inflation, everybody wants to find ways to cut costs while maintaining their lifestyle. Many Filipinos are unaware that they are entitled to a reduction in premiums; it is just a matter of making appropriate inquiries.

Below are the factors to consider and ways by which you can redesign your policy and save on car insurance premiums in the process:

Comparison shop
Get your insurance agent to assist you in securing quotes from at least three different insurance companies. When you ask for a quotation or fill out an application form, give complete and accurate information since the premium rates are based on this information. Insurance companies are guided by tariff rates issued by the Philippines Insurance Rating Association (PIRA) and approved by the Insurance Commission. Rates vary for private and commercial vehicles.

There is stiff competition among non-life insurance companies such that some brokers may present a quotation that appears cheaper. Some companies are aggressive in marketing but not financially stable. They underwrite a lot of business by offering low rates. So it is important to take a look at the company’s financial stability. However, they cannot quote way below the tariff rates unless they are willing to take the risk because the governing institution – the Insurance Commission – can slap them with fines and penalties for any violation.

Start by analyzing coverage limits and compare premiums. Is the coverage quoted based on the fair market value? It is possible to lower your premium by buying smaller coverage. However, if your coverage is below market value, that is also the maximum limit that you can claim from the insurance company in case of total loss or damage. Wouldn’t you feel short-changed if that happens? This is the trade-off or risk you have to consider. Look at the term of coverage, is the quotation based on one year, more than a year (to coincide with the TPL period of coverage) or shorter than a year to make the quote appear cheaper?

Check the cost of insurance
Check the cost of insurance when you are purchasing a new or even second-hand car. As a rule of thumb, the more expensive and higher-performance your vehicle is, the higher the premium that you have to pay. Buying a luxury car, sports car, SUV, four-wheeled drive or diesel-powered vehicle is great but it also means embracing higher insurance costs. Hybrids such as the Toyota Prius generally cost more to insure than a typical four-door sedan, because the complex and intricate parts that make up most hybrids cost more to replace than traditional parts.

Companies may also charge more for cars that tend to cause more damage when involved in accidents, such as certain sports vehicles because these car drivers are more likely to test the speed resulting in a higher chance of being involved in a crash. Repair cost of premium cars such as Audis, BMWs, and Mercedes Benzes are higher due to lower depreciation levels making them more expensive to replace.

There are instances when insurers refuse to cover certain imported car models. This is because it takes a longer period to process claims as the parts, which are more expensive, may have to be imported. These cars also have high theft rates due to the higher black market value than a conventional car. Think twice before buying these types of vehicles. If you wish to save on premiums, buy a safe, moderately-priced vehicle.

The premium rate also depends on the age of your car. Brand new vehicles generally have lower rates compared to older vehicles. So if you have an older car, expect more out-of-pocket expenses in case of accidental damage to your car due to the higher level of depreciation. Depreciation is the decline in value caused by the effects of age, wear and tear, use, weather, and similar factors. When a damaged part is replaced by a new part, the insured has to pay the difference between the value of the part at the time of purchase and its value at the time of replacement. Evaluate the costs involved versus the value of the car if it still warrants comprehensive coverage. Other factors to consider are safe driving habits and less frequent vehicle usage. Decide whether it will be wiser for you to eliminate the comprehensive coverage and settle for the minimum CTPL required by the government. Use the money you save in a savings account for repairs and maintenance.

Review the policy information.
When you receive your insurance policy, check the correctness of the data you have previously given to the insurer because this information was used in assessing your premium. Take note if your vehicle is properly classified – private or commercial, the make and model, mailing or home address and the coverage you have agreed upon. Compare it to the quotation which you have previously approved. Make sure that your CTPL (Compulsory Third Party Liability) coverage is still in force since this is required by the government (PD612, Chapter VI).

The law mandates a minimum P100,000 CTPL coverage to cover against liability for death and bodily injury of third parties. For brand new vehicles, the initial coverage is good for three years, after which it is renewed yearly. This coverage is a prerequisite for car registration with the Land Transportation Office (LTO). It is actually a “no-fault” insurance law that is intended to pay medical indemnity of third party individuals regardless of who caused the accident. Over and the above the amount, there is a risk of possibly shelling out-of-pocket costs, which could be minimal or significant depending on the severity of the injuries or property damage. In case of permanent disability caused by the accidental crash, you may have to support the victim for life. This could be a financial knock-out.

To cushion the impact of potential financial loss, you can choose to expand this coverage by buying extra Voluntary Third Party Liability (VTPL) and Voluntary Third Party Liability – Property Damage (VTPL-PD) under a comprehensive cover. You have the option to determine the amount. Check how much premiums to add for the extra coverage.

The Own Damage and Theft coverage which protects against loss or damage on your car is generally based on the market value of your vehicle’s type, make, and model. The purchase or listed price from the dealer, PIRA (Philippine Insurance Rating Association), AMSI (Auto Management Center, Inc), Buy & Sell, and classified ads of leading newspapers are frequently used as references by insurers.

For an additional premium, extra perils such as Acts of God (AOG) for flood, typhoon, hurricane, volcanic eruption, and earthquake may be extended based on the underwriting guidelines of the insurer. These are normally based on the area of residence or where the vehicle is usually stationed or parked. If you live in a neighborhood that is flood- or typhoon-prone, it is unlikely that the insurer will approve such coverage. Some insurers provide a limited coverage. Another extra peril to consider is Strike, Riot, and Civil Commotion (SRCC). These are all subject to a deductible amount.

Auto Personal Accident covers the driver and unnamed passengers of the vehicle. Usually, the premium is relatively small. However, if you are normally the one using the car including your second car, it is your call to get standalone accident coverage for yourself. If your life insurance policy contains an accident insurance rider, you can waive this extra coverage. However, if you often have family members or friends riding with you, then it is worth buying the coverage.

Consider boosting your deductibles
Deductible is the amount which you share or pay first before your insurance company begins paying the rest. You can reduce the premium by reviewing your current deductibles. For commercial vehicles, the usual deductible is 1% of the sum insured with a minimum of P3,000 while private vehicles has a 0.5 % deductible with a minimum of P2,000. This amount must be paid before your vehicle is released from the repair shop. If you think you can afford to absorb a larger portion of your loss in case of an accidental damage to your vehicle, you can raise the deductible to reduce the premiums. Be cautious however in raising the deductible too much because you might find yourself in a difficult financial situation in case of a major claim. Make sure you have enough savings allocated for this to absorb the level of deductible chosen. The key is having the right deductible.

5 ASK ABOUT DISCOUNTS. Ask your agent or company if you are eligible for any discounts such as no claim bonuses, fleet rating discounts , airbags , anti-lock brakes, anti-theft devices , fire extinguishers, and other safety equipment.

6 LOOK AT THE SERVICE, DEPENDABILITY, AND FINANCIAL CONDITION OF THE INSURANCE COMPANY. Premium should not be the sole basis in choosing the right insurance company. Look at the ratings of the company from independent rating agencies. Malayan Insurance for instance, has a rating of B++ (Good) from A.M. Best and BB- (Stable) rating from Standard & Poor. You can also view the rankings of the authorized non-life insurance companies at the website of the Insurance Commission. It is more important to look at the financial soundness and track record of companies that has the ability to settle claims fairly, efficiently, and promptly than the insurance premium.

7 CHOOSE PAYMENT TERMS. You can save more if you pay your premium in full. There are some insurance brokers who allow installment payment terms however, you have to shoulder extra financing cost by extending terms of payment. A word of caution though if you swipe the full amount of premium through your credit card and pay the credit card company in installments, you defeat the purpose of saving.

8 SWITCH INSURANCE COMPANY? Should you decide to change insurer, make sure you get your new policy way before the old one expires. If you have a pre-paid policy, they will give you back the difference based on a scale printed in the policy if you choose not to avail of their services anymore. Normally, you have to make a written request to get this. Notify the insurer ahead of time. There are also instances when it is the insurance company that opts not to renew your policy due to heavy losses sustained in the previous year. In most cases, the insurance company gives advance notice to the client so they can look for another provider.

Shop around for the best deal but be careful about learning the details and consider all angles before you switch auto insurers. Make sure you are comparing the same coverage. Be alert to differences in policies and terms. Do you want to deal directly to a company or an agent? You may have direct link with certain companies and save a little on premiums but get a cold after sales service especially when a claim arises. Some companies might offer an initially low premium just to entice customers to switch then make significant increases in their premium rates the following year.

9 BE A SAFETY CONSCIOUS AND DEFENSIVE DRIVER to prevent accidents and heavy claims from arising. Simply slowing down or avoid aggressive driving, tailgating, and staying off the cell phone while driving are proven ways to dramatically reduce accidents. Once you have a claim history, this will raise a red flag to the insurer and they may charge you higher premiums the following year. The rate depends on the amount of damages claimed. They have a reference manual from which to base the rate. If you have no claims history, you may be eligible for a no-claim bonus.

10 GET MORE VALUE FOR YOUR MONEY. Check if the insurer provides free membership roadside assistance program such as towing, minor repair service, etc. in case of vehicle breakdown or emergencies. Compare the premium of insurer with this add-on feature and those without. If there is a significant difference in the premium for those without this privilege then, it may be a wiser decision to secure a separate membership in an auto club like the Automobile Association of the Philippines because the MMDA has recently slapped higher penalties for stalled vehicles to reduce vehicular traffic and road obstruction along major thoroughfares of Metro Manila.

Buying a comprehensive car insurance policy is a matter of choice unless you have a brand new car under a financing plan. In this case, the bank requires a comprehensive coverage to protect their interest. While buying a car insurance is an annual renewable coverage where you lose the premium if there is no claim, in reality this is not a reason to fret about. Is it not better that you were accident free for one year? It is like having a spare tire in your car. You carry a spare tire so that just in case one of your tire runs flat, you can make use of the spare tire and reach your destination. In the same manner, you buy a car insurance just in case an accident caused heavy damages to your car, property , injure passengers, or a third party, you have the financial protection of an insurer. With a comprehensive cover, your insurance company will cover the costs of repair or replacement of your car based on fair market value. On top of this, your insurer will provide you legal resources to defend you against lawsuit in relation to the accident instead of you hiring a lawyer and pay out of pocket legal fees and any damages awarded by the judge in a settlement. These court cases will not only cost you money that may deflate your wallet like a nail in a tire but also waste valuable time in attending court hearings which could run for years.
Consult your insurance professional how to come up with a package that is responsive to your current needs, lifestyle and budget. Buy only the coverage you need on the vehicles that need it. Overall, taking a closer look at your auto insurance policy and coverage . Insurance deserves the time and energy it takes to comprehend the intricacies and details that make up your own individual situation. If you choose not to buy a comprehensive coverage, you should also be prepared to face the risk involved. A permanent disability caused by an accidental crash can be financially draining whether you are the victim or offending party. Remember that the primary purpose of buying a car insurance is to protect you from financial loss due to major accidental damage or injuries due to collision. Buying a car involves responsibility not just in maintaining the car in good running condition but also being a defensive driver to lessen the risk of accident resulting to injuries to other motorists, passengers, pedestrians, or the public in general and damage to property. Having a comprehensive auto insurance is a great way to give you financial preparedness and a valuable safety net. Becoming aware of all these things and seeking the regular advice of your trusted professional insurance advisor can provide better coverage and save you money down the road. If you take heed and apply these tips , you will reap economic savings which can be allocated for other needs.

Arlyn W. Cheng, LUTCF, CIS is a Certified Philamlife Financial Planner. Aside from life insurance services, she is also involved with the leading non-life insurance companies like Malayan, Prudential Guarantee and Western Guaranty as well licensed to offer mutual funds through Philam Asset Management Inc. After completing the Registered Financial Planning course, she became a staunch advocate of financial literacy. For comments or clarifications, kindly send your email to arlyn_moneysense@yahoo.com.

THE BOTTOMLINE>CAR INSURANCE

Buying a Car Insurance Policy

Protect yourself against loss due to road accidents and car theft. Here’s a primer on auto insurance

By Arlyn W. Cheng, LUTCF, CIS

Do you know that road accidents are now the fourth leading cause of death in the country? Based on the 2006 report of the Philippine National Police, an average of 41 traffic accidents occur in a day  due to driver errors, mechanical defects, over speeding, cell phone use while driving , driving under the influence of alcohol and drugs, etc. These traffic accidents resulted in 674 fatalities, 3,767 injuries and 10,623 property damages.  In recent years, there has been an alarming increase in the number of traffic accidents. For instance, the June 2008 data alone showed 1,648 incidents.

So what does it indicate to all of us? For car owners, we are all exposed to road hazards. No matter how careful you are in driving, if the driver behind you is undisciplined or sleepy, you could still be in trouble. An accidental collision involves property damage and possible bodily injuries. Worst, it could be fatal. A lawsuit can be financially and emotionally draining aside from time consumed in attending court hearings. Another possibility is car theft, which is rampant in our country. Hence car insurance coverage becomes a necessity to protect us against potential financial loss. Below is a guide in choosing the right coverage:

WHAT IS MOTOR CAR INSURANCE?

Motor car insurance is a contract whereby an insurer undertakes to indemnify the insured against loss, damage and/or liability that may result, due to an accident arising from the use of a motor vehicle in exchange for a premium.

WHAT ARE THE MOST IMPORTANT CONSIDERATIONS IN CHOOSING AN INSURANCE COMPANY?

Select a company that is financially sound since you buy insurance to protect you financially. You may view the ranking of authorized non-life insurance companies at the Web site of the Insurance Commission at www.insurance.gov.ph. Their ranking provides us a clue to their financial capability to settle claims promptly. Another basis is to look at their ratings from independent rating agencies.

Deal only with reputable providers who have a track record of attending fairly, efficiently, and as quickly as possible to their clientele. It is best to deal with licensed and ethical non-life insurance professionals as they are mostly affiliated to reputable firms and have been trained to give you proper advice on the right coverage to buy.

WHAT IS THE COVERAGE AVAILABLE IN A COMPREHENSIVE MOTOR CAR INSURANCE?

The typical policy has six components. Here’s a primer from Malayan Insurance:

1. COMPULSORY THIRD PARTY LIABILITY (CTPL) – The state (PD 612, Chapter VI) requires that before the registration and operation of any motor vehicle, it must be covered against liability for death and bodily injury of third parties. A Schedule of Indemnities for Bodily Injury &/or Death is contained in Sec I/II of a standard motor car policy.

1. OWN DAMAGE & THEFT (OD/Theft) – This protects against loss (theft) or accidental damage to the insured’s own vehicle.

1. VOLUNTARY THIRD PARTY LIABILITY – Excess Bodily Injury (VTPL-EBI) – This is the second layer to the CTPL coverage which provides additional insurance coverage (in excess of the P100,000 required by law). If you are found legally responsible for bills beyond the limits, you might find yourself in a situation where you have more out-of-pocket and in the long run, the cost could wipe you out. An example is when you run over a man who becomes permanently disabled.

1. VOLUNTARY THIRD PARTY LIABILITY – Property Damage (VTPL-PD) – This is additional coverage against liability due to the insured vehicle’s accidentally damaging a third party property. What if you had an accidental collision with luxury cars like BMW or Porsche, will your coverage be enough to cover the cost of damage?

1. EXTENDED PERILS COVER – For an additional premium, these perils may be added:

• Acts of God – flood, typhoon, hurricane, volcanic eruption, earthquake (FTHVEE)
• Strike, Riot, Civil Commotion (SRCC)

1. PERSONAL ACCIDENT – This covers against losses due to the accidental death or disablement and/or medical expenses of the vehicle occupants who are riding in the insured vehicle involved in an accident.

For an additional premium, you may opt for a Loss Of Use coverage (if offered by your provider) which provides transport allowance while your car is undergoing repair due to a motorcar claim.

WHAT IS THE SHARE OF THE INSURED IN THE EXPENSES FOR INCURRED LOSS/DAMAGE – THE SUBJECT OF SETTLEMENT OF A MOTORCAR CLAIM?

DEDUCTIBLE – Deductibles represent the amount of money you pay before your insurance policy kicks in.  The policy, be it a Private Vehicle (PV) Policy or Commercial Vehicle (CV) Policy,  provides that the insured must share in the loss/damage – the expenses of the repair/reinstatement of the vehicle, equal to 1% of the sum insured for CV, and 0.5% for PV; Minimum deductible amount is P3,000 for CV and P2,000 for PV. This must be paid by the insured before the vehicle is released from the repair shop or by the insurance company.

DEPRECIATION – Depreciation is a decline in value caused by the effects of age, wear and tear, use, weather, and other similar factors. When a motorcar part is used to replace a damaged part, the insured has to pay the difference (amount) between the value of the part at the time the car has been purchased and the value of the part at the time it is replaced.

WILL THE INSURANCE COMPANY PROVIDE LEGAL ASSISTANCE IF THE DRIVER OF THE INSURED VEHICLE IS SUED BY THE OTHER PARTY AS A RESULT OF A CAR ACCIDENT?

If you have comprehensive cover, it can shield you from legal liability to third party. Having car insurance does not stop anyone from suing you. But it does provide the assurance that if you are sued as a result of an auto accident, the financial and legal resources of the insurance company will assist you in defending against the suit and paying any resulting damages.

In summary, buying an adequate coverage will take away the worry and hassles when a road mishap occurs.  Just like a spare tire, we carry it just in case. Drive with confidence and peace of mind.  An insurance coverage can be a vital financial safety net!

PROFILE

Arlyn W. Cheng, LUTCF, CIS is currently affiliated with leading companies that provide various financial services in life insurance, non-life insurance, mutual funds, pre-need, and HMO. A business management and psychology graduate of De La Salle University, she has a passion for analyzing how a person’s lifestyle  is affected by the way he manages his personal finances. After taking up the RFP course, she became a staunch advocate for financial literacy. For questions or comments, kindly send your e-mail to arlyn2005_aig@yahoo.com.

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HOW DO WE SAVE ON COST OF INSURANCE?

Tip #1. Before you buy a new or used car, check into the cost of insurance. If you do not have a preferred agent, you can obtain a quotation from several providers directly and compare.  Generally, you pay more for higher coverage depending on the type of vehicle.

Tip #2. You can ask for higher deductibles. Consider your insurance as a backstop against major losses, not a way to pay for minor scratches and damages. By requesting for higher deductibles, you can lower your cost substantially. But make sure you have adequate savings to pay the deductible amount if you have an accident.

Tip #3. Consider dropping or reducing comprehensive coverage on older cars. Depending on the age of the car, it may not be cost-effective considering that you have to pay higher depreciation costs in case of a claim.

Tip #4. Inquire about discounts. There may be discounts such as No Claim Bonus from your provider if there had been no claims filed in the previous year. There are also fleet rating discounts for the insured with 10 or more vehicles under the same owner.

Tip#5. Look for add-ons. Some insurance companies provide free membership road assistance program like free towing, vehicle breakdown minor repair service, ambulance, alternative transport, etc. if you buy from them comprehensive car insurance. If your provider doesn’t have this service, you can join auto clubs like AAP (Automobile Association of the Philippines) to assist you in case of vehicle breakdown on the road.

Tip #6. Understand the coverage you are buying. Review the provisions of the contract, limits of coverage, etc.  Clarify from your agent/broker and what benefits you can possibly add or delete.

EASY MONEY>VERSUS

New Vs. Used Car

It’s time to buy a car. Should you get a used car, otherwise known as second-hand or the better-sounding pre-owned vehicle, with the major price reduction, or a brand new car, with its fresh-from-the-lot smell? Here’s our take:

EASY MONEY>MONEY MATH

Which Car Financing Term?

Newly married couple Alex and Jenny are planning to buy a new car – a mini SUV worth P1,270,000. With their combined monthly income of P200,000, they figure they can put down 20% and borrow the balance from the car dealer’s financing plan. They also don’t want to spend more than 20% of their monthly income in car payments.

The dealer offered five monthly amortization plans based on a P1,036,000 loan (selling price less down payment):

1. 12 months: P90,989
2. 18 months: P62,238
3. 24 months: P49,598
4. 36 months: P35,306
5. 48 months: P28,224
6. 60 months: P24,137

Which plan should Alex and Jenny choose?

Answer: D or E

The first three plans (12, 18, and 24 months) exceed the couple’s threshold of spending only up to 20% of their monthly income (i.e. 45%, 31%, and 25% respectively), so they wouldn’t be able to afford them. That leaves the last three plans (36, 48, and 60 months), which are below their maximum (i.e 18%, 14%, and 12%). While the 48- and 60-month plans look very easy on the pocket (just P28,224 and P24,137 a month), the interest rates are higher.

Computing the rate based on the term, monthly payments, and loan amount using Excel’s formula (=RATE(nper,pmt,pv) where nper=number of months, pmt=monthly amortization, and pv=loan amount), we come up with the following interest rates for each plan: 12 months=9.81%, 18 months=10.04%, 24 months=13.71%, 36 months=13.80%, 48 months=13.83%, 60 months=14.06%).

While the first three plans are cheaper, the monthly cash out is beyond what the couple can afford. They actually have two good options: Option D (36 months) where they pay P35,306 at 13.80% or Option E (48 months) where they pay P28,224 at 13.83%. It’s only a 0.03% difference but the it frees up P7,082 in their monthly cash flow for other expenses, so Option E (48 months) sounds pretty good. However, there’s a tradeoff here. Stretching the loan one more year even at a slightly higher rate means they’ll be paying P83,736 more in interest expenses (P318,752 for Option E versus P235,016 for Option D), quite a significant amount. If the P7,082 cash freed up goes to other expenses, then it’s best to choose Option D, plus they get to own free and clear the car one year earlier.

But here’s another twist: if instead of spending the P7,082, they merely save it, they would have accumulated P254,952 after 36 months. Offsetting the P83,736 interest difference, they would still be ahead by P171,216. In which case, Option E is the smarter choice.

EASY MONEY>HOW TO

How to File a Car Insurance Claim

You get into a car accident. Bummer. What do you do now?

Step 1: Call a traffic officer

Call police hotline 166 to report the accident. Then wait for a traffic officer to investigate. Of course, if it’s a serious accident involving physical injury, call for an ambulance (your insurer can help you here). Verbal admissions and assurances are not enough. Make sure you get a police report always.

Step 2: Call your insurance company

You should have the hotline of your insurer on hand (insurers usually issue a sticker or a card that you can place in your car; save that number in your cell phone as well). A representative will walk you through the process of filing a claim.

Step 3: Exchange information

Exchange contact information (name, number, address) with the other driver as well as details on the car (model, plate number) and insurance policy (name, number). If it’s a major accident, identify witnesses and ask for their names and phone numbers in case their account of the accident is needed.

Step 4: Prepare required documents

Prepare all the necessary requirements such as the police report (or your insurer’s accident report form), policy report or a notarized affidavit, photocopy your car’s official receipt and registration certificate (OR/CR), photocopy of your driver’s license and official receipt, and photos of our car (damaged portion and entire car with the license plate visible). Submit these documents to your insurer where a claims examiner then will evaluate your claim.

Step 5: Have your car fixed

If the damage is minor, you can bring your car to your insurer’s claims evaluation center, where an assistant will assess the repair cost. If it’s major, many insurance companies will have your vehicle towed to any of their accredited car repair shops, which will then assist you regarding the documents and repair of your car. Often, your insurer will simply reimburse the car shop instead of issuing you a check.