Ethan Hamby | Jan 15 2025 13:00
Debunking Insurance Myths: Separating Fact from Fiction in Home and Auto Coverage
Every year on March 11th, the industry observes Debunking Day, a fitting opportunity to address the misconceptions that continue to shape how people think about insurance. Despite insurance being one of the most important financial protections individuals and families rely on, it is also one of the most misunderstood. Many policyholders make decisions based on outdated assumptions, half-truths, or advice passed down informally—often without realizing the potential financial consequences.
Insurance myths can be harmless at first glance, but when left unchallenged, they can lead to serious coverage gaps, unexpected out-of-pocket expenses, or denied claims at the worst possible time. Whether it’s misunderstanding what a homeowners policy actually covers or assuming auto insurance works the same way for every driver and situation, misinformation can be costly.
To help bring clarity, we’re addressing eight of the most common and persistent home and auto insurance myths. Understanding the truth behind these misconceptions empowers you to make informed decisions, better protect your assets, and avoid unpleasant surprises when you need coverage most.
Myth #1: “Red cars cost more to insure.”
The truth: Vehicle color has absolutely no impact on auto insurance premiums.
This is one of the most enduring insurance myths, and it’s simply not true. Insurance companies do not consider a car’s color—red, black, white, or otherwise—when calculating premiums. There is no statistical data linking paint color to accident frequency or claim severity. What insurers do evaluate includes:
The vehicle’s make, model, and year
Repair and replacement costs
Safety features and crash-test ratings
Theft rates associated with the vehicle
How often and how far the vehicle is driven
Where the vehicle is garaged
The driver’s age, driving history, and claims record
A red sports car may appear more expensive to insure than a beige sedan, but that difference comes from performance characteristics, repair costs, and loss history—not the color itself.
Myth #2: “Flood insurance is only necessary if you live in a flood zone.”
The truth: Flooding can occur almost anywhere, and many flood claims happen outside high-risk flood zones.
Flood risk is not confined to coastal regions or areas marked as “high-risk” by FEMA. In fact, FEMA reports that approximately 25% of all flood insurance claims come from properties located outside designated high-risk flood zones. Heavy rainfall, poor drainage, infrastructure failure, and rapid snowmelt can all result in flooding far from rivers or coastlines.
Another critical fact often overlooked: standard homeowners insurance policies do not cover flood damage. Water damage caused by flooding—defined as water rising from the ground up—is excluded unless a separate flood insurance policy is in place.
Flood insurance may be required by a lender in high-risk areas, but even when it’s optional, it can be one of the most cost-effective protections available, particularly in moderate- or low-risk zones where premiums are typically lower.
Myth #3: “Older cars don’t need full coverage.”
The truth: The need for coverage depends on financial risk, not just vehicle age.
While it’s true that older vehicles generally have lower market value, that doesn’t automatically mean comprehensive and collision coverage should be dropped. These two (first party) coverages are what most folks consider "Full" coverage when added to Liability, Medical Payments, Rental Reimbursement/Loss of Use, Under & Uninsured Motorist, etc. Liability coverage—required in most states—only pays for damage or injuries you cause to others. It does nothing to repair or replace your own vehicle.
Consider these factors before removing coverage:
Could you afford to replace the vehicle tomorrow if it were totaled?
Do you rely on the vehicle for work or daily responsibilities?
Would unexpected repair costs create financial strain?
For many drivers, especially those without savings set aside for vehicle replacement, maintaining physical damage coverage on an older car still makes sense. The decision should be based on risk tolerance and financial readiness, not age alone.
Myth #4: “My homeowners policy protects everything I own.”
The truth: Personal property coverage has limits—and valuable items often need special protection.
Homeowners insurance does include coverage for personal belongings, but that coverage is not unlimited. Typically, personal property coverage is capped at 50–70% of the dwelling limit, and specific categories of items—such as jewelry, firearms, artwork, electronics, and collectibles—have much lower sub-limits.
For example, many policies limit theft coverage for jewelry to a few thousand dollars. If you own engagement rings, luxury watches, or rare collectibles, those limits may fall far short of replacement cost.
To properly protect high-value items, policyholders often need:
Scheduled personal property endorsements
Inland marine policies
Appraisals to establish value
Without these, valuable items may be only partially covered—or not adequately covered at all.
Myth #5: “Anyone who drives my car is automatically covered.”
The truth: Coverage depends on usage, frequency, and policy terms.
Auto insurance typically extends coverage to permissive drivers—people who occasionally borrow your vehicle with permission. However, that coverage is not unlimited and does not apply equally in all situations.
Common exceptions include:
Drivers who regularly use the vehicle but are not listed on the policy
Business use, such as delivery services or rideshare driving
Excluded drivers specifically named on the policy
If a vehicle is used for commercial purposes or shared frequently, the policy may require endorsements or a different type of coverage altogether. Assuming coverage applies without confirming can lead to denied claims.
Myth #6: “If I have strong savings, I don’t need homeowners insurance.”
The truth: Homeowners insurance protects far more than just the structure.
Even substantial savings may not be enough to recover from a catastrophic loss. Homeowners insurance provides multiple layers of protection, including:
Dwelling coverage for rebuilding or repairing the home
Personal property coverage
Personal liability protection
Medical payments to others
Additional living expenses if your home becomes uninhabitable
With average home rebuilding costs exceeding $300,000 in many markets—and liability lawsuits easily reaching six or seven figures—insurance serves as a financial backstop that savings alone often cannot replace.
Myth #7: “My auto insurance automatically covers rental cars.”
The truth: Coverage often extends to rentals—but with limitations.
Many personal auto policies do extend coverage to rental vehicles, but typically only for personal, non-business use and within certain geographic boundaries. Coverage may not apply if:
The rental is used for business purposes
The rental agreement violates policy terms
You decline required coverage overseas
Additionally, coverage types matter. Your policy’s collision and comprehensive deductibles still apply, and loss-of-use fees charged by rental companies may not always be covered.
It’s always wise to confirm coverage before renting and understand when supplemental rental coverage may be appropriate.
Myth #8: “My credit score doesn’t affect what I pay for insurance.”
The truth: In many states, credit-based insurance scores influence premiums.
Most insurers use a credit-based insurance score, which differs from a traditional credit score but is derived from similar data. Studies have shown correlations between certain credit behaviors and claim frequency, leading insurers to factor this information into pricing—where permitted by law.
If your credit profile has improved, it may positively impact your insurance rates. This makes periodic policy reviews especially important, as updated information can sometimes lead to lower premiums.
Smart Ways to Avoid Coverage Gaps
Avoiding insurance pitfalls doesn’t require expert-level knowledge—just proactive review and communication. Consider these best practices:
Review policies annually and after major life events
Ask your agent to explain exclusions and limitations
Maintain an inventory of personal property
Understand the difference between replacement cost and actual cash value
Reassess liability limits as assets and income grow
A simple question can be helpful: If I had a major loss tomorrow, would I be financially prepared?
When to Revisit Your Insurance Coverage
Insurance should evolve alongside your life. Reviews are especially important when:
Purchasing or selling a home or vehicle
Completing renovations or upgrades
Adding a new driver to the household
Starting a business or side venture
Experiencing income or credit changes
Regular reviews ensure your coverage remains aligned with your risk exposure.
Final Thoughts
Insurance myths persist because coverage can be complex—but clarity is achievable. By understanding how policies actually work and challenging long-held assumptions, you can protect yourself from unnecessary risk and make confident, informed decisions.
Whether you’ve believed one of these myths or simply want reassurance that your coverage still fits your life today, now is an excellent time to review your policies. A brief conversation can uncover gaps, identify opportunities for improvement, and ensure you’re protected when it matters most.