Insurance Myths, Checked Against How Insurance Actually Works

Last reviewed 16 September 2026. This page replaces an earlier list-style version of the same article. Thirteen claims are covered in depth rather than twenty-five in one line each, and unsourced figures that appeared in the earlier version have been removed — see the corrections log at the end.

Why these myths survive

Insurance myths are not random. Each one is a simplification that is nearly true, which is what makes it durable: “full coverage covers everything” survives because full coverage does cover more than liability-only. The problem is the word everything, and the fact that the exclusions are where claims actually go wrong.

The thirteen below are the ones worth knowing. Each gets a verdict, the mechanism behind it, and where the myth came from. Where a figure is involved, it is either arithmetic you can check or a rule you can look up.

The short version

#	Claim	Verdict
1	Red cars cost more to insure	False — colour is not a rating factor
2	“Full coverage” covers everything	False — it is not a defined term, and the exclusions still apply
3	Filing any claim raises your premium	Partly — depends on fault, state and carrier
4	State minimum coverage is enough	False — it is a legal floor, not a protection level
5	Homeowners insurance covers flood	False — excluded, and flood needs its own policy
6	Insure your home for its market value	False — you insure rebuild cost, not sale price
7	My credit doesn’t affect my insurance	False in most states — a credit-based insurance score is used
8	Term life is wasted if you outlive it	False framing — it is protection, not an investment
9	My landlord’s insurance covers my things	False — it covers the building, not your contents
10	Life insurance is only for the rich	False — the test is dependents, not wealth
11	Umbrella insurance is only for the wealthy	False — the test is exposure, not net worth
12	Carrying the state minimum stops you being sued	False — it is a compliance floor, not a shield
13	Shopping around is not worth the effort	False — it is the single largest lever you have

1. “Red cars cost more to insure”

False. Colour is not a rating factor in personal auto insurance. Carriers rate on the vehicle’s year, make, model, trim and body style, because those determine the cost of repair and the likelihood of theft. Two identical cars in different colours carry the same premium.

Where colour does matter, marginally: unusual or multi-stage finishes cost more to refinish, so repairing a pearlescent or tri-coat panel can cost more than a flat colour. That is a repair-cost difference at claim time, not a rating difference at purchase.

The myth is thought to come from the same folklore that produced “red cars get more speeding tickets.” Even if that were true, tickets — not paint — are what affect the premium.

2. “Full coverage covers everything”

False, and this is the most expensive myth on the list. “Full coverage” is not a defined term in any policy. It is a sales shorthand for liability plus collision plus comprehensive, and it says nothing about limits or exclusions.

What “full coverage” typically does not cover:

• Flood and surface water — excluded from standard auto and homeowners forms
• Earthquake — excluded, needs a separate policy or endorsement
• Wear and tear, mechanical breakdown and rust — maintenance, not an insurable event
• Intentional acts
• Your own property in most liability contexts
• Anything above your limits — which is the point of the next myth

The reason this matters: a driver who bought “full coverage” at 25/50/25 has full coverage with a $25,000 ceiling per injured person. The label is not the coverage.

3. “Filing any claim raises my premium”

Partly true, and the conditions matter more than the rule. Three variables decide it:

• Fault. An at-fault claim is the one that predictably surcharges. A comprehensive claim — theft, hail, a deer strike — is treated differently by most carriers, and several states restrict or prohibit surcharges for claims that were not your fault.
• Frequency versus severity. Many carriers weight the number of claims more heavily than the amount. Two small claims can cost more at renewal than one large one.
• State rules. States regulate what may be used in rating, including how far back claims and violations may be considered.

Two practical points. First, an accident-forgiveness feature, where offered, typically forgives one at-fault accident — it is a product, not a right, and it usually requires a clean record to qualify. Second, the deductible maths matters: if a loss is below your deductible, filing may create a claims record for no payment at all. That said, a loss involving another party or an injury should still be reported, because your policy’s conditions require it and because the other side may file against you.

4. “State minimum coverage is enough”

False. Minimum limits are the legal floor for driving legally, and in most states that floor is far below the cost of a serious crash.

A 25/50/25 policy pays up to $25,000 per injured person, $50,000 per accident for injuries, and $25,000 for property damage. A single serious injury can exceed $25,000 in the first day of hospital care. Once the limit is exhausted, the excess becomes your personal liability — your savings, your home equity and, in many states, a portion of your wages.

For the actual per-state figures, our state pages list each state’s minimum limits alongside its average premium, and the auto insurance cost by state article sets out all 51 jurisdictions in one table.

5. “My homeowners insurance covers flood”

False. Flood, surface water, waves and overflow of a body of water are excluded from standard homeowners forms. It is one of the oldest exclusions in the market, and it exists because flood is a correlated risk — one event damages thousands of homes at once, which is not a risk an insurer can diversify across a neighbourhood.

Flood needs a separate policy: through the National Flood Insurance Program or a private flood carrier. Two things to know:

• The 30-day waiting period. NFIP coverage generally does not take effect until 30 days after purchase, with limited exceptions for certain loan-related transactions. A policy bought the day before a storm covers nothing.
• Standard homeowners coverage does cover some water damage — a burst pipe, an overflowing appliance, a roof leak caused by wind-driven rain. The distinction is the source of the water, and it is worth reading your policy’s water-damage section carefully. Our policy language guide walks through how that exclusion is drafted and why.

6. “Insure your home for its market value”

False. Homeowners insurance replaces the dwelling, not the property. Market value includes the land, which cannot burn down, plus the value of the location — school district, commute, views — none of which is insurable.

You insure the cost to rebuild the structure at current local construction costs. That figure can be higher or lower than market value, and in expensive-property markets with modest construction costs the rebuild figure is often well below the sale price. Underinsuring the dwelling to match a low market value is how people end up with a settlement that will not cover the rebuild.

7. “My credit doesn’t affect my insurance”

False in most states. Most states permit insurers to use a credit-based insurance score in rating auto and homeowners policies. It is not your FICO score: it is a separate model, built for insurance, that uses credit-history patterns to predict claim likelihood.

Two things follow:

• A restricted or banned state changes your rate landscape in both directions. Where the practice is prohibited or limited, a driver with damaged credit avoids a large surcharge — and a driver with excellent credit loses a discount they would receive elsewhere. The states are listed in our credit-based insurance score by state guide.
• Correcting your credit file can be worth more than switching carriers. An error on a credit report affects an insurance score the same way it affects a lending decision.

8. “Term life is wasted money if I outlive it”

False framing. Term life insurance is not a savings product with a return. It is a payment for protection during a specific window — the years when a mortgage, children or a business depend on your income. Outliving it is the expected outcome and, in most households, the desired one.

The honest comparison is not “did I get the money back” but “what would the premium difference have earned if invested instead.” That is a calculation with a real answer, and our term versus whole life article works through it, including the two assumptions where it usually fails.

Where term genuinely falls short is a need with no end date — estate liquidity, a special-needs trust, a lifelong dependent. Those are real, and a 30-year term cannot cover them by construction.

9. “My landlord’s insurance covers my things”

False. Your landlord’s policy covers the building — the structure, and the landlord’s liability as owner. It does not cover your furniture, electronics, clothing or your liability as a tenant.

Two gaps it leaves: your contents, and your liability if a guest is injured in your apartment or you accidentally cause damage to the unit. Renters insurance addresses both, and the standard profile used in our renters cost data is $30,000 of contents and $100,000 of liability. One check worth making: many renters policies default to actual cash value on contents, so add replacement-cost coverage if the premium difference is modest.

10. “Life insurance is only for the rich”

False. The test is not wealth, it is whether anyone depends on your income or your unpaid work. A household earning $60,000 with a mortgage and two children has a larger coverage need than a high earner with no dependents.

Term insurance for a healthy adult in their thirties is among the least expensive insurance products available per dollar of protection, and the DIME worksheet will produce a concrete coverage figure in about ten minutes.

11. “Umbrella insurance is only for the wealthy”

False. The test is exposure, not net worth. A judgment is not capped by what you own: a $500,000 judgment against someone with $80,000 of savings follows them for years through wage garnishment. A household with a home, a retirement account and two drivers usually has more exposure than its auto and home liability limits cover.

The calculation is set out in our umbrella insurance guide — exposed assets plus income exposure, minus what the law protects.

12. “Carrying the state minimum stops me being sued”

False. The minimum is a compliance threshold. It does not limit your liability, and it does not stop a claim. If you cause a crash with $200,000 of damages and carry 25/50/25, the injured party can pursue you personally for the balance.

Whether your assets are reachable is a separate question — homestead exemptions, retirement-plan protection and wage-garnishment limits all vary by state, and they are covered in the umbrella guide. The point is that the minimum protects your driving privileges, not your finances.

13. “Shopping around is not worth the effort”

False, and this is the myth with the clearest cost. Rates for identical coverage vary substantially between carriers for the same driver, because each carrier’s book of business, appetite and rating model differ. The only way to find out where you sit is to get quotes at identical limits and deductibles.

The reason it feels like it is not worth the effort is that people compare quotes that are not comparable — 50/100/50 with a $1,000 deductible against 100/300/100 with a $500 deductible is not a price comparison. Our insurance comparison worksheet exists to hold those variables constant.

How to test a claim yourself

Four questions will resolve most insurance claims you encounter, including ones not on this list:

1. Is it in the policy wording, or in a marketing description? “Full coverage” is marketing. The insuring agreement is the contract.
2. Which defined term is doing the work? Look up the words in the definitions section — that is usually where a broad promise narrows.
3. Is there an exclusion, and does it use anti-concurrent causation wording? If it does, a partly-excluded loss may be excluded in full.
4. What would it take to verify? If nobody can name a source, the claim is folklore. If a figure has no source, treat it as unknown rather than approximately true.

Corrections log

• 16 September 2026 — This article was rewritten. The previous version listed twenty-five myths with one- or two-line answers and included figures that could not be traced to a citable source: a claim that misconceptions cost consumers “billions of dollars annually” and an assertion that understanding them “can save you $500–$2,000 per year.” Both were removed. No source supported them, and a range that wide is not a finding. They have been replaced with the mechanisms above, which a reader can verify against their own policy, their state’s rules or the arithmetic shown.
• 16 September 2026 — Thirteen myths are covered in depth rather than twenty-five in summary. The myths that were dropped were either restatements of the same mechanism or too state-specific to answer in general terms without a source.

If you think something above is wrong, tell us with the source and we will check it. The correction process is described in the editorial policy.

Sources

• Standard personal lines policy forms — homeowners forms in the HO-3 family and personal auto forms, for the flood, earth-movement and wear-and-tear exclusions, and for the structure of the insuring agreement.
• FEMA / National Flood Insurance Program — the 30-day waiting period for flood coverage and its exceptions.
• NAIC — state insurance department directory and consumer guidance on rating factors.
• State insurance departments — restrictions on the use of credit-based insurance scores and rules on surcharging for not-at-fault claims.
• IRC §101(a) — income-tax treatment of life insurance death benefits.

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This article is educational and is not insurance advice. Rating factors, policy wording, exclusions and state rules vary by insurer, policy and state. InsurTool is not a licensed insurance provider, agent or broker. Confirm the details of your own policy with your insurer and consult a licensed professional about your circumstances.