Debbie asks a good question. If you buy too much auto insurance
you're wasting money. But if you buy too little, you could have a very serious
problem down the road.
And, to complicate matters, the answer isn't the same for
everyone. Not only will our need for insurance change as we acquire wealth, but
even the value of the car we drive makes a difference.
Let's begin by understanding the purpose of insurance. And
that's to pay for financial commitments that you can't handle yourself. In this
case, commitments that come from accidents involving your car. Generally drivers
must be able to pay for any losses that they cause others while driving their
car. Since the potential amount of damages is greater than most drivers assets,
they use insurance to make up the difference.
Let's start by examining the types of dangers car owners face.
The most obvious one is to our car. The second would be to our health and the
health of our passengers. Finally, an accident could put our money at risk.
The first priority is to protect our car. If you lease or
finance your auto, you may be required to carry collision and comprehensive
coverage. Collision pays for damage to the vehicle caused by your car running
into another car or object. A simple definition of comprehensive is that it
covers things that aren't caused by a traffic accident. Things like theft and
How much coverage does Debbie need? She'll need to choose a
deductible that's low enough so that she can afford to pay it. And, she'll need
enough collision to cover the balance of the value of the car.
The best way to reduce the cost of auto insurance is in the
collision and comprehensive coverage. If Debbie hasn't built up her savings,
she'll probably need to have a low deductible. But if she's able to put a few
extra dollars in savings, she could raise the deductible and make a serious dent
in her insurance bill.
As Debbie accumulates more savings, she'll get to a point where
she could replace the car all by herself if she had an accident. At that point
she may decide that she doesn't want to carry collision at all. Next Debbie will
need to consider what insurance she needs to protect her wealth. Remember that
by owning a car she's agreed to be responsible for any damage that it causes.
Liability coverage pays for damage that you're responsible for and have caused
to other people or their property.
If her life savings is only $300, then there's not much a
lawsuit could take from her. Some would advise that she should only buy the
minimum liability coverage required by the state.
But Debbie might be uncomfortable with that. Not having enough
coverage to help a child crippled in your accident might not be something that
she'd want to live with.
As Debbie accumulates wealth her need for liability coverage
becomes more important. She wouldn't want a lifetime of savings to be wiped out
in one accident. Fortunately, increasing her liability coverage is not that
expensive. In fact, many people purchase a 'liability umbrella' that kicks in
when your auto liability limits are reached.
Implied in Debbie's question is how to control the costs of auto
insurance. At a minimum, she will need to buy the coverage that's required by
her state. The most common requirements are liability and no-fault coverage.
Raising her deductible on collision can do a lot to reduce her
bill. And, if she's driving an older car, she may be able to go without
collision coverage. No sense paying $1,000 a year for insurance to cover a car
that's worth $1,200.
Naturally she'll want to compare costs between different
companies. Just make sure that everyone is quoting the same coverage.
Debbie may also qualify for some discounts. A safe driving
record, a car alarm or multiple car discount could help. Using the same company
for your home or recreational vehicles (boats, RV's) might also cut her bill.
Don't be afraid to talk with your agent. Each state has it's own
laws. And insurance terms can be confusing. So don't be afraid to ask questions
now. Not only could you save money today, but it's too late to change your
policy after you've had an accident. You might find that you've purchased the