Knowing the type and amount of coverage you should carry

Do I Have Enough Auto Insurance?

by Gary Foreman

How do you figure out how much car insurance you really need? I would appreciate any help in this area. Thanks.

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, such as theft and fire.

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 wrong coverages.

Reviewed December 2017

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Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.

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