Do I Have Enough Auto Insurance?

by Gary Foreman

Do I Have Enough Auto Insurance photo

Not sure whether you have enough auto insurance? Or too much? Use these guidelines to figure out exactly how much car insurance you need.

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

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.

The purpose of insurance

First, let’s get an understanding of the purpose of insurance. And that’s to pay for financial obligations that you can’t handle yourself. In this case, obligations that come from accidents involving your car.

Generally, drivers must 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.

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Types of dangers car owners face

Now let’s examine 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.

Protecting your car

The 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 vehicle 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 car’s value.

The best way to reduce the cost of auto insurance is in collision and comprehensive coverage. If Debbie hasn’t built up her savings, she’ll probably need to have a low deductible. But if she can put a few extra dollars in savings, she could raise the deductible and make a serious dent in her insurance bill.

If Debbie has an auto loan, she may want to consider so-called ‘gap’ insurance. That comes into play if her car is totaled in an accident. It would cover the difference (i.e., gap) between what her car is worth and her loan amount. It’s not uncommon for a totaled car to be worth less than the loan balance.

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, especially as its value depreciates. At that point, she may decide that she doesn’t want to carry collision coverage at all.

Protecting your wealth and health

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 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 someone crippled in her 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. Many people purchase a “liability umbrella” that kicks in when your auto liability limits are reached.

Controlling the cost of auto insurance

Implied in Debbie’s question is how to control auto insurance costs. At a minimum, she will need to buy the coverage 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 vehicle that’s worth $1,400.

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, low mileage, 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 its 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 March 2022

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. You can read Gary's full bio here. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews.

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