I started purchasing my own auto insurance in college. I didn’t know a thing about auto insurance at the time, and I remember purchasing only the minimum coverage required by law (which wasn’t nearly enough) in order to reduce the premiums I paid. I shudder to think what would have happened had I hit a nice car or seriously injured or killed another driver during those years.
Auto insurance should not be taken lightly. It is illegal in most places to drive without it. If you are pulled over by police and do not have auto insurance, your car could be impounded and you could even be arrested in some cases. Even worse, if you are involved in a car accident, there could be serious legal and financial consequences.
Purchasing auto insurance generally involves 3 steps:
1. Find the Best Auto Insurance Quote
There are many different auto insurance companies, so you would be wise to shop around and compare quotes before deciding on a provider. The rate you are charged will depend on a number of factors, including the amount of coverage you purchase, your age, credit, driving record, and what vehicle you drive.
Different insurers rate drivers and vehicles differently, so you can literally save yourself hundreds of dollars a year in a matter of minutes by shopping around and finding the best deal for you. Many auto insurance policies provide coverage for 6 months, so I recommend checking rates at least twice a year.
The first auto insurance provider I ever used was one my brother recommended. I didn’t shop around; I just took his word that it was the cheapest option out there. 6 months later, I decided to get a few quotes and ended up saving about $400 a year by switching providers. I learned a valuable lesson that day.
2. Choose the Appropriate Types of Coverage
Most states and countries have compulsory auto insurance laws. However, the types and amounts of coverage required may vary from place to place. Understanding the various coverage characteristics of auto insurance can help ensure that you are properly insured and your assets protected from financial ruin in the event of an unfortunate accident.
Liability coverage protects you and your family from bodily injury and property damages inflicted on a third party.
For example, if you are at fault in a collision, you could potentially be liable for significant legal costs, property damages, funeral costs, medical expenses, lost wages, and pain and suffering. Having adequate liability coverage could help shield you and your assets from having to pay these expenses.
Uninsured and/or Underinsured Motorist Coverage
This type of coverage would generally pay for any damage and medical expenses you incur from an accident where another party is at fault but does not have sufficient coverage.
Collision coverage covers your automobile when it is damaged by a collision with another object or vehicle. This coverage would generally cover the repairs, or if your vehicle was badly damaged, pay for a replacement automobile.
If you own your vehicle, collision coverage is generally not required. However, if you have an auto loan, the lender may require you to obtain adequate collision coverage while your loan is outstanding.
Comprehensive (Other-Than-Collision) Coverage
Comprehensive coverage protects you from damage or loss to your vehicle from something other than a collision, such as vandalism or theft. Coverage is generally optional unless required by a lender.
Medical coverage generally helps shield you from the costs of medical expenses from injuries incurred in an accident, no matter who was at fault.
In addition to the types of coverage listed above, one may also obtain additional coverage in the event they need a car rental (while their vehicle is being repaired), roadside assistance, or towing.
3. Choose the Appropriate Amounts of Coverage
Being insured and having the appropriate types of coverage is not enough. You also need to have the appropriate amount of insurance.
If you are underinsured, your assets could be at risk if you were to get in an accident. In a serious accident, the state minimum requirements likely won’t even come close to fully covering you, so don’t use that as a rule of thumb. A professional advisor can help you determine the appropriate amount of auto insurance coverage for you.
Insurance companies tend to use a series of 3 numbers (in thousands of dollars) to refer to a policy’s liability limits, such as 100/300/50. This is what they mean:
- 1st number: Maximum bodily injury per person liability that the insurer will cover
- 2nd number: Maximum bodily injury liability per accident that the insurer will cover
- 3rd number: Maximum property damage liability per accident that the insurer will cover
If you are at fault in an accident and the damages exceed your liability coverage, you may be on the hook for the difference.
Final Thoughts about Auto Insurance
- A deductible is the amount of each loss that the insured is responsible for. Increasing your deductible will likely decrease your premiums, but it will increase your out of pocket costs for each claim.
- You may want to bump up your emergency fund before significantly increasing your deductible.
- Improving your credit can decrease your auto insurance rates. I actually opened my first credit card in college so I could lower my auto insurance premiums by establishing credit.
- Consider dropping collision coverage on a low value vehicle if the expense is not justified.
- Personal liability umbrella insurance can cover you in the event that you are in an accident and damages exceed your auto insurance liability limits. It is very inexpensive.
- Save yourself hundreds of dollars a year on auto insurance by obtaining multiple auto insurance quotes every 6 months or so.
Being properly insured ensures that you, your car, and your other assets will be protected in the event of an accident or other unforeseen event.
For additional information on auto insurance (as well as other types of insurance) you might consider reading the below book:
What tips or thoughts do you have regarding auto insurance? Leave a comment below!