Car Insurance 101
Are you getting the best bang for your buck on your car insurance? There are so many car insurance companies and options that choosing the right one can be overwhelming. I want to make sure you know your options and can pick the best one for you. There is a lot of information, but I promise it is worth it! You and your bank account will thank me later.
First things first, let’s go through the basics:
Car Insurance Premiums
A car insurance premium is simply the amount you pay for coverage. This is the bill paid to the insurance company either monthly, quarterly, semiannually, or annually, depending on the company. Prices will vary according to things like deductible, make and age of the car, driver’s history and age, and the type of insurance being chosen.
Deductibles
A deductible is the amount you pay before your insurance kicks in. For example, you get in an accident resulting in $3,000 worth of repairs needed for your vehicle. You have car insurance, thank goodness...and your deductible is $500. Therefore, you will have to pay $500 in order for your insurance company to step in and take care of the repairs. The insurance company would then cover the remaining $2,500 of the repair costs. Keep in mind that most insurance deductibles apply per claim/accident. This means that if you have another incident where you need to file an insurance claim, you most likely would have to pay an additional $500 deductible.
Sometimes, the damage to your vehicle may cost less than the deductible. Therefore, you would end up paying the full amount of the damage because the repair costs do not exceed the deductible. In such cases, it is wiser not to file a claim at all. Some things are best kept private, you know? Filing too many claims could raise your premium.
Pros and Cons of Low and High Deductibles
Premiums may be higher or lower depending on the deductible. When choosing a higher deductible, you are a lower risk to the insurance company because you will be paying more towards any claims filed, and the insurance company will pay less. Therefore, the insurance company allows you to pay a lower premium. If you choose a lower deductible, however, your premium will be higher.
Now that you know the basics, let’s get into some car insurance options:
Liability insurance
Liability insurance kicks in when you are in an accident that is deemed your fault. It does not cover you or your vehicle but covers the other party involved in the accident. Your liability insurance will cover their auto repairs and any medical expenses, if needed. PLEASE, I repeat, PLEASE do not skip on liability insurance in an effort to save money. Skipping this could actually cause you to lose a lot more. Being sued or having your paychecks garnished to pay for someone’s auto repairs or medical expenses is never a good thing. Also, who wants to be that terrible human being who injures someone and then cannot afford to pay for the damages? Not me.
Collision insurance
We have all heard the saying, “accidents happen.” This is because it is true. Collision coverage plays a major role in an accident whether the accident is your fault or not. You could unfortunately get into an accident with someone who either does not have any liability insurance or does not have enough liability insurance to cover the cost of your repairs. In these cases, if you do not have collision insurance, you will have to pay out of pocket to cover your repairs. The only time I recommend considering not adding collision insurance is if you drive a clunker that you’d rather replace than repair, AND you have the money saved to replace it.
Comprehensive insurance
Comprehensive insurance covers damage that happens outside of a collision, for example, theft or a hailstorm. The good news is it is relatively inexpensive, so I recommend having it whether you are driving a clunker or a Bentley.
In addition to those options, there are even more add-ons you can either add or remove from your insurance policy. Let’s dig into these
Disappearing Deductibles - If you have a good driving history, you may be offered a disappearing deductible. A disappearing deductible is one that decreases each year that you do not file an insurance claim. The catch is that this usually results in a higher premium, and the deductible will “reappear” if you are ever in an accident. The higher premium probably is not worth the benefit—use this money to save or invest, instead!
Guaranteed Auto Protection (GAP) - Gap insurance is very important if you have a car payment, meaning you still owe money on your car. Let me share a quick story to explain why.
I have a friend who got into an accident in his brand new convertible. The car was totaled, and his insurance would only pay the actual market value of the car—which, by the way, decreases by 25% the moment you drive off the dealership parking lot! So he owed 100% on his car loan, yet his insurance only covered the new value, which was 25% lower than what was owed. Let’s break this down:
New car: $25,000
Insurance check: $18,750
Amount still owed on the car loan: $6,250
My friend did not have $6,250 to pay off the car loan, so he had to continue making his car payments even though he had no car. Had he purchased GAP insurance, however, it would have covered the remaining $6,250, and he could have bought a new car instead of having to bum rides for the next couple of months.
Do not be that guy (or girl) hanging out in the passenger side of your best friend’s ride…
Rental Reimbursement - I personally love rental reimbursement. It has come in handy for me many times. It covers the cost of a rental car while your car is being repaired. If you can make do without your car for a while, you may be able to skip this addition. However, keep in mind that some car repairs can take up to a month or possibly even longer.
Roadside Assistance - Unless you have some serious mechanical skills, I suggest getting roadside assistance. You do not want to be left on the side of the road with an empty gas tank, dead battery, or flat tire and desperately calling friends for help. Spare your friends and get roadside assistance instead.
Glass Coverage - Some insurance companies offer glass coverage with no deductible, but the cost of the added coverage may outweigh the benefits, especially since some policies only cover the windshield. This is another instance where simply paying the small repair costs could be a better option than paying a higher car insurance premium.
Phew! So many options, right? Now that you know your options, I have one more tip:
Do not forget to negotiate! There are tons of potential discounts available, so make sure to do your research and ask your insurance agent about discounts. I recall receiving a discount on my car insurance in college for making good grades. I guess nerds are considered less risky!
When you are ready to negotiate, click here for a more in-depth description on potential discounts.
Knowledge is power
Now that you are equipped with everything you need to know about car insurance, you are ready to talk to a professional insurance agent. Always consult with an expert before making any decisions on car insurance but never go blindly into the conversation. Don’t forget they are sales agents whose job is to sell as much insurance as possible. Know your options and get the best deal and coverage for your personal situation.
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