Car Insurance: What Not to Do

By John Malloy Posted : 03/19/2009

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You can save money on your car insurance. That's the good news. The bad news is that you can't safely save money by slashing your coverages dramatically and dropping damage coverage for your car. Sorry for the reality check, but if anyone tells you to improve your financial situation by calling your auto insurance company and buying a lot less coverage, they simply don't have all the facts.

What? Cheaper is better!

Sometimes, yes. However, you get what you pay for. Everyone wants to save money on their insurance premium, but no one wants to pay out of pocket when the unexpected happens. Car insurance exists because bad things happen. If you reduce your liability coverage and drop uninsured/underinsured motorist coverage, and drop comprehensive and collision or raise the deductibles, who pays when there's an accident? Most likely, you do.

Dropping and reducing auto insurance coverages is a lot like gambling. It's a decision to stake your financial future on the assumption that you are an excellent driver, that everyone you encounter is an excellent (and insured) driver, and that your car will never be damaged or stolen.

But my friend saved a lot by getting the bare minimum.

It's possible to save money if you only get what's required, just like it's possible to win the lottery or predict the stock market. That doesn't make it a good bet. Let's look at why.

Suppose you have an old car that's only worth around $2,000. Your friend tells you he saved $300 a year by dropping collision coverage. You like saving money, so you do the same, but the next week you lose control of your car and hit a utility pole. You were only going 20 MPH, but that's enough to total the car, since repair costs exceed $2,000. You did save $300 on your premium, but you have no car and no coverage. Now you have to find a car that's as reliable as your old one for as little money as possible.

What if you also tried to save money by lowering your liability limits to the state minimum? For example, in Ohio the minimum limit for property damage coverage is $7,500. If you knocked the utility pole over into a storefront, taking out power for the block at the same time, who pays? If it costs $15,000 to repair the pole and replace the store's window and display, you can bet the extra $7,500 will come out of your pocket somehow. If you have assets, those will be used to provide payment, and if you don't have assets, you'll usually be asked to work out a payment plan. Now you've actually cost yourself money instead of saving it, and this accident didn't even involve any injuries.

So how can I save money?

We did mention that there was good news. Although you don't want to eliminate the protection you have with uninsured/underinsured motorist and Comp & Collision coverages unless there's no choice, you still have options. First, make sure you're getting all of the discounts you're eligible for. Next, compare auto insurance rates from other companies to see if you're paying more than you have to for the same coverage. Rates can vary considerably from one company to the next, so investing a little time in comparing quotes might pay big dividends in savings.

What's your quick advice?

Since you asked, here are some quick tips for sorting out the good advice from the bad.

  • Don't slash your policy limits. If you want to protect your assets – now and in the future – it's too risky to cut your limits to state minimums.
  • Insure your car against damage, even if you have to increase the deductibles. Unless you can afford to pay cash to replace your car, try to keep it insured for comprehensive and collision. Comprehensive in particular is relatively inexpensive, especially if you have an older car model. No matter how much someone else would pay for your car, in this economy it's probably priceless to you!
  • Always buy Uninsured/Underinsured Motorists coverage. With more uninsured drivers on the road, UM/UIM coverage gives you low-cost protection from unnecessary risk.

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