Insurance Part 2: Auto

Insurance

Part 2: Auto

By Keith Bunn Jr.

August 12, 2012

Auto insurance is one of those “must have” insurances by law in every state, and for good reason. But most people get just enough insurance to make them legal to be on the road for a couple of reasons.

1.    They don’t have enough money for full coverage. Thinking the monthly premium will be less if they choose a lesser coverage.  

2.    Their car(s) are paid for and don’t feel they need full coverage.

Even though this may make sense in some situations, a good portion of the time it doesn’t. Let’s go over what make sense and what doesn't.

·         Full Coverage: We all know if you have a car loan, you have to have full coverage, but if your car(s) are paid for and you can’t afford to replace them if something were to happen to them, it then makes sense to have full coverage on them.

·         Monthly Premiums: A good portion of the time you are not saving that much on your premiums by going from full coverage to a lesser one. If you really want to save on your premiums, raise your deductible. By raising your deductible, you are taking on more risk and in turn, lower your premium. This, however, only makes sense if you have a fully funded emergency fund in place.

·         Break Even Analysis: Another way to see if raising your deductible makes sense is by doing a Break Even Analysis. If you have a $250 deductible and you raise it to $1000. You increased your risk by $750. Now if your premiums go down by $75, you would have to go 10 years without something happening to your car ($750 extra risk divided by $75 per year in savings = 10 years without an event. Now for most people, that doesn’t make much sense, but if you were to save $750 per year instead of $75, you would then only have to go 1 year without an event happening and that would be well worth raising your deductible. You would have to do the math for your situation to see what works for you.

·         Liability Insurance: Most of the time, when people are trying to lower their insurance cost, they tend to lower the liability portion of their coverage, which in my opinion is not a good idea. Liability insurance is one of the best buys in the insurance world and it really only costs pennies a month and sometimes even a year to have liability insurance. So it makes sense to have a minimum of $500 coverage in your policy.

·         Finding the Best Deals: To get the most bang for your buck, it is better to go through an insurance broker that will shop around for you to find the best insurance for you and your family’s situation. The stand-alone insurance companies like State Farm, Allstate, Farmers, etc… will only sell you there insurance and those may not be the best deals for you. It also makes sense to have your broker do a check every few years just to see if what you have is still best for you and your family.

Questions

1.    If something were to happen to your car(s), do you have the proper insurance in place to cover the loss?

2.    Does full coverage make sense in your situation?

3.    Do you have a fully funded emergency fund in place?

4.    Have you done a Break Even Analysis? If so, does it make sense to raise your deductible?

5.    Do you go through a stand-alone insurance company or an insurance broker for your insurance?

6.    Do you know whether or not you are getting the best deal for what you and your family needs?

I hope my posts inspire you to look at what you’re doing financially and if needed, make some changes that will cause you to win financially. I also look forward to reading your views on any articles or postings that I may post. For more money news, facts and ideas, follow me on Facebook, or Twitter. Thanks you!