It is prudent to have insurance, but it is also smart to have the right amount of insurance for your needs. If your car is over-insured, you are simply giving away money to the insurance company, and regardless of how nice your insurance agent is, you can probably find a better use for that cash.
Over-insurance can be hard to determine because it depends on subjective criteria — specifically, your tolerance for risk. However, in the field of auto insurance it is a little easier to determine a good balance of risk.
Consider the different types of insurance that make up a typical auto policy:
- Liability – With the exception of New Hampshire, every state requires liability coverage that covers injuries to other people (including passengers) and property in case of an accident that they cause. You need to carry the baseline minimum required by your state as well as any other state mandated minimum coverage. That is not negotiable.
Many policies offer greater liability coverage for a higher premium. The decision to increase liability should be based on the assets you are trying to protect. When damages in an accident that you cause are greater than the coverage amount, your financial assets (cash, home, etc.) are put at risk. Higher liability coverage becomes less useful with the fewer assets and lower income that you have to protect.
- Personal Injury Protection (PIP) – PIP covers medical expenses and lost wages for you and your passengers resulting from an accident regardless of who was at fault. Some states require this coverage while others do not. In areas that do not require PIP, you will have to look at your health insurance policy to see whether it covers the same potential injuries as a PIP policy. If you rarely carry passengers and have double coverage on yourself, it may make sense to drop PIP in states where that is allowed.
- Uninsured/Underinsured Insurance – This coverage pays for your injuries in case you are struck by a driver with inadequate insurance or no insurance at all. As with PIP, you should check for areas of overlap with your health insurance company. Assuming not, keeping this insurance is just a matter of risk preference. If you want to make a decision based on statistics, dig into the typical rate of uninsured drivers in your area.
- Collision and Comprehensive (C&C) – Collision covers damages to your car in case of an accident, while comprehensive covers other types of damage to your car such as theft, hail, or a non-accident related flood or fire. While your car is still being financed, you may be required to have C&C coverage, but after that, it becomes an economic decision. How much is your car worth to the insurance company, and how much are you paying in premiums? Remember that your credit score may also have an impact on your insurance premiums. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
A general rule of thumb is to drop C&C when your annual payments are more than 10% of the car's value. You may decide to shift that rule if you tend to drive in higher risk situations or live in (or park in) areas that are more prone to theft or natural disaster.
- Add-Ons – Insurance policies can also add services such as roadside assistance and towing coverage in case of breakdown. If you are not covered by any other policy, these may be reasonable purchases. Check any other sources of coverage for these services that you may have, such as AAA membership or extra packages that came with your automobile purchase.
In general, you can save money by eliminating areas of dual coverage and reducing or eliminating coverage where the potential reimbursement is inadequate.
Try giving your auto insurance policy a review before your next bill is due. You may be able to maintain a reasonable coverage while saving money — and if you can do so, why wouldn't you?