Car Insurance: How Much Do You Really Need?

Car insurance. The very mention of it probably sent a shiver up your spine, right? Most of us view car insurance as one of the necessary evils in life when we really should view it as a form of financial protection. Auto insurance allows you to protect your hard-earned money by transferring risk to your insurance company. That way, an accident with a huge financial figure attached to it won’t plunge you into financial disaster.

You spend a lot of time in your car, so insurance is vital. But how do you know if you have the right amount of car insurance? Whatever that figure is for you, it shouldn’t be based on a national average but on your own individual situation.

Dollars vs. Deductibles

For car insurance, an ideal plan would have a $1,000 deductible. That’s a lot of money, but if you’re following the Baby Steps, you know the first step is to save up $1,000 for emergencies. That means you can cover your deductible if you need to, and you’ll save money with lower car insurance premiums.

Before you sign up for a $1,000 deductible, however, make sure it’s worth the extra risk by conducting a break-even analysis. By raising your deductible from $500 to $1,000, for example, you increase your risk by $500. If that reduces your annual premium by $50, you’ll have to go 10 years without an accident to break even—not a great deal.

But if increasing your deductible knocks $150 off your annual premium, you’ll break even in just over three years, which makes more sense.

To Skimp or Not to Skimp

One place where you don’t want to skimp on car insurance is your liability coverage. Liability covers property damage and medical bills if you’re at fault in a car accident. It’s also one of the best deals in the insurance world, so make sure your policy includes at least $500,000 in liability coverage. Keep in mind that your state-required minimum auto insurance probably doesn’t give you enough liability coverage. Saving money on your premiums may be tempting in the short term but could come back to hurt you later in the event of an accident.

If you drive an older car, you can consider dropping your collision coverage, which pays to repair your car. A break-even analysis can help you here too. If you drive a $5,000 car, and dropping your collision coverage would save you $800 a year, you’d have to go more than six years without a wreck to break even.

One more thing to think about before you drop collision coverage: If you total your car in a wreck that’s your fault, you won’t receive any money from the insurance company to buy a new one. So make sure you have enough savings to replace your car before you make changes to your coverage.

Time to Review

It’s probably been a while since you took time to examine your policy, so here’s an action plan. Take some time this week to review your car insurance to ensure you have the best coverage for your situation. Remember, you aren’t buying car insurance just to meet a state requirement, you are protecting your hard-earned money—as well as your loved ones riding in the car with you.