When it comes to insurance, it’s a tug of war. You need to insure yourself against financial calamity. The insurance industry, on the other hand, wants you to insure against even the slightest inconvenience, because that’s how insurers make the most money.
But if you buy enough insurance to protect against inconvenience rather than calamity, you’ll create a calamity trying to pay for all your insurance.
This step-by-step guide is about paying as little as possible for car insurance, while still maintaining enough coverage. Many of the things you’ll learn here will also apply to other insurance policies you’ll encounter, from home and health to life.
I promise not to bore you to death as we go through it. Let’s get started…
Getting organized
If you don’t know how much you’re paying for car insurance, it’s time to find out. Create a spreadsheet so you can see not just the total, but exactly which components you’re paying for within your policy.
Don’t make this a big deal: It’s not. You can do it during commercial breaks while you’re watching TV.
Pull out your car policy and record the pertinent information: what’s covered, deductibles, phone numbers, policy due dates, etc. Then, save this information in the cloud. Having it in one place will give you everything you need to know at a glance, and make shopping for better rates a snap.
I use Microsoft Excel for my insurance spreadsheets, but you can use Google spreadsheets or just about any program that will allow you to write stuff down and keep it straight.
As an example, here’s my spreadsheet for the car I drive. I got this information by logging on to my insurance company’s website, but I could also have gotten it from the paper policy I receive by snail mail every six months when I pay the bill.
Liability
The liability portion of your policy pays for damage you do to other people and their stuff. This is typically required by law and always required by common sense. It’s one area of your car policy where you don’t want to scrimp.
As you can see, I can screw up to the tune of $1 million per person and event, with a $100,000 limit on property. You can also see I made a note to remind myself exactly what this coverage does.
For my personal situation, $1 million in liability is hopefully adequate. But when you think about how much liability to buy, you need to consider your situation and net worth, not mine.
While you don’t want to pay for more coverage than you need, it’s important not to underinsure yourself in this critical area. If you think you may not have enough, do what I did: Call your company, see how much additional liability will cost, plug it into your personal cost/benefit equation and then decide what to do. While liability coverage isn’t cheap, you’ll likely find adding more isn’t all that expensive.
Do you need comprehensive and collision?
Liability pays for other people and their stuff. Comprehensive and collision coverage pays for damage to your car.
If someone else hits you and it’s their fault, their liability insurance should pay to repair or replace your car. If you screw up and your car is damaged, however, that’s where your comp and collision come in. This type of coverage also pays if your car gets stolen, vandalized or otherwise damaged.
When I wrote about this topic more than a decade ago for a book called “Money Made Simple,” I didn’t have comprehensive or collision coverage on my car.
Why wasn’t I paying for it? Because I didn’t feel I needed it. In short, when it came to my own mistakes, my car was self-insured.
At that time, I was driving a car worth only about $3,000. So worst-case scenario, I would have been out three grand to replace it. That was a risk I was willing to take versus paying hundreds in extra premiums every year.
The rule of thumb when it comes to comp and collision: If the premiums exceed 10% of the value of your car, you might consider dropping the coverage. I considered; I dropped.
Today, the car I drive is worth considerably more than $3,000, so I’m now paying for comp and collision.
If you borrow to buy a car, this isn’t a choice you can make because your lender will force you to have comp and collision. So, here we have an example of less being more. Pay cash for a cheap car, and you’ll have less car to insure, less time spent shopping for coverage, less time spent working to pay for insurance and more time for leisure.
One more note regarding comprehensive coverage: If you self-insure your car and do away with comprehensive and collision, don’t forget this fact when you rent a car. Because if you don’t have comp and collision on your car at home, you won’t have coverage for cars you rent, either.
So, if you’re not given this coverage free as a perk on a credit card — see “The Best Credit Cards for Rental Car Insurance” — you may have to voluntarily submit to one of the greatest rip-offs of the modern age: paying for insurance, known as a collision damage waiver, at a rental-car counter.