Basics of Auto Insurance

You may have heard this common axiom regarding auto insurance: “Don’t pay for any more insurance than necessary; buy only what you are required to by the state and save the money.”

What’s the problem with this advice? It leaves you too exposed to risk. Aside from your health insurance, your auto insurance is probably the one you will call upon most frequently. More importantly, auto accidents can get very expensive very quickly. Saving a few bucks on premiums can’t compare to the cost of a serious accident.

So how much auto insurance should you have? First, a quick review of the components of your car insurance policy, then some suggestions for saving money.

Basic Components of Car Insurance

Bodily Injury. This coverage generally pays for the injuries caused to others by the driver of the vehicle. For this and each of the items listed below, you (and any family members) must be listed on the policy in order to be covered by the insurance.

Medical Payments or Personal Injury Protection (PIP). This covers injuries to you and your passengers. It may (check your policy) cover lost wages or even funeral expenses.

Property Damage. This covers the damage that you (or someone driving your car with your permission) cause to others. While typically it applies to the car you hit, it can also include other property like fences.

Collision. Collision coverage pays for the damage to your vehicle caused by a collision. This will cover damage regardless of who is at fault for the accident.

Comprehensive. This covers a loss to your car caused by other than collisions, such as rocks, theft, fire, etc.

Uninsured/Underinsured Motorist. According to Consumer Reports, roughly 1 in 8 drivers are un- or under-insured. This coverage will reimburse you if you are hit by an uninsured (or hit-and-run) driver.

Factors Affecting Your Premiums

Credit Score. Many insurers start their underwriting with your credit score. According to Consumer Reports, a couple with a low score can pay over $2,000 more per year than a family with stronger credit.

Driving Record. Speeding, accidents (even if you’re not at fault) and DUIs can all have a significant impact on the cost of your auto insurance.

Teenagers. Because they are historically more prone to accidents and aggressive driving, and have less experience behind the wheel, having a teen on your policy will raise the cost significantly.

Deductibles. Higher deductibles work in your favor, while low deductibles can cost you.

Other insurance. Owning a home and bundling your home and auto insurance is one way to cut the cost of your car insurance.

Don’t scrimp on auto insurance coverage

Generally speaking, you are better off with more insurance rather than less. This is because the cost of the coverage pales in comparison to the damage you’re protecting yourself from. The basic 100/300/100 (that’s $100,000 bodily injury coverage per person, $300,000 per accident and $100,000 of property damage) is a good place to start. If there are a lot of expensive cars in your area, you should consider increasing it. If you spend a lot of time driving with other people’s’ children in your care, you should definitely carry more insurance. Also, adding an umbrella liability policy for additional liability insurance can be very affordable – about $200 – $400 for $1,000,000 extra protection.

Also, uninsured motorist coverage is relatively inexpensive and should match your own personal coverage. Think of it this way: when someone else hits you, how much insurance do you want them to have?

Higher collision deductibles can help reduce the cost of increased coverage, but higher comprehensive deductibles may not actually help much.

A final tip is to shop around. Even if you’re with one of the top rated insurers like USAA or Amica, you should still comparison shop. Insurers know that people are reluctant to make changes, and they may use that to raise your policy rates every year.

Risk Management as part of your Wealth Management Plan

Maintaining sufficient auto insurance coverage is a key part of any family’s risk management strategy. And risk management is, in turn a key ingredient in a holistic wealth management plan. At Blankinship & Foster, we consider risk management and all other facets of your financial picture in developing an overall wealth management plan. Contact us to learn more about how our proven process brings clarity, confidence and direction to your finances.

About Rick Brooks

Rick Brooks, CFA®, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Investment Officer. He is a lead advisor, counseling clients on all aspects of personal financial management. Rick serves on several boards. He is the Chairman of the Board of Girl Scouts San Diego, and also chairs the San Diego Foundation’s Professional Advisor Council. Rick and his family live in Mission Hills. Rick enjoys spending time with his family, theater, cooking, skiing, gaming and reading.

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