Do you wish you could save money on your regular bills? Are you tired of overpaying for important components of your financial plan, but not sure what to do?
If so, I’ve got some simple advice that can help you save hundreds of dollars in one budget category: your auto insurance policy.
Every year, thousands of people make a specific mistake with their coverage that costs them big time. These people are literally taking hundreds of dollars every year and lighting it on fire.
Want to hear more? Stick around and I’ll show a simple change you can make in your finances to keep several hundred dollars in your pocket – every single year.
My tip for saving hundreds a year on auto insurance isn’t to switch to a new insurance company with an adorable gecko as its mascot, or to the one with the cute gal named “Flo.” Nope. Instead, it’s a simple tweak to your existing coverage that will help you have more money.
Before I explain how and why to make this change, let’s talk a little bit about the different types of insurance offered by automobile companies and how they work.
Liability coverage is just one of the types of insurance that make up your auto insurance. Liability insurance is the mandatory part of your insurance policy. In other words, liability coverage is required by law. You must have liability insurance whether you like it or not.
Fear not, because the requirement is for a good reason. Liability insurance covers you when you drive your car into another car, a person, a house or a tree. Since a 4,000 lb. object being pushed into anything can cause a lot of damage, you want liability insurance. And you want a lot of it.
When it comes to liability insurance, you want to make sure you’re getting the maximum amount of coverage. The max varies by insurance company, but it ranges between $100,000 and $500,000. Whatever your company’s maximum is, you should strive to buy it. On top of that, you can buy a separate umbrella insurance policy. (An umbrella policy increases your protection.)
Unfortunately, that’s going to cost money.The good news is, your liability coverage and umbrella coverage will come in handy if you’re hit with a $500,000 lawsuit. If that ever happens, you’ll be happy you followed this advice!
Uninsured and Underinsured Motorist Coverage
This is another very big – and very important – part of your auto insurance. This insurance helps you when the other guy drives his car into you – and that other guy doesn’t have big liability coverage (which is very, very common).
Consider this example:
Bob is a total green horn when it comes to auto insurance. He doesn’t have a financial planner and he doesn’t read this blog or have any clue how to have more money. For this reason, Bob doesn’t understand or appreciate the importance of liability coverage. He selects his insurance company’s default liability coverage choice of $30,000.
On his way to work, Bob is distracted. Seriously! Bob is eating a doughnut, shaving, and putting on his make-up, all at the same time. Bob’s a mess, so he doesn’t see you right in front of him. His car plows right into you.
Your car is totaled. You’ve got $100,000 in medical bills as a result of the accident. Worse, you can’t work for an entire year due to your injury. This causes you to lose $100,000 in income. Based on that math alone, Bob owes you a car and $200,000.
But guess what? You’re only getting $30,000 from Bob’s insurance company – because that’s all the liability coverage Bob has. Unfortunately, suing Bob won’t get you anymore because he doesn’t make money and doesn’t have anything saved up.
Sure, your medical insurance might cover some of your medical bills – but not all of them. And your disability insurance policy may replace some of your income – but not all of it. Let’s not forget; you still need a new car. Where is all the money going to come from?
Enter Uninsured/Underinsured Motorist Coverage. This is coverage that fills the gap left by another irresponsible driver. As you can tell in the example above, having this coverage makes a big difference. Like your liability coverage, you should max this out. Being out of work and having very expensive medical bills is a big deal. You can protect yourself by maxing out your Uninsured/Underinsured Motorist Coverage on top of your liability coverage.
Save Money on Comprehensive & Collision
Now let’s talk about how we’re going to save you several hundreds dollar a year. Are you ready?
Comprehensive & Collision coverage insures the value of your car. This coverage kicks in when you drive your car into a tree (collision), or when a tree falls on your car (comprehensive).
Is Comprehensive & Collision Insurance Right for You?
Pretty much every car insurance company thinks you need to load up on this coverage. How do I know? Because every insurance policy I’ve seen has ample coverage for comprehensive & collision – and its owners are paying for it. But should they?
Here’s one simple query that can help you decide:
Do you have more cash than your car is worth?
If the answer is yes, you should skip comprehensive & collision insurance and bank the money you would spend on that coverage.
Why should you skip comprehensive & collision if you have more cash than what your car is worth? Math. But not just any math – probability, statistics, and actuarial stuff.
Basically, it boils down to this: an insurance company is only going to sell you an insurance policy if the insurance company believes they can turn a profit. That is, on average an insurance policy is priced so that you’ll lose money and the insurance company will make money.
So, on average, you will save money by skipping this type of coverage. And when it comes to comprehensive and collision coverage, the most money you could lose is the amount of money your car is worth. But, if you have the money already, it’s not going to cause you financial ruin.
This is why liability and uninsured/underinsured coverage is different. If you skipped either types of coverage, you could be out hundreds of thousands of dollars or more. Not having $500,000 could easily ruin your finances and lead you to bankruptcy.
Save Money by Working Your Comprehensive & Collision Coverage
If you have more cash than your car is worth, skip comprehensive & collision insurance. On average, you’ll save money. And if you ever do need to replace your car from an accident or incident, you will be able to.
I’ll use myself as an example. I’ve got a 2007 Hyundai Sonata. Maybe my insurance company would give $3,500 in the event of a wreck. Do I have $3,500 in cash in my rainy day fund? I sure do. (Come on man, I’m a financial planner. Of course I have a rainy day fund!) So, I don’t need to pay for comprehensive & collision coverage on my car. I can afford to manage the cost of this risk myself – and on average I won’t ever have to. But, even if I did, it wouldn’t be a problem because I have $3,500 in cash in my rainy day fund.
Work Your Deductible Instead
Of course, not everyone has a big pile of cash in the bank. Fortunately, you can still save money on your comprehensive and collision insurance by working your deductible.
Your deductible is the amount of money you must pay out-of-pocket before your insurance company pays you anything. Here’s an example of how this works:
Bill just bought a brand new pick up truck. It’s fully loaded with a sticker price of $35,000.
Bill doesn’t have $35,000 of cash sitting in the bank. Bill gets comprehensive & collision insurance on his new rig. The next day, a tree falls on the truck, destroying it completely. Bill’s insurance company pays Bill $34,500.
Why not the full $35,000? Because of a $500 deductible. The bigger the deductible, the less the insurance company pays out. And the bigger deductible, the more money you can save on your auto insurance bill.
You can save money by picking a deductible that’s equal to the size of your cash savings. Do you have $500 in cash? Get a $500 deductible. Do you have $1,000 in your rainy day fund? Opt for the $1,000 deductible instead. The bigger your rainy day fund, the bigger your deductible should be – and the more money you’ll save on auto insurance.
How to Save a Ton of Money on Auto Insurance
Start by maxing out your liability and uninsured/underinsured coverage. Then, get an umbrella policy to increase your liability coverage even more. After those tasks are squared away, pick the biggest deductible that’s within the limits of your rainy day fund. That way, you can pay lower auto insurance premiums and save money over time.