Buying auto insurance can seem like a challenging task. After all, there are a lot of insurance companies out there offering policies. And there are a lot of different types of auto insurance coverage for sale. It may seem like a full-time job to sort through all this info to get the right protections in place at a fair price.
The good news is, there’s really only one thing drivers need to do when buying car insurance. Here’s what it is.
Consider this one big thing when buying auto insurance
When buying car insurance, the one big thing every driver needs to ask themselves is how much they can afford to lose.
See, the reason this question is so important is because insurance is supposed to provide protection for assets. Many people forget about this in their quest to get the cheapest coverage. As a result, they end up taking risks like going without protections they need or setting policy limits too low or a deductible that is too high to be affordable.
By getting back to this fundamental question, auto insurance buyers can make more informed choices about what risks they want to transfer to an insurance company. They can make their choices on coverage based on what really makes sense for their personal finances in the long term — rather than based on saving a buck or two on premiums.
Here’s how this can guide insurance buying
So, how can drivers put this into practice and actually figure out how much insurance to buy based on thinking about what they can afford to lose? It’s simple:
- Consider how high of a deductible is affordable. The auto insurance deductible is the amount of money that has to be paid out of pocket when a covered claim is made. If a driver cannot afford to pay a $1,000 deductible, they should opt for a lower one even if that means higher premiums.
- Consider whether paying out of pocket for a new car is feasible. The average cost of a new vehicle is now over $48,000. A driver who could not afford to pay to replace their car out of pocket if they are in an at-fault crash should buy collision coverage.
- Consider whether it’s affordable to pay off the remaining balance of a car loan after an insurer pays fair market value. Insurers pay only what a car is worth, while data suggests close to 20% of people have negative equity in their vehicles (they owe more than the market value of their vehicle). A driver who couldn’t afford to pay off the difference between what they owe and what their car is worth should have gap insurance.
- Consider whether paying for a rental car is affordable. If a car needs to be repaired due to a covered loss, most people will need something to drive in the meantime. If it’s not affordable to pay out-of-pocket costs for a rental car (which average more than $100 a day), then they should add rental car coverage.
With each type of coverage on offer, look at what it is providing protection from. If it’s a loss that would do serious damage to a bank account and that is simply not affordable, then buying insurance against that loss is the way to go. This should guide every driver in buying car insurance, so they can get the protection they truly need.
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