How Much Car Insurance Do You Really Need?
from daveramsey.com on 29 May 2013
According to AAA’s annual Your Driving Costs study, you’ll pay an average of $1,029 a year for insurance coverage on the average sedan. Of course, that price tag can vary based on the driver’s record, the type of car and even where the driver lives.
So 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, Dave recommends 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 more than 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.
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.
Go With a Pro to Answer Your Questions
With so many variables surrounding the “right” amount of car insurance, you need an expert who can answer your questions and help you run the numbers. Dave’s insurance Endorsed Local Providers (ELPs) are professionals who work with several insurance companies to help you find the right coverage and the right price. Find your ELP today!