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Budget Car Insurance

Written by Todd Clay. Posted in Research Last Updated: 09/29/2010

How to get cheaper auto insurance, when you should lower your liability limits, raise deductibles, or drop full coverage altogether

Man doing the bills

When to consider cutting auto insurance out of the budget.

No one wants to pay too much for car insurance. After all, if one can save some money by eliminating unnecessary expenses, why not consider your insurance bill?

It’s not always a good idea to skimp on car insurance. Being cheap is great – being dumb is not. The ideal is to purchase coverage that will be there for you in a worst-case scenario in the most cost-effective manner possible.

In order to properly budget car insurance, the trick is to know how car insurance works. The main ways people save on their premiums are to either lower their liability limits or raise their collision and comprehensive deductibles.

Other types of coverage, such as uninsured and underinsured coverage (UM/UIM), and medical payments in states that don’t have “no-fault” laws, represent a small percentage of the auto insurance premium and therefore don’t generate significant savings when changed. These are best left alone.

Lowering Liability Limits If It Makes Sense

Liability limits are often expressed in a group of three numbers, such as 25/50/15. This example represents limits of $25,000 in injury coverage to one person in an accident, $50,000 in injury coverage to any number of persons involved in a single accident, and $15,000 in property damage. This 25/50/15 level is the state liability minimum in Idaho and several other states. Some states have even lower minimum liability requirements.

In other words, keeping your insurance at state liability limits is often insufficient for anything other than minor accidents. If you’re found at fault totaling a new Mercedes and injuring three people, the state minimums will be exceeded very quickly. You will probably be personally liable for the difference. Accordingly many insurance agents recommend carrying liability limits of no less than 50/100/50 – often more in metro areas.

Raising Deductibles if You Can

If you’re still making car payments, your bank will require you to carry full coverage. If you don’t, your lienholder has the right to “force place” insurance on your car and bill you for it. Force placed insurance is almost always very expensive. Keeping your own full coverage is a much cheaper alternative.

Fortunately most lienholders only require deductibles of $1,000. In addition, most personal auto insurers offer $1,000 as their highest deductible. This gives you some leeway in maximizing your insurance value.

When considering your deductible, ask yourself how much you are willing to personally pay to get your car fixed and then set your deductible accordingly. Deductibles are typically available in $0, $250, $500 and $1,000 levels, although your company may offer something different.

To minimize your insurance cost don’t set your deductible any lower than what you’re comfortable with, and to give you peace of mind don’t go any higher. Also remember collision and comprehensive deductibles are different and separate. Many insurance companies cover glass repair (but not replacement) at a $0 deductible for a small cost or even no additional cost at all. Many people keep their comprehensive deductible lower than their collision deductible.

Consider Dropping Comprehensive and Collision?

No state requires collision or comprehensive coverage. Once the car is paid off, you can consider dropping full-coverage entirely. However, if you do this know there’s no coverage if your car is stolen or vandalized, and no coverage to fix your car unless someone else hits you and is found at fault.

In this situation ask yourself if you would be OK walking away from the vehicle if something major happened to it. If you can afford it, then dropping full coverage may be a good idea. Alternatively, it is often possible to drop collision coverage but keep comprehensive, or vice versa. Talk to your agent for more information on that.

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Todd Clay

Todd Clay is a former insurance agent with the largest insurance company in the United States. He earned his Bachelor’s from the University of Texas. He's worked in several fields but has specialized in insurance, financial-related information, and technology. He blogs at Car Insurance Guidebook. Connect with Tood on Google+

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