Monday, May 10, 2010

3 tips to save $500 per year in auto insurance

The scary green gecko wants your money!

Okay, so maybe that really isn't a Gecko, but I thought I'd have a little fun with those popular commercials you see on TV about saving money on auto insurance.

However, you really can save $500 or more per year in auto insurance premiums, you don't have to switch providers and it only takes one phone call.

You can also increase the real protection that insurance provides you at the same time.

Too good to be true you say?  I did it, here are my three tips:

Types of auto insurance

First, let's talk about why we have auto insurance.  In California, we are required by law to carry proof of financial responsibility whenever we drive.  For most of us, this means we (as a minimum) need liability insurance.  Liability should cover damage to people or property (excluding your car) caused by an accident.

I'm sure other states in the US have similar minimum requirements.  For those of you in other countries, tell us how your systems work!

In addition to general liability insurance, many of us also have optional insurance specifically for damage to our car (called collision insurance), and non-accident related damage to our car (called comprehensive insurance).

Tip #1: Check your Limits

Beyond the minimum level of liability insurance, you may want to opt for higher coverage limits.  As an example, you may have a limit of $50,000 per person or $100,000 per accident total.  That may seem like a lot, but situations could happen in which more damage/injury is caused and you wouldn't be protected.

Increasing your limits does increase your cost some, but perhaps not by as much as you'd expect.  Besides, an accident with serious injury is the primary reason why you need insurance.  Having too little insurance would be a big problem for most people.  So, in my opinion, this is money well spent.

Tip #2: Check your Deductible

If you have optional collision or comprehensive coverage, the associated deductible affects your premiums.  For example, if your deductable is $500, then the first $500 of any accident damage to your car would not be paid by the insurance company.  Raising your deductible may sound scary at first, but it could significantly lower your premiums.

In my case, raising my deductible from $500 to $1,000 would save me $108 per year.  While this may not sound like a lot, it will add up over time.

Tip #3 (the controversial one):  Do you really need collision / comprehensive coverage?

Neither collision nor comprehensive insurance is required by California law.  Remember, this coverage is only for damage to your car alone.

Before we get into the why, let's examine what it costs and why you should care.  For me, having collision and comprehensive insurance would add $580 per year to my policy (with a $1,000 deductible).  With a $500 deductible it would increase to $688 per year.  This is for a family with three relatively new, average cars and two drivers.

$580 may not sound like a lot v.s. your cars' value, but it adds up over time.

Of course, there are reasons why this coverage makes perfect sense:
  1. If you have a loan on your car, the bank may require this coverage (until the loan is paid off).
  2. Your car represents a major investment for you.
Often, especially when we are young, our cars are the most expensive things we own.  Losing our car (a distinct possibility to an inexperienced driver), would be a terrible event.

One thing to realize is that the reasons why you may want/need this coverage should decrease as you get older (for several reasons).  Hopefully, you become a safer driver, you pay off your car loans and the cars no longer represent such a big part of your financial assets.  By the time you buy a house (especially in high cost areas), I think you'll agree that cars usually become the least of your worries.

Since the savings are significant, it is worth asking yourself if the risk is worth it?

Oh no! What if you have an accident?

You are probably thinking that if or when you get into an accident you could easily lose any savings gained by dropping that optional coverage!  This is a reasonable reaction, but here are some important points:
  • Think long term:  You are going to be driving for many years, perhaps more than 50!
  • Car accidents are (hopefully) relatively rare things in your life
  • Many accidents only cause minor damage
Finally, will insurance really protect you in the long run?

If you make a claim, there is a very real chance that they will raise your rates for a period of time.  Since this increases your cost for several years, you should offset this cost against any claim payments they make to you.  Remember, they are in the business to make money and will want to recover their loss.

This happened to us a few years ago.  We had an unfortunate accident (our fault) and the claim against us cost our insurance company about $2,000.   We had been good drivers and had otherwise accident free records.  At the next policy period, our insurance company raised our rates well over $600 per year and told us that it would stay that way until three years had elapsed (at which point we could again qualify for an accident free rate).

Since we had an accident, switching insurance companies wasn't an option as they too would charge us a higher rate.  Our rates went up almost exactly the amount to cover the cost of the previous claim (coincidence perhaps, but you get the point)!!!

I can't tell you how mad this made me as this really isn't any protection at all!  If I had known, I would have paid the claim off myself and would have saved money.

Here is another related point:  What if the minor damage had been to our car only (and I didn't have insurance to cover it)?  I probably would not have opted to repair it.  Repair costs are so high that I'm certain I'd be better off living with a lower resale value (eventually) instead of a major repair bill now.  This means that the real cost of a minor accident doesn't have to be that high (if you are willing to live with a dent or two until you sell the car).

Evaluate your choices carefully

Obviously, what I decided may not be right for you or your situation.  If you reduce any optional insurance coverage, please do it with due care.  If the risk of having to pay for damage to your car makes you nervous, then chances are the insurance is worth the piece of mind it provides.


  1. Well reasoned. Never sacrifice the liability coverage. Yes, it's for damage or injury you cause, and no one wants to use it, but having good injury coverage (100k or more) will definitely help you against the ambulance chasers. And depending on your driving history and where you live, it's only $40/year or so difference between the minimum and $100k coverage.

  2. Here is another reason to drop collision & comprehensive coverages. Let's say you're paying for $25,000 worth of collision & comprehensive, but you are driving an older car. Your car is now worth somewhere between $15,000 and $20,000 as a trade-in or private sale. The insurance company may value your car even lower, say $12,000. What do you think they will pay you when THEY determine that you have totaled your car? Yes, you got it: $12,000 or less. So you're paying for "$25,000" coverage, but you will have to fight for any penny over $12,000.

    If you own an even older car, worth say $5,000, then dropping collision and comprehensive is an easy decision. They're happy to collect your premiums for "$25,000 coverage", never telling you that you will never see anywhere near that amount. (And your insurance company will declare your car totaled at a 70-75% repair cost to value ratio, i.e. $3,500 in damages, which factoring in labor and OEM parts could be as little as a damaged hood!) This last part is not a purely theoretical idea- this happened to me. Not to worry, I talked to a good shop in my area. They found a used hood in the right color for me, so my total cost was about $800, not the outrageous $3,500 insurance company estimate.


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