Optimize your auto insurance and save hundreds a year

The Author’s 2002 Toyota Corolla aka ‘The Babe Magnet’, purchased used in 2006, and still going strong with over 200,000 miles! (Extra carrying capacity shown on roof racks.)
Checklist to optimize your auto insurance
  1. Increase your Collision + Comprehensive deductibles to at least $1,000, and preferably $2,000 or as high as you can comfortably pay for.
  2. If you car is worth less than ~$5,000 – $10,000 AND you can replace it with cash today, drop Collision & Comprehensive altogether.
  3. Decline Underinsured Motorist Property damage since your Comprehensive/Collision already takes care of that.
  4. Protect yourself with high liability limits: Carry at least $50,000 / $100,000 for Bodily Injury Liability and $50,000 for Property Liability. If you have more than $100,000 in assets, increase your limits at least as high as your net worth, or to the max allowed by your insurer.
  5. If you and your family already have health insurance, you don’t need and should drop Personal Injury Protection and Underinsured Motorist coverages.
  6. Drop rental car coverage. Drop roadside assistance if you already have your own service, or decide you don’t need it. If there are any other small dollar coverages, you probably want to drop them too. Self-insure small financial risks yourself!
Step-by-step instructions to pare down your auto insurance to save hundreds per year

Most people carry coverages they do not need on their auto insurance, or simply pay too much for insurance because they haven’t shopped around in years. Let me show you how I optimize auto insurance coverage to save money while protecting myself from financial risks.

First, shop around for the best coverage by at least getting a quote at GEICO (they often offer the best prices) and Allstate/esurance. These guys offer insurance directly to consumers without brokers as middlemen, and thus often offer the best prices. Compare their rates to your current insurer and see if it makes sense to switch.

Next, let’s take a look at your current policy online, either after switching carriers or before. As an example, I’ll use my GEICO auto insurance to show you before and after cost savings.

Companies with good online interfaces like GEICO let you play around with coverage limits and types to see cost differences in real-time. If you carrier doesn’t let you do that, you’ll need to call them up and talk through the differences over the phone. (Another reason I like GEICO.)

Navigate to where you can see the coverage broken out something like this:

My post-optimization coverage. Note that I carry very high bodily injury + property damage limits to protect myself to the maximum extent possible, but I’ve pared down all other unnecessary (for me) coverage.

Now, find a button that says something like ‘Edit coverage’. So long as you don’t save the changes, you can hopefully play around with the limits and see the dollar differences. Let’s do this at GEICO, and explain how to determine what you do and don’t need.

Auto insurance has four basic components to it:

  • Injury Liability: this protects YOU financially by paying for physical injury to another person in an accident. I.e.: you hit them and they end up in the hospital.
  • Property damage liability: this protects you financially by paying for damage you cause to someone else with you car (e.g.: you hit their car, or, god forbid, their house.)
  • Injury protection: this pays you/your passengers some (usually small-ish) amount for medical bills that you incur as a result of the accident. Most people don’t need this IF they already have health insurance and can pay their insurance deductible.
  • Property damage protection: this pays you if your car is damaged. If you can afford to fix, or replace your car if it’s totaled, you’re better off ‘self-insuring’ by keeping cash on hand and declining this coverage. My car is worth less than $5,000, which is an amount I’m totally comfortable self-insuring.

Let’s say I had a fairly typical set of coverages that looks like the below, including collision + comprehensive with deductibles of $500.

The first and most important thing to look at is your liability limits. You generally want these as high as you can afford to protect you from large financial losses.

As a rule of thumb, get as much as will be equal to or greater than your total net worth if possible, but get at least $50,000 / $100,000 for Bodily Injury Liability and at least $50,000 for property damage liability. (I.e.: if you wreck someone’s $50 K car, you’re safe. If you total their $200 K Ferrari, you’ll still be on the hook for more money…)

Next we have coverage for your losses. This is where you can save some dough. I always decline Medical Payments (above), Personal Injury Protection, and Underinsured motorist (below) because these cover my or my passenger’s medical bills, which I don’t need because I already have health insurance that would cover those. If you also have health insurance, and so do the people who ride with you (your family, say), then you almost definitely do not need any of these coverages, which will save you big bucks!

Eliminating these three things will save me $58.90 + $123.30 + $43.40 = $225.60 every 6 months, so $451 per year.

Next are Underinsured Motorist Property Damage (above; this covers my car) and Comprehensive + Collision. Collision pays for damage to your car resulting from a car crash if you’re at fault, or in a no-fault state, or if it’s the other guy’s fault and he doesn’t have insurance or is never caught. Comprehensive is for non-crash damage to your car like from theft, vandalism, or natural disasters.

I drive a cheap, reliable car, and keep plenty of cash on hand, so I decline all of these coverages completely and pocket the savings (to save & invest if I ever need to pay for any such damage, or to replace my car.) If you can afford to pay cash to replace or fix your car, waive all of these. A general rule of thumb might be to waive them if your car costs $10,000 or less, and certainly waive if it’s only a few thousand or less.

Check Kelly Blue Book to estimate your car’s replacement value, since that’s all an insurance company will give you (they won’t pay you more than the car’s worth! That’s why even a minor-but-expensive-to-fix ding will ‘total’ your car from the insurance company’s perspective.)

For those of you with more expensive/newer cars, even if you need this coverage, you should definitely increase the deductible to the highest level you can afford to pay without losing sleep over it. For more people, that’s probably in the area of $1,000 – $2,000. If you haven’t saved at least that much in an emergency fund, get busy!

If I dropped these property coverages completely, I’d save $11.30 + $12 + $49.20 = $72.50 per 6 months = $145 per year. You can decide if that savings is worth it to you for the extra ‘first dollar’ risk of paying the deductible/cost of the car.

If I upped my deductible from $500 to $2,000 and dropped the Uninsured Motorist one (I don’t need it since I’d have my own Comprehensive + Collision coverage to use in that event), I’d still save about $61 per year. (Your savings might be much greater if you have a more expensive car.)

Dropping rental car coverage saves me $30/year. Ask yourself: if your car is in the shop, are you really going to need to rent a car, or could you just borrow one, get a ride with a friend, work from home, ride the bus/public transit/bike/walk, or take Uber/Lyft? And even if you DID need a rental car, it’s not expensive to rent one yourself, so you don’t need to insure that risk.

If you already pay for AAA or another roadside service, you definitely don’t need to pay for duplicative roadside assistance from your insurer. However, if you don’t have it, it’s only $20.60 per year from GEICO, and is probably worth it, so you decide there. Here’s what GEICO’s covers:

Okay, now you’ve eliminated coverage you don’t need, raised your deductibles, and upped your liability limits to protect yourself. Way to go!

Tell me in the comments how much you saved, and whether you also increased your protection by raising your limits.

Author: Ward Williams

Ward is an independent financial advisor at Better Tomorrow Financial. He started working as an independent investment advisor in 2009.

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