The 10 Minute Finance Fix series focuses on topics you can learn in ten minutes or less to help improve your personal finances. In this 10 Minute Finance Fix, you will learn about how different options affect your auto insurance rates.
When you bought that brand new shiny car, you probably bought a brand new shiny automobile insurance policy with every bell and whistle available. If you kept every insurance bell and whistle until the day you traded that car in, you probably overspent on your insurance policy.
The truth is that once your car reaches a certain point, comprehensive and collision insurance are no longer cost-effective. One rule of thumb for this is when the cost of a year’s worth of collision and comprehensive insurance is more than 10% of the current cost of your car. Why? When your car is devalued to this point, it’s often getting close to the point where you would merely trade it in for a newer model.
If you’re driving an older car that is getting near the end of its lifecycle, it’s almost always just one major incident away from being traded in for another car. When you start to feel this way about your current vehicle, save some money by calling your auto insurance agent and canceling everything but liability insurance on the car.
1. Calculate the Current Value of Your Car
Refer to Kelly Blue Book or search for auto sales of your current year and model car to get a good idea of the current value of your car. If you still have a loan balance on your car, dropping too much coverage may not be an option, but you may be able to increase your deductible to save money.
2. Talk to Your Insurance Agent
Discuss different coverage options with your insurance agent. You may be able to drop collision coverage if your car is not worth much or increase your deductible if you have sufficient funds in your emergency fund to cover the deductible in case of an accident. Calculate your return based on a year’s savings in auto insurance cost.
3. Change Your Auto Insurance
Once you understand the options and the savings versus potential costs, change your auto insurance to reflect the current state of your car, financial situation, and desired amount of money you want to save. If you have at least $1,000 in an emergency fund, you probably don’t need that $300 deductible and can increase it to $500 or $1,000.
If you’re car is several years old, consider different insurance options to reduce your expenses. You may not need every coverage available and dropping them or reducing the total amounts of coverage will reduce your overall insurance cost.