Being Over-Insured and Having too Much Car Insurance Coverage

Imagine: You’re driving home from the used car dealership in your recently purchased sedan. A pair of deer run out and front of you, and you have no time to avoid them. Your $6,000 used car, for which you paid cash, sustains a good $3,000 in damages. Since you have collision insurance, you think that you’re adequately covered, but unfortunately, animal accidents are covered by comprehensive insurance, not collision. You’re going to have to come up with $3,000 out of pocket to get your car fixed - you’re underinsured.

Underinsurance is a major problem for people, and one that most don’t recognize until it’s too late. In the case above, the driver should have taken out a $6,000 comprehensive coverage (which deals with animal incidents, theft, vandalism, fire, etc.), in addition to a $6,000 collision policy. But the driver didn’t understand the details of his coverage options, and in an effort to save money, he passed on comprehensive.

Saving money by skimping on insurance that you actually need isn’t usually a good idea. But what if the person in the above example had purchased $10,000 worth of collision and comprehensive coverage? Since the policies would only cover damages to his $6,000 car, he would be wasting money on excess premiums. In this case, he’d be over-insured, which while not as serious of a threat as underinsurance, can be a needless drain on your personal finances.

How Much Coverage Do You Need?

State laws dictate the minimum amount of car insurance you must have to pay for damages you cause to other people and property, and you should always observe the law. Furthermore, in states that have low minimum requirements - California, Mississippi, New Jersey, Pennsylvania, and South Carolina, to name a few - you should probably carry additional coverage if you can afford it. Otherwise, you may be held responsible for any damages in excess of your liability coverage.

But state laws do not dictate how much coverage you carry on your own vehicle. If you are still making payments, then the institution that financed you will require you to carry full coverage for the amount you still owe. Otherwise, the amount of coverage you carry is a personal decision, and one that you should take seriously.

Insurance is a financial product. It is not something that you should buy just because the government says you have to, nor is it something you should buy in order to give you peace of mind or because your son-in-law is an agent. You need to evaluate the financial implications of the types and of amounts of coverage that are available.

Self-Insurance - A Risky Option

As consumers, we tend to think of risk as bad. That’s why we pay insurance companies to assume our risk. But if you’re one of the daring few who aren’t particularly risk-averse, it may be appropriate to consider self-insuring at least a portion of your auto coverage.

For example, if you’re a safe driver of an older car, collision and comprehensive insurance may not be worth your premiums. If your car is only worth $2,000, maybe it would be better to establish a fund to which you make monthly payments in place of your insurance premiums. The money could be invested in a money market or interest bearing savings account. If you were in an accident, you could draw upon the account to pay for the damages to your car.

Or, let’s say you own a expensive car, say a 2002 Chevy Trailblazer, valued at $15,000. If you had $6,000 in personal savings, you could save money on your premiums by carrying only $9,000 of collision and comprehensive coverage.

Find the Right Agent

Auto insurance agents are salespeople, and the good ones believe strongly in their products. Few will ever recommend that you cut back on your coverage and self-insure, but if you’ve honestly evaluated the pros and cons of self-insurance, and you’re financially equipped to deal with the worst case scenario, you deserve an agent who will work with you. The best way to make sure this happens is to shop around.

Furthermore, your automobile depreciates over time. If you never adjust the amount of collision and comprehensive coverage you carry, this means you could be paying to insure $10,000 on a car worth only $5,000. In the event of the car being totaled, your insurance company will only pay the replacement value, so it makes no sense to insure beyond the level.

Review your insurance coverage at least twice a year, and get quotes from at least three agents each time that you do. While being adequately insured should be your number-one concern, not being over-insured should be a close second.