- Insurance serves to protect assets.
- Evaluating how much one can afford to lose determines factors such as the deductible size and necessary coverage.
- Considerations include the ability to pay for a rental car or settle a car loan in the event of a total loss.
Purchasing auto insurance can be a daunting task, given the multitude of insurance companies and coverage options available. Despite the complexity, there is a fundamental question that every driver should ask themselves when buying car insurance: How much can I afford to lose?
This crucial question underscores the primary purpose of insurance – safeguarding assets. In the pursuit of affordable coverage, individuals often overlook the importance of adequately protecting their financial interests. Consequently, they may compromise on necessary protections or opt for low policy limits and high deductibles, exposing themselves to undue risks.
By returning to this foundational question, prospective auto insurance buyers can make informed decisions about the risks they wish to transfer to an insurance company. This approach enables individuals to tailor their coverage choices based on long-term financial considerations rather than merely seeking to save on premiums.
Here’s how to apply this guiding principle in the insurance-buying process:
- Assess the affordability of the deductible: The deductible represents the out-of-pocket amount payable when filing a covered claim. If a high deductible, such as $1,000, is financially burdensome, opting for a lower one, even with higher premiums, is advisable.
- Evaluate the feasibility of self-financing a new car: Considering the average cost of a new vehicle surpassing $48,000, drivers who cannot afford to replace their car out of pocket in the event of an at-fault accident should invest in collision coverage.
- Examine the affordability of paying off a car loan post-insurer payment: Insurance payouts align with a car’s market value, but around 20% of individuals may have negative equity in their vehicles. Those unable to cover the difference between the owed amount and the car’s market value should secure gap insurance.
- Consider the affordability of rental car expenses: Most individuals require an interim vehicle while their car undergoes repairs due to a covered loss. If paying out-of-pocket costs for a rental car is financially unfeasible (average daily costs exceeding $100), adding rental car coverage is advisable.
With each type of coverage offered, it is essential to scrutinize the protection it provides. If the loss it guards against would inflict substantial financial damage and is deemed unaffordable, securing insurance against that specific loss becomes imperative. This approach should serve as the guiding principle for every driver purchasing car insurance, ensuring they attain the necessary protection for their individual needs.