An insurance policy tends to be a fear-based purchase. Buyers wonder what would happen if they totally destroyed their brand new car. They compare the cost of the insurance with the cost of buying a new car or making extensive repairs and decide to take the smallest deductible.
Unfortunately, this is a mistake in most cases. What buyers forget is that they’ll be paying insurance premiums year after year, but in most years they’ll have no accidents at all. Insurance companies make most of their money by insuring against events that never happen.
THE BASIC RULE FOR BUYING INSURANCE
The general rule for buying auto insurance, or almost any kind of insurance, is to take the biggest deductible you can afford. Insuring against fender benders is much more expensive than insuring against major calamities, because fender benders are much more common. Insurance companies jack up the premiums accordingly. In the long run you’ll do much better by driving carefully and paying for that minor damage out of your own pocket, if the accident was your fault or if the other driver was uninsured, than paying the extra premiums to cover such minor damage.
KEEPING AN EMERGENCY FUND
One good rule is to take the money you saved by buying a policy with a bigger deductible and putting it into an interest-bearing account. Don’t touch this money, except to pay for damage your insurance doesn’t cover. Over the long haul, you’re likely to find yourself with a large surplus in this account from the money you save every year.
IF YOU CAN”T AFFORD A BIG DEDUCTIBLE
Although the forgoing applies to most people, it does not apply to you if you have no money in the bank or are heavily in debt. If you need your car to get to work and couldn’t afford to cover the cost of even minor repairs, you should opt for the smallest deductible until your finances improve.
The auto insurance deductible you should choose depends upon your financial picture and what costs you could afford to cover on your own. Those who can afford to cover minor repairs should opt for the biggest deductible they can handle, while those with few assets will need protect themselves with a lower deductible. If you fall into the latter category, don’t to forget to review your policies and make changes as your financial picture improves.