Car insurance, Home insurance, and every other type of insurance has its drawbacks. Read below to see how to assess how much insurance you actually need.
Is Minimum Insurance Coverage Enough?
How much car insurance do I need? This is a tough question to crack. Because when it comes to property and casualty insurance – otherwise known as coverage for your car or home – determining the best value for your premium dollars can feel like trying to comprehend quantum physics in a single half-hour, self-taught class. Yikes, right? Part of the challenge lies in understanding whether the basic coverage level is enough to sufficiently transfer the risk of financial loss off your shoulders and into the hands of your insurance company. For some, more extensive policy benefits are appropriate, while others are adequately protected with only minimal coverage. To take the pain out of understanding insurance coverage as it relates to you home or your vehicle, start by answering the following questions.
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What are your Financial Circumstances?
The majority of consumers first look to price in deciding the amount of insurance coverage for car or home. The monthly (or quarterly, semi-annual or annual) premium payment should fit comfortably within the boundaries of cash flow each month, but getting the most affordable (read, cheap) policy does not always offer the best coverage. Less coverage with a higher deductible may result in the lowest premium due; however, this combination also means you’ll owe considerably more out-of-pocket if you are in an accident or have a claim to submit.
If you have money set aside in emergency savings to satisfy a high deductible or damage expenses above and beyond what the insurance company provides, the minimum coverage may be sufficient. If not, consider securing more insurance coverage that fits into your budget. Just remember that both your monthly budget and potential out-of-pocket costs should be considered when selecting home and auto coverage amounts.
What are your Assets?
Anyone with a high net worth or a significant income should take these factors into consideration when selecting home and auto insurance benefits. If you are the cause of an accident in your vehicle, for instance, liability coverage may not be enough to cover the medical bills or property damage incurred by the other driver. And no surprise, you’re on the hook for the remaining amount which could result in the need to liquidate assets. The same principal can be applied to accidents that take place within the home. If you have savings, investments or other assets worth protecting, the minimum coverage simply won’t cut it.
How much is your Car Worth?
Another determining factor in selecting the level of insurance coverage specific to your vehicle is the overarching need for comprehensive coverage versus liability alone. Regardless of the state in which you live, comprehensive coverage (meaning higher insurance benefits and coverage for non-accident-related damages) is required if you have a financed vehicle. The financial institution providing the lease or car loan has a reasonable interest in covering the cost of the vehicle in the event of an accident or other damage while payments are still being made. An outstanding loan balance creates the need for comprehensive coverage in this case. However, if you have an older car or one that is fully paid off, comprehensive coverage may not be necessary.
The general rule of thumb is this: the annual cost of carrying comprehensive coverage should not exceed 10% of the vehicle’s worth, according to Kelley Blue Book. For example, if you own a car outright that has a value of $5,000, and comprehensive coverage costs $600 per year (12%), you can consider dropping the additional coverage. In this scenario, the financial risk is not high enough to warrant carrying additional coverage at a cost.
The Bottom Line
Determining the most appropriate level of insurance coverage for either your car or home starts with an evaluation of your specific financial circumstances. Review your budget to see what premium level comfortably fits within your cash flow, and know your worth in terms of assets and income to safeguard yourself from unexpected out-of-pocket costs. Finally, consider the value of the asset you are covering to understand whether additional insurance benefits are required or necessary. Following these steps can save you a pretty penny on your insurance premiums, your costs during or after an accident, or both.