Car Insurance Basics For Dummies

Car Wreck

Make sure you have insurance because accidents happen!

One of the key decisions in deciding what car to buy is assessing how much all the other costs are that come with ownership.  The purchase price and/or the car payments are just the most obvious of costs.

There are two main ownership costs to consider: maintenance and insurance.  For new cars, maintenance costs are quite minimal, unless you have a lemon and have to waste all your time going to and from the dealer.  For used cars, maintenance costs are a much bigger issue that can quickly eat into any savings you’ve made from not buying new.  We can talk about maintenance costs in more detail in another post.  For now, let’s talk about insurance costs.

I received my semi-annual car insurance premium bill the other day, and I was pleasantly surprised to discover it only costs $285 every 6 months to cover Moose. However, by not telling you the full details of what $285 gets, it’s hard to understand whether $285 really is good value. Let’s breakdown the line-items to better understand what car insurance options I get for my money.

UNDERSTANDING CAR INSURANCE OPTIONS

First of all, you must have car insurance if you drive a car. It’s illegal not to, and if you so happen to cause an accident, you could very well be sued for all you have and go bankrupt. Don’t be a donkey and not have car insurance! There are a lot of different options to choose from, and for the sake of clarity, let’s go through each one.

Along with the expenses associated with your own damaged vehicle, you can get sued by other motorists or by the passengers in your car. You must decide on appropriate coverage from all angles.

PROTECT YOUR FINANCIAL RESOURCES

Bodily Injury Liability: If you hurt someone in an auto accident, the insurance company will pay a certain amount.  In my case, I elected for $300,000/$500,000 per person/per accident for a cost of $115.

Property Damage Liability: If you damage someone else’s property in an auto accident, the insurance co will pay a certain amount. My insurance company pays $100,000 per accident to property at a cost of $84.

PROTECT YOU AND YOUR PASSENGERS

Uninsured Motorists Bodily Injury: If an uninsured or underinsured driver injures you or your passengers.  I elected $300,000/$500,000 per person/per accident for $43.

Medical Payments: Covers you or your passengers. I have $100,000 per person at a cost of $24.06

Extended Benefits: Wage earner disability benefits, essential services disability benefits, death benefits.  I pay $5.10 for minor distribution of all three. I have my life insurance and disability insurance from work to cover 100%.

PROTECT YOUR VEHICLE

Comprehensive: Covers damage caused by something other than another vehicle such as hail, theft, collision with Bobo the bear.  I chose not to get comprehensive coverage because Moose is worth no more than $4,000.

Collision: Covers damage to your vehicle caused by impact with an object other than an animal. Gray area here, given this is what comprehensive is for. I declined coverage.

Uninsured Motorists Property Damage: If an uninsured driver damages your vehicle. If an uninsured motorist damages Moose, I will just ask him to pay for everything, otherwise, I will introduce him to my cousin Viktor, who will break his legs for non-payment.

Towing & Labor: Provides emergency roadside assistance such as towing, flat tire, jump start, and delivery of gas. This service is a life saver!  I’ve run out of gas, had an older car not start before for some reason, blew out my tire, left my lights on, and each time needed roadside assistance.  Takes no more than 45 minutes to get everything fixed. I recommend everybody get towing & labor. I pay only $5.88 and I can’t believe it’s not at least $100 every 6 months.

CHEAP TO ME MIGHT NOT BE CHEAP FOR YOU

People often forget that having a nice car doesn’t stop once you pay for it in full.  New cars will always come with at least a 3-year, 36,000 mile bumper-to-bumper warranty so maintenance is not really an issue in the beginning. It’s the insurance costs for expensive cars that really start getting to you.

Moose is almost 12 years old and isn’t worth much more than $4,000. As a result, I don’t have comprehensive or collision since I will just write-off the $4,000 in case of an accident and buy a new car. If I had a $165,000 Bentley Continental GT, you bet your buns I would have comprehensive and collision! It’s really just a judgement call though, as a Bentley’s insurance will probably run in the $3-4,000 range a year for me.

A $285 car insurance premium every 6 months equates to only $47.5 a month. That’s cheap for me since I’ve paid up to $200 a month for one expensive car that I bought new some 8 years ago. Everything is relative.

There are some grown adults who still free-ride off their parent’s policy to save money. Good for them if they can get mom and dad to pay for it or somehow latch on as a dependent with discounted rates. Meanwhile, there are those who have no assets, and therefore go without auto insurance to save money, even though that’s illegal.

You have to protect yourself from these motorists by getting your own insurance. You just never know. Finally, if you have a wealth of assets which your car insurance policy doesn’t provide enough for, you must get an Umbrella Policy that goes above and beyond your car and home property insurance.

Recommendations For Saving Money And Protecting Your Assets

Check for lower insurance rates. Auto insurance is the second biggest expense to owning your car. Esurance is the leading online market place to help you find the most affordable and reliable auto insurance. They get you comparison quotes to make sure you’re getting the best deal. You can easily purchase auto insurance straight from their website if you like what you see. It is very important that everyone gets at least basic liability car insurance. You can total your car and be fine. But if you total someone else’s car and injure them, they can go after you for ALL your assets and wipe you out! Check for a better auto insurance quote via Esurance today.

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Updated: 5/2014

Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Andy says

    I pay a total of $339 every six months. That includes comprehensive and collision at $20 and a $101 respectively. My coverage amounts are less than yours, but I also have full tort, which you didn’t say you have or not (unless I missed it).

  2. JT says

    No comp, no collision. My car’s worth maybe $3500 at best.

    I pay $450/6 months, or something like that, for nearly identical insurance to yours. However, I’m also 21, single, male, and driving with a 95 in a 50 speeding ticket to my name.

    I’ve done plenty of negotiating/shopping around to get it down to that price. Previously, it was over $100/month.

    • JT says

      Oh, I can’t forget the accident I got in either. Rear-ended someone when a school bus in front of me threw out a stop sign and she practically slammed on her brakes and threw it in reverse.

      That low-speed accident apparently registered to $30,000 in damages. Of course, her car was one speed bump away from being totalled, but she went to town on medical bills and claims for disability, etc.

      • Financial Samurai says

        Yikes! Well, I’m glad nobody was really hurt.

        $450/6months doesn’t sound bad for you. $100/month does.

        When I look back upon my teens and early 20s, I surely was a more reckless driver. I deserved to get charged more!

  3. Untemplater says

    Thank you for making all the various coverages so easy to understand! Insurance has always been a bit confusing to me. Very helpful post Sam!

    • Financial Samurai says

      No problemo Sydney. I was going through each line-item and thinking hmmmmmmmm…. this could be useful for some of us. I didn’t understand the difference between some myself. Good record keeping post.

  4. Jerry says

    I think it’s illegal to not have car insurance most places except New Hampshire. It is the “Live Free or Die” state which can lead to many drivers opting NOT to have insurance.

  5. Jeff @ Sustainable life blog says

    I pay about 750 for 6 months, but I have all types of coverage because I dont own the vehicle myself, and it’s still worth around 20k. I consider this a pretty good deal, and was able to verify just last week after getting a hail damage report. I’ve had the car for ~20 months, and have paid about 2500 in insurance costs over the life of the vehicle (from when I purchased to now) and after a recent hail storm, they calculated over 6k worth of damage! So they cut me a pretty sweet check. I’d say the insurance was worth it for me.
    I’ve got a fairly good record, with 1 speeding ticket in 5 years.

  6. eemusings says

    We pay $1200 for full coverage for a year. Our car is worth about $5k. But having to replace it out of pocket would be a big hit at this stage, which is why I decided to pay for full. I guess at some point – not sure how to work that out – it will make more sense to drop down to third party/theft and cut our premiums, and gamble on good luck.

    • Financial Samurai says

      Hmmmm… $1,200 a year for a 5K car is 24% of the value of the car every year. Kinda a lot to be honest!

      I would drop the comprehensive, and/or raise the deductible and try and get it down to under $750/year, or 15% the value of your car.

      But, whatever you are comfortable with! I’m just happy fellow readers/bloggers are also driving beaters! :O)

  7. Maggie@SquarePennies says

    Good list. Be sure to check with your agent for discounts available for taking safe driving courses. Adults as well as teens can do this. Sometimes it’s just a one evening class; other times you just have to watch a safety video.

  8. Janna says

    Your 1/10 rule may be a wise financial decision but is bad news for the auto industry! It means that only the top 5%-7% of earners can really afford even a cheap new car!?? I think your rule may be a little too strict, but I agree with you on not wasting money on an expensive car you really can’t afford. I bought a car in 1997 (slightly used – a year old with 17K miles) for 14K (and I wasn’t earning 140K), but 13 years later, I still have the car (192K miles now!), so I think it has served me well!

    • Financial Samurai says

      Indeed. The auto industry and the marketers have tricked people into OVER spending on their vehicles.

      If you make $50,000, then one has really no business spending 40% of their gross income on a $20,000 car. That’s just silly! A 8 year old $5,000 should serve just fine.

      Glad your car has lasted you 13 years!

  9. The Wealthy Canadian says

    Although I’m talking Canadian rates, my wife and I pay a total of $119 a month to have both of our vehicles covered.

    One vehicle is only a few year old, and the other is a 2010 pick-up truck.

    I increased our deductible on the collision side of things so that our monthly premiums would be lowered.

    Nice post!

  10. World of Finance says

    Love it! Provides information and humor all wrapped into one :) Great job. I’ve actually been interested in the auto insurance topic lately myself as I have to renew mine in the next month or so; however, my though process is learning more towards what areas/counties in the USA provide the most expensive coverage. I’ve heard I live in one of them and my auto insurance bill tells me likewise. I also have a much older car like you with Moose :) and pay almost double what you pay and I also don’t have coverage on the car since it’s not worth much. I was actually planning to write a post about this angle coming soon :)

  11. joel charles says

    Nice job. Compact & easy to understand. 30 years in the ins biz, 24 as an agent, couldn’t have done better myself & I taught ins to college students for 14 years

  12. Jourdan says

    Auto Insurance is a scam.
    They want me to pay $5,000 for 6 months of the bare minimum. I have had my license for almost a year, im 18, driving a 99 Chrysler.
    I have checked with most the insurance companies and none are much better.
    I have a perfect driving record and I just graduated high school. No criminal record
    im only making about $300 a week working almost everyday I can not afford this. Dont tell me to add me to my parents insurance because they can absolutely not help me. I have tried to do this but they will not let me

    EXPLAIN THIS !!!!!!!!!!!!!
    INSURANCE IS A SCAM

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