Car Insurance: Dealing with Damage to Your Vehicle

From Insurance for Dummies by Jack Hungelmann

In this section, I discuss how to manage the risks of damage to your vehicle — risks such as fire, theft, collision, vandalism, glass breakage, and so on. Here are just a few examples of how to use noninsurance strategies to reduce risks:

• Carrying an onboard fire extinguisher to reduce the risk of a serious fire
• Always locking your car and installing a burglar alarm to reduce the theft risk
• Parking in a locked garage at home and always parking in well-lit, nonisolated areas when away from home to reduce both theft and vandalism risks
• Keeping a safe distance behind the vehicle ahead of you to reduce the risks of both glass breakage and collisions. You can use the retaining strategy by either choosing higher deductibles or by not buying damage insurance at all and paying all claims out of your own pocket.

Insurance for vehicle damage is usually offered in two parts:

• Collision coverage, covering damage from colliding with another object (for example, a vehicle, post, or curb), regardless of fault
• Comprehensive (also known as Other Than Collision) coverage, covering most other kinds of accidental damage to the vehicle, such as fire, theft, vandalism, glass breakage, hitting a deer, wind, or hail

Deductible psychology

Make sure that you can emotionally afford a high deductible before changing your policy. I’ve had a number of clients who chose higher insurance deductibles, but when the loss occurred shed tears when actually parting with the money. I have one well-to-do client who could easily replace her new Jaguar out of petty cash but who opts for the lowest deductibles the company offers. She knows herself well enough to be aware that that parting with any money at claim time would be emotionally traumatic.

Both of these coverages are subject to a front-end copayment on your part, called a deductible. When buying either or both of these coverages, it is wise to assume as much risk as you can afford, financially and emotionally, through higher deductibles — or possibly not purchasing these coverages at all. A couple of things to keep in mind here:

• Make sure that the insurance company gives you enough of a price discount for taking the additional risk. I offer some guidelines for choosing the most cost-effective deductibles, as well as for determining the point where dropping these coverages on an older car makes sense, later in this chapter.
• If you’re on a tight budget but still need higher liability insurance limits to protect future assets or income ( like if you’re a student in medical school), it may make sense to carry higher deductibles even if the money to cover them isn’t currently available. The savings will often pay for most or all of the cost of the additional liability coverage you need.

Incredibly, the savings for raising your Collision coverage deductible by just $250 (from $250 to $500) is often enough to pay for an extra $200,000of liability insurance. No matter how tight things are, coming up with another $250 to fix dents is far easier than coming up with $200,000 to cover lawsuits!

TIP!  If your driving record has deteriorated and your premiums are in danger of rising significantly with one more claim, I recommend very high deductibles, such as $1,000. In all likelihood you won’t file a small claim — and risk higher rates — so why pay for something you’re not going to use?