To save, tailor your insurance
If you own a car, you must have insurance. That's the law.
In many states, auto insurance is so expensive that it's been a major, bitter issue in political campaigns. After rising less than 2 percent a year in 1999 and 2000, auto insurance premiums shot up by 7.3 percent in 2001 and 9 percent in 2002, according to the Bureau of Labor Statistics.
Helping to moderate overall rates is the emergence of baby boomers into late middle age. That means fewer accidents and lower rates for them.
A second factor working to lower rates is that cars are safer. In the mid- to late-1990s, more cars came equipped with such insurance discount items as dual side-impact air bags and antitheft devices.
Even so, the average annual car insurance expense for Americans was $774 in 2002, the latest year available, according to the National Association of Insurance Commissioners. Because auto coverage and rates are highly specific, your annual premium could vary greatly from that amount. Your rates depend on:
By tailoring your coverage to what you really need and then shopping around, you can get a better deal on your insurance.
But before shopping, it's best to understand the different components of coverage: liability, collision, and comprehensive.
Both the collision and comprehensive sections of your policy, which together account for 40 percent or more of your premium, involve a deductible amount that you must pay before the insurance kicks in on a claim. Policies also might include medical-payments coverage for you and your passengers, regardless of who is at fault, and uninsured motorist protection in case your car is hit by an uninsured driver.
Most policies also offer lower-cost add-ons, such as rental reimbursement in case your car is incapacitated for a period of time after an accident for repair, as well as towing insurance.
To keep costs down, figure out what types of coverage you can avoid entirely.
Nearly all states require drivers to carry liability insurance, but in some states the amount of coverage required is quite low -- say $15,000 to $25,000. No matter what your state mandates, get a policy with coverage limits of at least $100,000 per person injured and $300,000 per accident. Lower limits won't protect you because the average personal-injury award in such cases in recent years has been about $323,000, according to the Insurance Information Institute.
Get at least $50,000 in property-damage-liability coverage. Though state limits are much lower, repair bills can escalate swiftly on luxury cars and other expensive vehicles.
If your net worth, including your home, is more than $300,000, be extra cautious. A lawyer for the injured party could target those assets, so you might want to raise your liability limit to, say, $1 million.
The most cost-effective way to do this, at a cost of perhaps $100 to $150 annually, is with a so-called umbrella policy that will tie into your homeowner's insurance policy and cover you for potential liability from an accident, either in your car or at your home. This arrangement requires both policies to be issued from the same company.
The fastest way to cut your premium is to increase the deductible on your collision and comprehensive coverage. Raising your deductible from the common $200 or $250 limit to $500 can cut 10 to 15 percent a year from your insurance bill. Weigh these potential savings against the higher out-of-pocket expenses you'll incur if you file a claim.
For older cars, you may be able to drop comprehensive and collision coverage entirely; if the car is more than five years old, consider this option. Paying costly premiums makes little sense if the car isn't worth that much. Remember that any payout will be on the market value only of that car. As a rule of thumb, don't keep up coverage if the premium for collision and comprehensive is more than 10 percent of the retail used value of the car.
Most states require uninsured/underinsured motorist coverage, which is often $20,000 to $40,000 in protection. If your vehicle is hit by a driver who has insufficient insurance, this section will cover injuries to your passengers and other expenses ordinary health insurance does not pick up. It also protects you if an uninsured motorist hits you while you're walking or bicycling. You can purchase $100,000 in coverage for about $50 or less each year.
You may be able to save on medical-payments coverage. Regardless of who's at fault, this will pay doctor and hospital bills -- and sometimes funeral expenses -- for you and your passengers. But check to see if a combination of your life and health insurance would cover these items.
