Reviewing Your Auto Insurance: What You Really Need to be Thinking About

By Heather Lawrence, CFP®, CTFA
Director, Chief Financial Planning Officer

​One item that we review with clients as part of the financial planning process is their auto insurance coverage. With nothing so constant as change in our lives, it is always a good idea to take a few minutes and makes sure you have the coverage you need with the right provider. Below are critical questions and thoughts to help you do a high-level look at your insurance. Once you know what you have, you can gather questions to ask your current insurance provider or another provider if you are obtaining quotes for coverage from another company.​

Which company is providing your insurance?
Knowing who is providing your coverage is very important. How financially strong is the company and how have they fared in recent years since you began your relationship with them? You can check out their financial stability on AM Best to see their most recent rating. How does your current company compare to others? You want a company that is highly rated and will be able to pay your claims. You can also check the Better Business Bureau (BBB) to see ratings and complaints on local agencies, but keep in mind that not all agencies or insurers are reviewed by the BBB.
 
What coverages do you currently have?
What is actually covered under your policy? This is a good question to ask your agent so that you can better understand what is and what is not covered by your policy. Does the coverage match with what you thought? Why do you have these specific coverages? Additionally, ask how certain aspects of the coverages work. For example, if you need to have your vehicle towed (and this is covered by your policy), what conditions are covered and what are the parameters for coverage? Can you have the vehicle towed back to your preferred auto shop or does the policy only cover the tow costs to the nearest repair shop? Understanding how your coverage works could save you significant money when the time comes to use it!
 
If you are going to compare your current coverage with another provider, we suggest listing out each specific coverage you have, and the limits or amounts associated with that coverage - including the itemized cost. You will want to ask the other potential providers for those specifics to accurately compare.
 
What coverages do you need?
What do you need covered? At a minimum you need liability coverage to help protect you from footing the bill should you be responsible for any damage or injury. Beyond liability, what are you willing to pay to protect against the cost of loss? What is the minimum coverage required in your state and how does that compare to what you have? According to NerdWallet, the average cost difference between full coverage (comprehensive + collision + higher liability limits) and the minimum coverage in North Carolina is approximately $850 per year. In South Carolina, the average difference is approximately $1,000. These “averages” assume the driver has good credit and has no recent violations or accidents.
 
Do you need collision coverage, comprehensive coverage or both? The difference between the two coverages is based on the situations each covers. Collision insurance pays for damage to your car if you hit an object or another vehicle, while comprehensive coverage pays for theft or damage from causes such as severe weather, fire or fallen trees. Some insurers require that you purchase collision and comprehensive insurance together, while other insurers may allow you to purchase these two types of coverage separately. It is also worth noting that most lenders will require you to have both coverages if you have a loan against your vehicle.
 
As you start thinking about what you need, consider the current value of your car. For example, if you have a lower value older vehicle (and does not have a loan against it), does the cost coupled with the deductible for comprehensive coverage make sense given the value of the car? If a tree fell on your car and you had to replace that car, what would the insurance company/policy pay towards that replacement?
 
There are many other potential coverages that you can have for auto insurance. So how do you know what you should consider adding or what is worth keeping? The answer to this question depends on what is most important to you. Some of the additional coverages available are for things that you might be able to cover the cost for out of pocket. Start by asking yourself how does the cost you would pay out of your pocket compare to what you will pay for the coverage? Understanding the specifics of each additional coverage, what is covered and how it is covered, can make a big difference in the cost and the usefulness of the coverage.

​Here are a couple of examples:
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• Gap Insurance - This covers the gap between what the car is worth and what you owe on it. Given how the values of used cars have dramatically gone up, you should check to see what that gap currently is before electing this additional coverage. Double check that you do not already have this coverage provided with the vehicle loan.
  
  
• Roadside Assistance/ Rental Coverage - In your area, what is the average cost of getting a tow truck to come on a service call? How does that compare to the additional cost of this coverage, and what are the specifics of the tow insurance coverage? Unless you have access to an alternative vehicle for an extended period of time, auto rental insurance should be included with a daily rate of at least $45. This will ensure that you have access to a car if extensive repairs are needed on your car.
  
  
• Custom Equipment or OEM Endorsement - If you have any custom parts or modifications to your car, you may want to consider this coverage. How much would it cost you to replace or potentially repair your custom part? How expensive is the coverage? With the OEM (original equipment manufacturer) endorsement, how concerned are you with only having parts from the car manufacturer used on your vehicle to make the repairs? If other brands of parts are used, will that significantly impact the value of your vehicle? How does that impact to the value of your vehicle compare to the cost of the coverage?
  
  
• Minor Violation Forgiveness/Accident Forgiveness - If you are concerned with what a violation or accident would do to your rates, you may want to consider this coverage. Again, what does this coverage cost verses how much could it save you? What is considered a “minor violation” or a forgivable accident? Knowing the specifics of this kind of additional coverage is key.

 
Understanding what coverages you need and what you want can be helpful in comparing the costs alongside the risk of loss exposure. Once you decide what coverage you need and want, be sure to ask about those coverages/options when you are comparing companies and quotes. Knowing the price of specific coverages along with potential discounts you might be eligible for can help you more accurately compare costs. A company might have some good discounts, but if those discounts are hard to qualify for or maintain, that might be more effort than you are willing to give. When comparing companies and quotes, do not forget to ask if the insurer can provide you with other insurance (home, rental, umbrella) that could help you save on your overall insurance bill.
 
Liability Limits
The liability limits you have on your auto insurance policy are extremely important. While each state sets minimum limits, those numbers are typically exceptionally low, leaving you at risk for not being fully insured in an accident. Given the increasing costs of medical treatments and care, property damage repair, and the general litigiousness of our society, we generally recommend having at least $100,000 in property damage and $100,000 liability per person and $300,000 per accident. These limits need to be coordinated with your umbrella liability coverage, which provides additional liability protection. We encourage you to have a conversation with your insurance agent and any potential providers to get an idea of the amounts they recommend and why along with the variation in rates/costs.
 
Customer Service
Decide what kind of customer service experience you want. If you want to be able to speak with someone or be face-to-face with an agent versus only being able to communicate via email or a self-service website, make sure you understand what channels are offered (and the hours offered) by the companies you are considering. How has your current company been when it comes to any kind of service issues? Keep in mind that top rated insurance companies may or may not have a local agent. Regardless of what company you choose, if it is necessary to file a claim, it will likely be done through a 1-800 number. Be sure to ask your current agent and any company you are comparing how your agent or contact at the company would be involved (if at all) in any kind of claims process.
 
Summary
Reviewing your auto insurance coverage is something you should do at least every 18-24 months to make sure you are properly insured and covered for the risks you want covered. Understanding your coverage and making a deliberate decision to share a certain portion of the risk or take that risk on fully yourself is a key part of your asset protection plan and can definitely impact your cash flow. As part of your financial plan, make sure you are scheduling time to review and discuss your coverage with your agent and your covered family members.