Purchasing car insurance can seem like a difficult task. After all, many insurance companies offer insurance policies. And there are many types of car insurance coverage for sale. Sorting through all this information to put the right protections in place at a fair price can seem like a full-time job.
The good news is that there is only one thing drivers need to do when purchasing car insurance. Here's what it is.
Consider this an important consideration when purchasing car insurance
When purchasing car insurance, the only important question any driver should ask themselves is how much they can afford to lose.
You see, the reason this question is so important is because insurance is supposed to protect assets. Many people forget this in their quest for the cheapest coverage. As a result, they end up taking risks, such as missing out on the protections they need, setting policy limits too low or a deductible too high to be affordable.
By returning to this basic question, car insurance buyers can make more informed choices about the risks they want to transfer to an insurance company. They can make their coverage choices based on what really makes sense for their personal finances in the long term, rather than saving a dollar or two on premiums.
Here's how it can guide the purchase of insurance
So how can drivers put this into practice and determine how much insurance to buy based on how much they can afford to lose? It's simple:
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- Consider how much of the deductible is affordable. The car insurance deductible is the amount of money that must be paid out of pocket when a covered claim is made. If a driver cannot afford a $1,000 deductible, they should opt for a lower deductible, even if it means higher premiums.
- Determine whether it's possible to pay for a new car out of pocket. The average cost of a new vehicle now exceeds $48,000. A driver who cannot afford to replace their car out of pocket in the event of an at-fault accident should purchase collision insurance.
- Determine whether it's affordable to pay off the remaining balance of a car loan after an insurer pays fair market value. Insurers only pay out what a car is worth, while data suggests that almost 20% of people have negative equity in their vehicle (they owe more than the market value of their vehicle). A driver who cannot afford to pay the difference between what they owe and the value of their car should purchase gap insurance.
- Determine if paying for a rental car is affordable. If a car needs to be repaired due to a covered loss, most people will need something to drive in the meantime. If it's not affordable to pay the cost of renting a car (which averages over $100 per day), then they should add rental car coverage.
With each type of coverage offered, consider what it offers protection against. If it is a loss that would cause serious damage to a bank account and is simply not affordable, then purchasing insurance against this loss is the way to go. This should guide every driver in purchasing car insurance, so they can get the protection they really need.
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