Is your car over-insured?


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The last time you met with your auto insurance agent, you had a lot on your mind: your next appointment, your grocery list, your yard work. So you nodded as he talked about low deductibles and roadside assistance extras and signed the contract before scrambling out the door. But now it's time to renew your policy, and as you browse through your paperwork, you begin to wonder if those high monthly premiums are a result of carrying too much insurance on your vehicle. But how do you know if you're over-insured?

Before we get started, remember that driving a car that's over-insured is preferable to being uninsured. Every state except New Hampshire requires drivers to carry liability coverage, which pays for injuries to passengers and damages to other vehicles and property when they cause an accident. Some states require additional forms of coverage to get on the road legally. Failing to carry these minimum amounts of insurance can result in penalties ranging from blemishes on your driving record to fines to jail time, and causing an accident without insurance can be financially crippling.

However, the amount of liability coverage the law requires you to carry might be lower than the amount you're paying for each month. For example, Florida requires its drivers to carry $20,000 worth of bodily injury liability coverage and $10,000 worth of property damage liability coverage -- meaning the insurance company pays these amounts for claims resulting from an accident that you caused [source: Florida Department of Highway Safety and Motor Vehicles]. If you're insured for $300,000 of bodily injury liability and $50,000 of property damage, you can reduce your coverage and probably pay a lower premium.

But whether or not this is a good idea depends on your financial situation. If you cause an accident and the damages exceed your coverage, a lawsuit could target your financial assets -- your home, salary and certain investments -- to make up the difference. However, if you earn a modest salary and have few or no assets, you can typically get by with less coverage [source: SmartMoney.com].

What are some other types of coverage you might not need on your car? Read on to find out.

Should I drop some of my coverage?

Beyond carrying less liability coverage, you can prevent your car from being over-insured by eliminating redundancies in your insurance policy. For example, personal injury protection coverage (PIP) reimburses for medical and funeral bills stemming from auto accidents regardless of who is at fault and is mandatory in only a handful of states. But if you and your passengers already have health, life and disability policies -- and you know they're likely to cover these expenses -- you should purchase the minimum amount of PIP coverage required or consider dropping it if your state law allows [source: SmartMoney.com]. Your insurer might also push you to sign up for extras like towing and roadside assistance, but if you have a membership with the American Automobile Association (AAA) or a similar group, these services are already covered.

If you drive an older car and have collision and comprehensive coverage on your insurance policy, you might consider dropping them. Collision coverage pays for damages caused to your car during an accident, regardless of your responsibility; comprehensive coverage pays for repairs stemming from vandalism, cracked windshields and other non-collision forces. These forms of insurance can make sense for newer models, and if you're leasing your car they might even be required. But an insurer will only reimburse you for costs up to the Kelley Blue Book value, which declines dramatically within a few years. If you decide to keep this coverage, take a higher deductible -- the amount you must pay out-of-pocket before the insurer will compensate you for damage -- to lower your premium. And according to SmartMoney.com, if the cost of this coverage totals more than 10 percent of its value and you can pay for damages if you cause an accident, you should consider dropping this coverage completely [source: SmartMoney.com].

It's also possible to be over-insured when you're behind the wheel of a rental. Look at the rental company's insurance policy and cross-reference it with your personal auto insurance policy. Chances are you don't need the extra coverage that the clerk tries to sell you, and you might even be covered by your personal auto insurance policy or through the credit card company you use to reserve and pay for the rental [source: Deane]. Confirm your insurance status ahead of time, and if you're not sure, purchase rental coverage anyway. As we said before, being over-insured is better than driving with no insurance at all.

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Sources

  • Deane, Michael. "5 Car Insurance Add-Ons You Don't (Always) Need." Investopedia. Feb. 25, 2011. (Apr. 25, 2012) http://www.investopedia.com/financial-edge/0211/5-Car-Insurance-Add-Ons-You-Dont-Always-Need.aspx#axzz1t4juUBdX
  • Florida Department of Highway Safety and Motor Vehicles. "Vehicle Insurance Questions and Answers: Involved in a Crash." 2009. (Apr. 25, 2012) http://www.flhsmv.gov/ddl/frfaqcrash.html
  • Fox, Eric. "Are You Over-Insured?" Mar. 3, 2011. (Apr. 25, 2012) http://www.investopedia.com/financial-edge/0311/Are-You-Over-Insured.aspx#axzz1t4juUBdX
  • Insurance Information Institute. "What is covered by a basic auto insurance policy?" 2012. (Apr. 26, 2012) http://www.iii.org/articles/what-is-covered-by-a-basic-auto-policy.html
  • Kiplinger. "Medical Payments: Coverage You May Not Need." June 2010. (Apr. 26, 2012) http://www.kiplinger.com/basics/archives/2003/03/auto2a.html?topic_id=3
  • SmartMoney.com. "How Much Auto Insurance Do You Need?" July 9, 2008. (Apr. 25, 2012) http://www.smartmoney.com/plan/insurance/how-much-auto-insurance-do-you-need-10731/