Optimizing Capacity in Your Auto Insurance Policy

For many people, structuring their auto insurance policy comes down to obtaining the greatest amount of coverage at the lowest cost. And, because auto insurance has become commoditized, the focus often shifts to the premium amount as the primary point of comparison, which is fine as long as you don't lose sight of what it is you are trying to protect. Paying a $1,000 deductible for a dented bumper, while inconvenient, is not a game-changer for many people; but a liability claim of $500,000 or $1,000,000 is a game changer - a life changer actually. So, the objective of auto insurance coverage should be to provide the maximum amount of protection against that which poses the greatest threat to our good life. In this hyper-litigious society, a $20,000 collision claim is really the least of our worries.

It's not uncommon for people to focus first on the collision and comprehensive components of their auto insurance policy. After all, when we think of the risks of driving, we tend to envision our car colliding with another car or being stolen. And, because we need to pay a premium each month for insurance, it seems only right that we shift as much as the financial responsibility as possible to the insurance company. So the tendency is to choose the lowest deductible. Because collision and comprehensive coverage are the most expensive components of an auto insurance policy, a lower deductible will increase the premium cost.

Interestingly, if you ask the average person whether they would actually file a claim for, say, an $800 collision when they carry a $500 deductible, many would not. The reason is that claims of this sort can have the effect of increasing your insurance rates, and if multiple claims are filed, you risk the possibility that your insurance carrier will cancel your coverage. So, these people are paying a premium on a strategy that they are not likely to use. That doesn't make sense. If they are willing to take on more of the financial risk, then why not just increase the deductible?

A higher deductible on your collision and comprehensive coverage can result in significant premium savings which can be redeployed to the liability portion of your coverage. Most people can manage a $1,000 deductible payment, but they couldn't manage the risk of multiple liability claims, so it would make more sense to protect against the risk that can cause the most harm. This would also include obtaining the maximum amount of uninsured/underinsured motorist coverage. We need to protect ourselves from others to the same degree we protect them from us.