Auto Insurance: Avoid Unnecessary Coverage And Save Money

Auto insurance is a legal requirement in most states, but there are some types of auto insurance that are unnecessary. While auto insurance is important for financial protection, there are certain add-ons and coverage types that may not be worth the extra cost. For example, gap insurance, which covers the difference between what you owe on a car loan and the vehicle's value if it is totaled, is often unnecessary as it has low loss ratios and may benefit the insurance company more than the consumer. Rental car insurance is also unnecessary for those who rarely rent cars, as the cost of renting a car is relatively low. Another type of insurance that is generally not worth purchasing is auto medical payments coverage, as health insurance usually covers significant medical expenses resulting from car accidents.

Gap insurance

For example, imagine you have a serious accident and your car is written off. You have collision insurance, but your car is only three years old and its actual cash value is $20,000. However, you still owe $25,000 in payments. Gap insurance will cover this difference, minus your deductible.

The cost of gap insurance varies depending on factors such as the current value of your car, the state you live in, and your previous insurance claims. It can be purchased at a flat rate from lenders and dealerships, or at a lower rate from an insurance company.

While gap insurance can provide valuable protection, it is not necessary for all drivers. If you own your car outright or owe less than its current value, you do not need gap insurance. Additionally, gap insurance does not replace standard car insurance coverage, which is still required to protect you and your vehicle from unexpected events.

Rental car insurance

When You Might Not Need Rental Car Insurance

Additionally, if you have personal injury protection or medical payments coverage, you likely won't need personal accident insurance offered by rental companies. Your health insurance may also cover you in the event of an accident.

Furthermore, if you have a homeowners or renters insurance policy, it will generally cover your possessions if they are stolen from a rental car, so personal effects coverage is often redundant.

Credit cards may also provide rental car insurance if the rental is paid for with the card, though this is usually secondary coverage, kicking in after your auto insurance policy limit is reached.

When You Might Need Rental Car Insurance

There are several situations in which purchasing rental car insurance could be a good idea:

• If you don't have your own auto insurance policy or coverage through a credit card.
• If you're travelling overseas where your personal auto policy won't cover you.
• If you want to avoid paying a deductible or higher rates on your auto insurance in the event of damage to a rental car.
• If you're renting a luxury vehicle that your insurer won't cover.
• If you're renting a vehicle for business purposes, as your personal auto insurance may not cover this.
• If you're renting a vehicle more than average and don't carry your own auto insurance policy, a non-owner car insurance policy might be a good idea.

Collision insurance

The cost of collision insurance varies depending on factors such as the driver's age, gender, marital status, and driving record, as well as the vehicle and location. According to data from 2019, the average annual cost of collision insurance in the US was $381.43, with South Dakota being the cheapest state and Washington, D.C. the most expensive.

When deciding whether to purchase collision insurance, consider the value of your vehicle and subtract your deductible. If the annual premium is less than 10% of your car's value, then collision insurance is recommended. For older or less valuable cars, it may not be worth the cost.

Extended warranties

In addition, extended warranties often come with high upfront price tags, which can be a burden, especially if you never need to use the coverage. The quality of these warranties can vary, and there is a risk of dealing with shady players and scams.

Instead of purchasing an extended warranty, you could consider saving money each month for unexpected car repairs or investing in a good medical coverage policy. You could also look into mechanical breakdown insurance, which is a type of auto insurance that covers the cost of repairing a vehicle that has suffered a major mechanical failure.

Therefore, while extended warranties can provide peace of mind and protection against unexpected costs, they are often unnecessary and there are more affordable and comprehensive coverage options available.

Credit card loss insurance

Credit card fraud insurance is another type of insurance that you don't need. Federal law limits your liability for all purchases made on a stolen card or for erroneous charges. There is no need to buy insurance to protect your credit card provider from their own inability to carefully monitor for fraudulent activity.

Instead of paying for credit card loss insurance, you could put the money you would have spent on premiums into an emergency fund. That way, you'll have a financial buffer if your credit card is lost or stolen, and you won't be paying for unnecessary insurance.

Additionally, if you're concerned about the hassle of dealing with a lost or stolen credit card, many credit card companies offer free services to help you cancel your card and order a new one. So, you can rest assured that you're protected and don't need to waste money on unnecessary insurance.

Frequently asked questions