The following is a guest post written by my good friend Jim Wang. For those of you who aren’t familiar with Jimmy, he’s a brilliant entrepreneur and blogger. In my opinion, Wang is a star. He is the creative genius behind a number of successful businesses and whenever I have a business problem – I go to him for a solution. I asked Jim to explain how to save money on auto insurance and here’s Mr. Nova’s advice.
All throughout high school and college, I never owned a car.
So imagine my shock when I got my first car, at 23, and found out it would cost two thousand bucks every single year to insure it.
So I had to find out why. I researched every line item, found out what I could cut or reduce, and discovered a few strategies you can use to lower the premiums without sacrificing too much.
How Auto Insurance Works in 30 Seconds
Automobile insurance is actually quite simple. It consists of three major coverages – liability, comprehensive, and collision. In simple terms, liability covers the damage you do to others and their property, comprehensive covers damage and loss to your vehicle in a non-collision scenario, and collision covers your vehicle in an accident.
There’s also a deductible, the amount you have to pay out of pocket before insurance kicks in.
The key to lowering your policy premiums is to assume as much risk as you’re comfortable with. It’s self-insuring a part of your vehicle so you don’t have to pay the insurance company.
How do you do that? There are two main ways.
Increase Your Deductible
The simplest way to self-insure more of your coverage is to increase your deductible on your comprehensive and collision coverage. If you have to pay more out of pocket for each claim, then you’ll pay the insurance company less.
Deductibles often start at $250 and can go as high as you want. Ask your agent how much your premium drops with each change.
Decline Comprehensive and Collision Coverage
If you want to save a significant amount on your insurance, you should consider removing comprehensive and/or collision coverage alltogether. Technically, you’re electing for a really high deductible ($999,999).
When I was in my early twenties, declining comprehensive and collision lowered my insurance cost by over 50%. Instead of close to $2,000 a year, it dropped to under $900 a year.
Neal’s Notes: Make sure to re-evaluate this decision each year. As your ride ages, you need less and less comprehensive insurance because the car itself is worth less. Most people overlook this and needless pay higher premiums. Don’t fall into that trap Pilgrim.
This makes sense, my vehicle has zero protection. If I get into an accident, I’m completely responsible. If my car gets stolen, I’m completely responsible.
The premiums go down because the coverage went down. I’m self-insuring. I was able to save nearly a thousand dollars a year and put that in a savings account.
This is only an option if you own your car. If you financed your car, the terms of the loan often require you to keep comprehensive and collision since the car is collateral for the loan.
Next, you have a few other strategies you can use to get the price down even more.
Be Comfortable Shopping Around
Like any other major purchase, shopping around is the best way to learn whether you’re getting a good deal or not.
I shop around my insurances every few years, or with every major life change, just to make sure I’m getting the best deal. Oftentimes, I’m able to bring quotes back to my current insurance company and they’ll maintain competitiveness in pricing.
Why should you shop around if nothing changes? Sometimes the actuaries, the folks who set rates at different companies, make decisions about the riskiness of certain geographic areas, demographics, and other risk factors. Sometimes your credit score improves and you become less risky.
Decline Emergency Road Service, Rental Reimbursement, etc.
These extra insurances cost a few bucks every six months but they’re usually redundant. You’re paying for a benefit you already have.
Let’s take emergency road service – it’s a benefit on most major credit cards. Just call up the credit card and they’ll set you up with a nearby company who will bring you gas, tow your car, and whatever else you might need. This is the same exact process as your insurance company.
The only difference is that with your insurance company, they’ll cover a certain amount of service before you pay (usually less than $100). With the credit card, they’ll arrange for service but you will pay out of pocket for the work performed.
How often have you used roadside assistance in the last year? I’ve never used it. In 10+ years of driving, I’ve never needed it.
Join an Affiliated Association
Back when my vehicle was insured by GEICO, I was able to get a discount on my premiums if I was a member of affiliated associations. One of them was the National Military Families Association.
The NMFA is a great organization doing good work, open to everyone, and the annual membership fee is $15. I joined, told GEICO, and was immediately rewarded with a discount on my premium far in excess of the annual membership.
Call your insurance agent and see if there are any benefits you may be eligible for if you were to join an organization, take a defensive driving class, or some other similar activity.
There are a lot of discounts out there and the key is to just ask your agent. They want to keep your business and have no problems sharing this information with you.
Those are just a handful of ways you can reduce your auto insurance premium while still maintaining an adequate level of protection.
There is no free lunch though, reducing your premiums means taking on more risk. You’re still protected against a catastrophic event but some of the smaller, expensive minor problems will be yours to bear if you take steps like reduce comprehensive coverage.
Just make sure you boost your emergency fund and keep the savings safe in case you need them. You can use these and other strategies to save on car insurance but don’t stop there. The same tips can help take a huge bite out of other insurance costs as well.
Jim Wang shares his unconventional but devastatingly effective strategies and tactics for getting ahead financially and in life on WalletHacks.com. To get access to exclusive bonus material, including the Wallet Hacks Money Toolbox, sign up for the newsletter!