Four Auto Insurance Tips

There's no shortage of reasons why you need auto insurance. What may not be clear to car owners, however, is what to look for when buying it. Know the basics, and you'll begin to see there's potential for serious savings.

For the vast majority of road warriors, auto insurance is a given. The chances of an accident occurring are simply too great to drive your car unprotected. Beyond the travails of the highway, there's also the chance that a storm could dump a tree branch on your windshield and cause serious damage.

Yet as ubiquitous and essential as auto protection may be, most people don't understand the simple fundamentals of insuring their wheels. These four tips will steer you toward the proper protection.

1. Know where your agent's bread is buttered

Insurance agents have a built-in conflict of interest. Whether they're independent or not, they're aligned with insurance companies. These firms make their fortune by providing the minimum amount of insurance (reducing their exposure) at the maximum price (increasing their profit.) As a result, an agent often earns more commission by selling smaller policies, a conflict of interest that leaves many people under-insured.

2. Understand the basics

If you can't count on your agent, then you must learn some basic facts about car insurance. Liability coverage will handle the costs of another person's car damage and injury. Collision insurance takes care of damages to your car if you hit another car or an object. Finally, comprehensive protection covers damages that occur if your car suffers weather-related damage, catches fire, or is stolen. The amount of protection you select is based on the year of your car and how much it's worth.

3. Downsize your deductible

A deductible is an insurance company's way of reducing their claims payouts. They want you to handle the minor fender benders, while they use the pooled insurance money to cover the bigger amounts. It explains why your premium becomes less expensive when you choose a higher deductible. A good deductible is right around $1,000. Choose an amount much lower than that and you anger the insurance gods, who may hike your premium in response.

4. Umbrella policy for added protection

Car insurance doesn't always cover the extensive damages that can result from severe accidents. To protect yourself from significant property damage and medical bills, choose an umbrella policy. Relatively inexpensive, the premium for $1 million in coverage is generally around $100. (The premiums are affordable because payouts are so rare.) Check with your financial planner regarding your net worth. You'll want to align that number with the size of your umbrella policy.

These four tips are designed to put you in the right mindset as you search for auto insurance. Remember the agent's motives, and take a careful look at your own financial picture before you make any decisions. The more you understand about how auto insurance works, the easier it will be to purchase the appropriate amount.