We have a question. He says, “What is your take on comprehensive versus liability-only auto insurance? My wife came from a family that did comprehensive while mine only did liability.” He also adds, “My dad was an attorney, which maybe gave him some extra feeling of protection if he ever got sued. Is that a factor? I don’t know, you guys can talk about it. What are your thoughts? My dad’s a lawyer, we’re comfortable.”
This one’s really interesting. I’ll leave a lot of the meat for you because one of the interesting things is if you’re doing all the stuff in your financial life that you should be doing, right? You’re saving, and you have your risk management in place. One of the things you’re going to do when you go to risk management, if you are someone who has assets built up, or you have earning potential, or you have high income, there’s a really good chance that you should carry umbrella insurance. You’re like, “Bro, I’m asking about auto insurance, why are you talking about umbrella?” Well, umbrella insurance is insurance that sits on top of your other policies – it sits on top of your auto, sits on top of your home – and it’s really, really inexpensive. You can get, like, seven figures of coverage for, like, very, very cheap, like $100, $200, $300 a year, so it’s not incredibly expensive coverage. Well, one of the requirements the insurance companies will often do in order to give you an umbrella policy is they may make you raise all of your auto policies to the full limit. So the decision between doing comprehensive or liability only a lot of times, if you’re doing other things, may not even be a decision you get to make because if you want to carry the other types of insurance that you need, you’re going to have to carry the full limits. But if that’s not the case, if you’re not someone falling into that scenario, bro, what’s the general guidance that we give to someone? Okay, when does liability only make sense, or when should I go and carry comprehensive to cover everything?
Well, there are two things. I’ll first speak to David, then I’ll give my own experience sharing this. David, the reason you might have only had liability but your dad being an attorney, actually everybody, liability, that’s what it sits out there to protect you from if you hit into somebody, or you get into an accident. That whereas the comprehensive is really to protect the replacement or the cost of repairing the vehicle. So when I hear that and your dad was an attorney, it might be just because y’all could self-insure. You know your dad was more worried about the liability of being in a car accident versus the cost of replacing the vehicle. But for a lot of people, especially if you’re driving a newer car, that replacement component is going to be very expensive. It could be catastrophic if you were in a car accident, you need to replace it. So that’s why we do comprehensive, so it not only protects you from the liability of being in a car accident but also replaces the equipment for you. That’s a big thing. Now, I grew up on the other side of it where we only rode around with liability because my dad was a mechanic. You know, my brother and him restored a bunch of old classic cars, my dad could fix anything. I’ve watched him change engines in the driveway and do all kinds of other crazy stuff, so we only had liability because we drove around a bunch of clunkers.
If you drive a car for 12 to 14 years, like a lot of financially savvy people do, there will come a threshold. When you bought that car brand new, without a doubt, you knew to do comprehensive. Because the cost difference between comprehensive and just liability only is going to be like, “Man, for a few hundred dollars more, I can protect myself from the risk on this forty thousand dollar vehicle.” It’s all about risk management. Fast forward, you’ve driven this car now for 10 years, it’s worth $4,500. But the insurance company is charging you $800 a year. The difference in price, I’m just making numbers up, but you can quickly say, “Wait a minute, does this make sense? I can self-insure the loss of this $4,500 car versus paying the extra $800 a year premium.” That’s when it will turn into a financial decision. At that point, David, that’s the way I would kind of look at it. What’s the actual vehicle you’re driving? What’s the cost to replace it versus the change in annual premium between the two different coverages? And then use the critical thinking skill as a financial mutant to figure out what’s the benefit and what’s the risk that you’re insuring and protecting yourself from. Love it, fantastic.
Same thing could happen to your homeowners’ deductibles. If your spouse is going to run into the garage with the side of the car and you’re going to self-repair it, raise your deductible. Because that’s the exact same when you’re talking about risk management insurance. We’re really talking about how much of the exposure you’re willing to self-pay for versus how much you want to push off towards the insurance company. So it’s not only just on comprehensive versus liability with your cars. You can also look at the deductible on your homeowners’ and if you’re not going to hire somebody or hit them, because by the way, there are a lot of reasons you should not hit up your homeowners’ policy too frequently, because they will cancel you. We know people see your auto policy as well, your auto. So you probably want to make sure your deductibles reflect what you really think the financial exposure you’re willing to absorb is. Because it will save you annually on your homeowners’ as well as auto insurance, and it’ll actually reflect how you plan on using the insurance.
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