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Foolish Advice on Auto Insurance

Welcome to another edition of our series aimed at helping you, our Foolish readers, better understand the varying types of insurance you may want to purchase. This week, we move from the high-stepping world of life insurance to the hard-driving market for auto insurance.

What it is
When it comes to insurance, it doesn't get more straightforward than an auto policy. Or at least, that's how it should be. Auto insurance, put simply, covers damage when you suffer an auto accident of some sort.

How much you get paid depends entirely on your policy. Some, for example, will include medical reimbursement costs. More often, though, you'll either be subject to the collision or comprehensive clauses in your policy. Collision coverage is for those awful days when you hit a vehicle while driving, or vice versa.

Comprehensive coverage is for just about everything else. For me, comprehensive coverage came in handy years ago when my car was parked outside during a massive hailstorm at Denver International Airport. A shop authorized by the insurer made the repairs.

But they didn't pay for everything. I paid the portion uncovered by the deductible. What's a deductible? It's a damage limit that must be satisfied before the insurer pays a dime. So, for example, if your car experiences $5,000 in damage in a collision, and your policy sports a $1,000 deductible, you'll be responsible for paying the first $1,000 out of your own pocket.

What should you buy?
And that's usually it. But as with life insurance and disability insurance, there are riders that can cost you extra money. Perhaps the most common feature is liability coverage, which offers you legal cover if you're the perpetrator of a crash that causes an injury to another driver. That could prove to be very comforting in the event of a lawsuit. As fellow Fool David Jacobs, who is also a trained auto technician, says, "If you're a well-dressed, well-spoken person driving a late-model car, someone might rear-end you and look at you as a free ticket to litigation lottery. A good liability clause means that the miscreant will have to deal with your insurance company rather than you."

Other common protections include rental car allowances and towing coverage, which may already be offered by your dealer if you own a newer vehicle. And, if not, a membership in the Automobile Association of America will typically cost you just $60 to $100 a year and provide the same service, plus travel discounts.

Three Foolish questions to ask before you buy
Of course, the law typically requires auto insurance if you drive. And it's absolutely worth the price. The National Highway Traffic Safety Administration says that traffic crashes tend to cost Americans an average of $820 a year, thanks to more and more vehicles being on the road -- 243 million in 2005, the NHTSA reports.

Nevertheless, you want to be sure you're paying for only what you need. Here are three Foolish questions to ask before you invest in a new policy:

  1. Do you own your car? Among the many drawbacks of leasing is added insurance. Since you're not the owner -- the dealer is -- you're likely to need both collision and comprehensive coverage. Liability insurance may also be required. Owners, on the other hand, have much more flexibility. For example, now that we own the title to our oldest vehicle, I've all but eliminated comprehensive coverage. That's created hundreds in premium savings.
  2. What other insurance do you have? Foolish community member yddeyma pointed out in a post to our Living Below Your Means discussion board that some policies overinsure you: "A lot of people don't know this, but many policies come with wage earner disability, disability, and death benefit coverage. You don't need this if you already have disability insurance (which you should) and life insurance..." That's good, money-saving advice.
  3. What sort of state do you live in? Not all states are equal when it comes to auto insurance. Some, for example, require that you carry an "uninsured motorist" rider to protect the insurer in the event that you're involved in an accident with a driver carrying no coverage. Pay for coverage like this only if you must have it. (For more about the insurance requirements of the state in which you live, visit the National Association of Insurance Commissioners.)

Follow the money
Auto insurance is a deceptively simple product; don't be small-f fooled into overinsuring yourself. Check your policy, check your state requirements, check your record, and then use the Internet to check rates. You're likely to find a hidden fortune that will do more for you in an emergency fund or a retirement account.

Have other money tips? Tell me. I'm writing new articles on personal finance and investing basics every week as part of our new money management service, Motley Fool GreenLight. It's tailor-made for Fools like you who aim to take control of their financial destiny. Click here to learn more.

Fool contributor Tim Beyers, ranked 1,622 out of 13,432 in Motley Fool CAPS, says to stay tuned for next week's coverage of homeowner's insurance. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get a peek at everything he's invested in by checking Tim's Fool profile. The Motley Fool's disclosure policy is like insurance for your portfolio.


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Tim Beyers
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Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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