Don't Fall for These 4 Auto Insurance Traps

Like gas and maintenance, auto insurance is one of those extra costs that comes with having a car. It can also be a confusing subject. There are so many car insurance companies and coverage options that it may be hard to decide what to choose.

The reason to get insurance in the first place is to protect yourself from potential financial problems, in the event of an accident. So it's important to watch out for auto insurance traps that could put you at risk.

1. Getting less coverage than you need

It's tempting to cut back on your car insurance coverage so you'll have lower premiums. This is fine if you have more coverage than you need. For example, if you have an older car that isn't worth much, paying for full coverage might not be worth it anymore.

But don't skimp on important coverages just to save some money every month. If you have a new car, you should get full coverage. You wouldn't want to be stuck paying out of pocket if it gets totaled or stolen.

Liability coverage is another area where it's not a good idea to go with the cheapest option. You may be able to get away with $30,000 in liability coverage to satisfy your state's legal requirements. But if you cause an accident that leads to $50,000 in damages, you could be sued for what your insurance doesn't cover.

2. Choosing a deductible you can't afford

Another way drivers reduce their premiums is by choosing higher car insurance deductibles. The higher your deductible, the lower your premiums, and vice versa.

A high deductible isn't necessarily a bad thing, but a deductible you can't afford is. You'll need to pay your deductible before your insurance company pays out for any damages. If you have a $10,000 claim after an accident, and your deductible is $1,000, you'll need to pay that before your insurance pays the remaining $9,000. If your deductible is $2,500, then you'll need to pay $2,500, and your insurance will pay the remaining $7,500.

This also determines the threshold for when your insurance will cover an accident. If your policy has a $2,500 deductible, that means you'll be paying out of pocket for any accidents costing less than that.

Whatever deductible you choose, make sure you have enough money saved to cover it. If you go with a high deductible, then you'll also need to have more in your emergency fund.

3. Letting your auto insurance lapse

A lapse, in auto insurance terms, is when you have a car without any insurance coverage. Your auto insurance can lapse if you miss a payment, although it normally doesn't happen right away. Insurance companies give you a grace period to get caught up. If you don't, that's when the trouble starts. Here are some potential consequences of lapsing on your auto insurance:

• You won't be covered in the event of an accident.
• Your insurance company may notify your state's Department of Motor Vehicles. This can lead to fines and even a suspension of your driver's license.
• You may need to pay higher rates when you get insurance again. Drivers who maintain continuous coverage get lower premiums than drivers who don't, even for a short period.
• If you currently have an auto loan or lease, letting your insurance lapse will violate that agreement. The lender could get insurance for you, which is usually expensive, or even repossess the car.

4. Lying to your auto insurance company

Insurance companies use the information you provide to set your premiums. Some drivers stretch the truth, or outright lie, to save money. They may underestimate how many miles they drive per year or omit a few pesky tickets.

You definitely shouldn't do this. It's fraud, for starters. If your insurance company finds out (and they tend to be good at it), it could drop you as a client. It might even decide not to pay out a claim if it determines that you provided false information.

All these auto insurance traps save you a little money upfront, but they could cost you much more down the road. There are plenty of legitimate ways to save on auto insurance, including shopping around regularly with the best car insurance companies, taking advantage of discount opportunities, and completing a defensive driving course. Stick to the safe methods so you can save while also having the coverage you need.