When you’re shopping for car insurance – something that’s a legal requirement in most areas when you own a car – one of the biggest questions that comes your way is whether or not you should have liability coverage or comprehensive coverage on your automobile. Liability insurance is usually cheaper, but comprehensive insurance covers more. Which is the right answer?
First, let’s look at what each type covers.
Liability coverage does not cover any damage to your own vehicle in the case of an accident. What it does cover is any damage done to other vehicles that you’re legally obligated to cover.
For example, if you’re in a traffic accident where you’re at fault and you damage another car, liability insurance kicks in. Liability coverage doesn’t typically have a deductible, meaning that if you have to use the insurance, nothing will come out of your pocket.
Comprehensive insurance goes beyond liability coverage. It covers the damage done to other vehicles, but it also covers damage done to your own vehicle, not just from traffic accidents, but from many natural sources. If your car is damaged in a storm, for example, comprehensive coverage kicks in.
When you make a claim on comprehensive insurance, however, there is usually a deductible, meaning you have to pay for some of the damage out of pocket (broken windshields are often an exception). Remember, though, that liability coverage is usually a part of comprehensive insurance – you get the liability coverage described above, along with the coverage of your own vehicle.
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Obviously, the monthly cost for liability coverage is going to be less than the monthly cost of comprehensive insurance. So, the real question is whether or not the additional benefits of comprehensive coverage are worth it.
For me, the question comes down to this: If your car were completely totaled, could you afford to pay off any remaining debt on it out of pocket as well as buy yourself a comparable car to replace it?
If you think about that question for a bit, it becomes pretty clear that liability works best in some cases and comprehensive insurance works best in other cases.
For example, if you’re driving an old car that’s fully paid for, basic liability coverage is probably the best option. You’re likely looking at auto failure in the next several years anyway, so an accident would just cause that failure to happen earlier. Also, considering that the deductible on the insurance (often $500 or more) would add up to a significant portion of the value of your car, even a claim on the insurance wouldn’t save you much money.
Also, if you have paid for any car and have a significant emergency fund, liability coverage is probably better. In this case, the difference between the monthly cost of comprehensive and liability insurance is significant. If you would be able to shoulder the cost of a vehicle replacement out of your pocket due to significant savings, I’d probably skip the comprehensive insurance.
Another situation that might push you toward liability insurance is easy access to public transit. If you use your car rarely and will be able to function without it for a while, comprehensive insurance may be unnecessary for you.
For most other situations, comprehensive insurance is probably a better choice.
For example, if you still owe a significant amount of money on your current automobile and you total it out, you’re still liable for that money plus you’ll need the resources to acquire another car. That can be a significant amount of money needed very quickly.
Also, most people do not have large enough emergency funds or cash reserves to simply go buy another car in a very short time frame. Many people are able to simply get a car loan, but even then, you’re putting yourself in a debt situation.
A final note: The savings of liability insurance should be yet another call to get your financial house in order. If you’re in a situation where you don’t have a significant emergency fund and are living paycheck to paycheck, the potential crisis that would arise from a devastating car accident can be troublesome and is likely pushing you toward comprehensive insurance. Without that pressure, liability looks like a better option and it has a lower monthly cost.
What about us? Right now, we have liability insurance on our older vehicle and comprehensive on our newer one, but we’re on the verge of switching them both to liability. This means lower monthly costs for us compared to running comprehensive insurance on both. We’re able to make that choice because we’re careful in other financial areas and have a very healthy emergency fund.