Comprehending What Comprehensive Automobile Coverage Actually Covers
Q I’ve always been an insured driver, but I only have liability and uninsured motorist coverage. I’ve never had collision or comprehensive coverage, even on new cars. I reason that I’m a good, safe driver and unlikely to cause any accidents that would damage my car--which is what collision and comprehensive are designed to cover.
If the other driver causes the accident, his liability insurance has to pay--or if he’s uninsured, my uninsured motorist coverage kicks in. Am I missing something? Or is this a smart way to save money?
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A You’re missing a few things. For starters, comprehensive coverage insures you for non-collision losses such as if a tree falls on your car or a thief decides he likes your wheels. That coverage has nothing to do with your driving ability.
And most people overestimate their driving ability. Even the best drivers on the road--police and highway patrol officers, who are trained for the most challenging conditions--still occasionally get into accidents, although at a far lower rate than the populace at large. Anyone can get momentarily distracted at the wheel, and the consequences at 65 mph can be disastrous. And 65 mph is the fastest you’d ever go, right? Being the good, safe driver that you are?
There are many better ways to save on insurance. Shopping among several different companies is one way to start. Raising your collision and comprehensive deductibles to $500 or even $1,000 could also save you a lot. The sting of that co-payment would be an appropriate consequence of any driving mishaps, but it could be far less than the financial risk you may be running now.
Of course, if you can afford to buy yourself another car if your current one gets wrecked, dropping comprehensive and collision coverage can make sense. If you have to take out a loan to buy your next car, however, plan on paying for both kinds of coverage. Most lenders won’t give you a loan if you don’t have collision and comprehensive coverage in addition to liability insurance.
All the More Reason to Save
Q I would like to start saving for retirement and other goals, but I work in the film industry and my income is very erratic--six figures one year, four figures the next. Well, maybe not quite that bad, but you get the idea. Last year I was out of work for almost six months, which really took its toll on my bank account and my credit cards. Now I’m making good money again, but I’m reluctant to use the cash that I’ve saved to pay off my credit card bills, fearing that I could be out of work again soon.
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A Use your cash to pay off your credit card bills. If you lose your job tomorrow, you’ll be able to run up your credit cards again if necessary.
You don’t want to be paying interest when that money could instead be going toward building a solid financial situation.
Here’s the plan: Hunker down and live like a monk until you have savings equivalent to six months’ worth of basic expenses; a year’s worth would be even better. This pile will give you freedom from worry when your current contract ends and allow you to be choosier about your projects.
Even when times are good, it’s important to keep your overhead down. Don’t succumb to the temptation to lease a fancy car or to take on other debt, because you’ll face crushing bills when the paychecks stop.
If fact, when the money’s rolling in, stuff as much as you can into retirement accounts. If you’re self-employed, you can open a Simplified Employee Pension, and put in as much as 13% of your net earnings. Or you could open a Simple, or Savings Incentive Match Plans for Employees, another type of tax-favored retirement account, which lets you put as much as $6,000 a year aside. Or you could open a Keogh account, but if you decide to go that route, make sure you choose the type of Keogh that gives you flexibility to fund it or not in any given year. If you’re in a union, definitely check out its 401(k) or other retirement plans and contribute the maximum possible.
Your investments--especially ones outside retirement plans--should be on the conservative side, since you may well have to tap them should your career goes into an extended funk. (You want to avoid these at all costs--the funk and the tapping--but they may happen someday.)
Balance your stock investments with a hefty dose of bonds, bond funds and cash; a mix of 60% stocks, 30% bonds and 10% cash might be a good way to start.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
