In this episode of FTFP, hosts John Scherer and Bridget Sullivan Mermel dive deep into the importance of comprehensive and collision insurance for your vehicle. They explain what each type of insurance covers and discuss when it might be necessary to have them. Furthermore, they explore the broader landscape of auto insurance, including liability coverage and how to determine the right amount of coverage based on your assets and lifestyle. This informative discussion is essential for anyone looking to understand more about protecting themselves and their vehicle financially.
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John's firm website: https://www.trinfin.com
Disclaimer: The information provided in this video is for general informational purposes only and should not be considered as financial advice. Please consult with a financial advisor for advice tailored to your individual circumstances.
TRANSCRIPT:
Bridget: John, we've been reviewing clients’ insurance this spring, and I got a question about comprehensive versus collision insurance, exactly what that is, and do I need it? So I thought it would be a great question to ask you, too. What do you tell people? And then we'll go into a broader discussion of auto insurance. What do you need? What do you not need? Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we dig into car insurance, I want to remind everybody to hit that subscribe button. We're trying to get to a thousand subscribers, and you can help us with that cause. So with that, let's dig in on insurance. This is one of the nuances of financial life. It's not always the most exciting one, but it is really critical to make sure that you have it. Most people have it; you should have it. But then who really understands what they've got and how it works, right?
Bridget: And sometimes people don't have enough. I’ve found that more people don’t have enough than have too much. Okay, so comprehensive and collision. Collision. Let's start with that. It covers if you have a collision.
John: Haha. Thank you.
Bridget: And if you run into a road object. In Chicago, they've put up all these pedestrian signs in the middle of the road and, jeez, you see them go over all the time. I'm sure people driving down those main streets in the middle of the night don't necessarily see those or are not as mindful. So that would be a hazard that you might hit.
John: Yeah. And what we're talking about, both comp and collision are similar in that what you're protecting is the value of your vehicle. We've got the liability coverage, which is a separate, but it's part of your auto insurance. You might say, “What about my auto insurance?” Well, there’re two different parts. Comprehensive and collision are similar. One collision being literally when you're in a collision, the other one, comprehensive. So what does comprehensive cover then?
Bridget: Everything else.
John: Everything else.
Bridget: If a tree falls on your car, hail damage.
John: Those sorts of things. Personally, one time we parked near a construction site and concrete splattered off the thing they were pouring and all over the car. So that's the sort of deal.
Bridget: Right. The chances of that are minimal, but guess what?
John: Exactly.
Bridget: And I would say that with one exception, it's kind of an all or nothing. Get both or get neither. And the exception is if you owe money on the car. So if you have a loan or if you have a lease, I would say you're going to want that.
John: Well, you need both, right?
Bridget: Yeah.
John: I always view those as sort of a package deal. Here's how I think about it. And we always tell people to talk with their insurance agent. Those folks are the experts. Our sort of sales pitch or our conversation with clients is that nobody has ever really talked with them about their insurance. It's not trying to sell more insurance. We don't care. We're not giving them a specific recommendation. But let's talk through what we've got. Let's look at some other things. We see a lot of different things, so we can discuss what questions to ask your agent.
For example, should I do this or what should my deductibles be? That sort of thing. Car these days can be crazy amounts of money: $30,000, $50,000, $70,000. If I'm in an accident or a tree branch falls on it or concrete spring sprays over it, that doesn't ruin the car, but you got some of these things that I would want that to be replaced, and I just don't have $50,000 sitting in the bank to replace this vehicle.
So the replacement factor is important as we think about things like, I've had an accident or something happened to my car, and then at some point, depending on how long a person keeps a car, things might change. Personally, I will keep cars until they give up the ghost sort of thing. And the last car I traded in was the first one that had any actual real value to it because the other ones were bound for the scrap peep sort of thing. So, geez, when a car is worth a couple thousand bucks, if a tree branch falls, am I really going to fix that 13-year-old thing?
Bridget: And will it give you enough to get the value of a $2,000 car?
John: Right.
Bridget: They're not going to say, “Oh, a tree branch fell on your car. Here's a $50,000 vehicle.” They'll only get you to the $2000.
John: So those are the places where at some point it doesn’t make sense. But what's the right number? I think that’s the question.
Bridget: What's the point for you? And this is interesting to me because I've always said $5,000. If your car is worth less than $5,000, then don't have it, which I still think is true. Yeah, definitely true of $5,000, but I think with inflation…
John: $10,000.
Bridget: Yeah, it might go up to $10,000, because there's not that many cars. I mean cars are just worth more these days because there's a decent used car market, and we've had some inflation. So I would say somewhere between $7,500 and $10,000 you might get rid of it.
John: That's about the right number. I’ve been $5,000 for a long time now. But now it's the range of $7,500 to $10,000. And that's where again, you should talk to your agent and ask, “Hey, does it make sense?” Maybe in some cases it does. Back in the old days we'd look at some of those things. You go, “Golly, you're spending a bunch of money that's just not really that useful.” Now, does it save you $50 a year? You go, “Well, geez, maybe I'll still keep that stuff even if there's not a huge deal.” If it costs me $300 a year and I'm going to get $2,000 out of it, I go, “Alright, that's not a good trade off.” But if it's $50, maybe it makes me feel more comfortable.
Bridget: Yeah, that's true. But one thing I always say is that most people don't review their insurance policies every year. They review them about once every five years. So if the insurance agent says, “Oh, you'll only save $150,” to me, it's like $150 times five because I'm not going to review this again. So it's not just the $150. The other factor I would say is we like people to have a nice emergency fund.
John: Yep.
Bridget: And that helps if I have to pay out $10,000 because something fell on my car. But if for some reason you don't have a nice emergency fund right now, then it might make more sense to keep the collision and comprehensive until you do.
John: Yep. I think that that's a great sort of segue into things and thinking about, what is insurance for? It's for a low probability. Chances are you're not going to get into an accident, the tree branch isn't going to fall, but if that thing happens, it's a high impact thing. And if my vehicle's worth $2,500, it's not that high of an impact. If I have a safety net, if I've got the liquidity, I can self-insure that. If it's a $50,000 brand new vehicle, geez, I'm not willing to soak up that level of self-insurance on things. And the same thing transfers over. As we talk about car insurance, globally speaking, comprehensive and collision is one part.
The bigger and more important part really is the liability coverage. And that's usually expressed in terms of thousands. You'll see 150/300 or 250/500 in thousands, $250,000, $500,000. And that protects you against liability. I'm in an accident, I'm at fault, I get sued, and I've got coverage for a quarter million dollars and usually it's per person and then per occurrence. So a quarter million dollars per person and half million dollars per accident. That's the big thing. I don't have half a million bucks sitting in my checking account ready to make a payment in case I've got that sort of liability. I should have $5,000 in my checking account if I need to buy a new car or replace that value.
Bridget: Exactly. So if there's major damage either to a person, yourself or somebody else because of a car, that's a more important type of insurance. Again, less likely to happen, but it could potentially be a lot more costly. And this is a place where I see people that are underinsured; that they should actually have more insurance than they do. So what you want to do with this 100/300 or 250/500 is find out what your net worth is and think, “I want to make sure I cover my net worth.” And so, if you're just starting out, 300 can be fine, but if you've got more, the 500 I think is going to make you feel better. And you might even want an umbrella policy on top of that, which is a subject for another episode.
John: Yeah. And that's what we talk about too, just making sure you have enough on that liability side. And, you know, for most of us, what things do we do that put other people at risk? Can somebody walk up my sidewalk and fall down and break a leg if I don't shovel the walk? It's not impossible, but the likelihood of that and the impact on that's pretty low, relatively speaking. When I drive to and from work every day or to wherever I go and I'm driving that two-ton vehicle down the road, those are the places where my real risk is. And that's where, for me anyway, I want to focus and where I think most people should focus, asking, “What's the potential damage?” Things can happen at home or other places, but it's when you're on the road that in today's world is really the big risk from a net worth standpoint.
Bridget: Yeah. And I would say it a little differently. When people come over to your house, you never know what they're going to do. And a lot of times people have dogs and they're unpredictable, too. There’re two risk areas in your life generally, and that's your car and your house. So that's covered by auto insurance and homeowners’ insurance. And the liability issues are the most important part of auto insurance, I would say.
John: Yeah.
Bridget: It's more important because, again, it's low risk that something's going to happen, but it could be potentially very high cost, so it’s higher than the cost of the vehicle, so cover that. And so, I would say that that's the thing to focus on, making sure you have enough. And I know that in Illinois there's a law that you have to have auto insurance, but the minimums are not that high. But it's something. That's good; I'm glad they have a law. But when I've looked at the policies of younger people, they just weren't high enough. So just so you know, if you're getting the minimum policy and you're not just starting out, meaning you've accumulated a little bit of money, it makes sense to think about getting more on the liability part of the auto.
John: And I'm on the same page. Again, talk to your agents about how much liability you can get and what are the costs? It's one of those things where you hate paying too much for insurance, but you also hate having not enough when suddenly you're facing a lawsuit.
Bridget: Exactly.
John: Well, great. I think that's a great place to wrap things up here. Again, I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. We're both proud members of the Alliance of Comprehensive Planners. We're both taking clients, but if you're interested in finding advisor in your area, you could check out acplanners.org.
John: And don't forget, hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.