Insurance is a tool, that allows people to assume a necessary risk, by spreading their cost over a wider basis. The costs can be significant, and sometimes minor changes can mean major savings.

Insurance companies are in business to make a profit. They are experts in the field of risk management. Risk management is a skill not as often seen outside a formal business environment. Most people pay handsomely to have risk managed for them. This trend is expanding drastically as the costs of vehicles continue to rise.

Insurance is a sizeable portion of the average family’s budget. It is a necessary expense, but safe drivers tend to subsidize the rest. Responsible drivers can cut costs by reducing unnecessary coverage.

Understanding risk and management

To an extent, insurance is a bit like a casino. A lot of people spend money, hoping to win, or at least avoid a loss. Insurance rewards those with losses at the expense of those without. By understanding risk and managing our exposure, we can better use money previously spent on insurance.

People do not need to insure against every risk, only those they cannot afford. A good question to ask is, can I afford the worst-case scenario. When the answer is yes, there is no need to purchase insurance. An example might be an extended warranty on a low-cost item. Worst case, take the loss and buy another item. Paying to insure such a risk is expensive and seldom sensible.

Liability insurance

When we drive, we assume liability for any damage or injury that may occur. Liability insurance allows people to do this, with less risk of being ruined financially. Because we need to drive and few can afford the potential loss, liability insurance becomes necessary. Many State governments have also mandated liability insurance.

The best purpose for insurance is to avoid risk we cannot otherwise afford to take. Some risk we can afford to take, and it is expensive to insure against these. By self-insuring the risk we can afford, we may save a great deal of money.

Poor decisions increase the need for insurance

Insurance is sometimes used to cover unwise decisions. An example of a poor decision is gap insurance. This insurance is available, to cover the difference in value, between what a vehicle is worth and the amount still owed. Gap insurance exists, because people make unwise purchases. Having to finance a vehicle for more than its value is a warning sign. A wiser choice is to save more money before making the purchase or selecting a lower-cost vehicle.

With a higher equity to debt ratio, people can afford the unlikely risk of the vehicle being worth less than the amount owed. With a slight change of behavior, the risk is eliminated rather than insured.

Today vehicle makers are desperate to sell their products and "creative financing" is all around. Just because an offer is available, does not mean it is in the client’s best interest. Many people buy new cars, but would be far better off purchasing a used vehicle. Even wiser may be a good maintenance program for their present vehicle to avoid the need for replacement at all.

Reducing insurance costs further

People who manage their finances well, can dispense with unnecessary coverage. For instance, maintaining a saving's fund to cover repairs is far more cost-effective than buying an extended warranty on the vehicle. Selecting a vehicle, based on reliability and with fewer gadgets will further lower the risk.

If well maintained, such a vehicle will have fewer problems. It will last far longer and sell for more, when it is time for a replacement. We can roll the money left over in the repair-savings account to the next vehicle, lowering costs even more.

Collision insurance on older vehicles

If a vehicle is damaged, through your own fault, collision insurance pays to repair or replace it. If you can afford to replace an older vehicle, collision insurance is unnecessary. Safe drivers often never have an accident at which they are at fault. If they can afford the loss of the vehicle, the risk is very low.

We may also not need comprehensive insurance on older vehicles. This coverage is for many non collision-related damages. An example is the replacement of a broken windshield. Comprehensive may also cover losses due to flood or fire. With a new vehicle, the lending institution may require such coverage. On an older vehicle, it is rarely worth the price.

Other things we might like to self-insure

Road hazard insurance on tires is another cost that is rarely worth the price. Having to replace a tire is unlikely and will not financially wipe a person out. Save the money and self insure the risk.

A deductible is the amount a person chooses to pay, before their insurance takes over. The lower the amount that is selected, the greater the costs of the insurance will be. Selecting a higher deductible is another way to reduce costs, and still maintain coverage. Consider the largest self-paid expense that you can easily tolerate. This is a good amount for the deducible.

Insurance is a valuable tool, but can costs out of proportion to the risk, if not managed. By considering the risk and your financial situation, often we may save a significant amount of money.

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