As with most things in life, car insurance is not a simple matter of yes or no. There are a thousand other ways to modify your plan once you have one, and not every option is a good one. But not every option is bad either, and ultimately you need to know how to decide which car insurance add-ons are wise and which are not. The pros and cons of car insurance add-ons can be understood in general, but exactly how the different possibilities affect you and your family are going to depend on your unique situation. In this article, Part 1 describes the principles of add-ons, and Part 2 explains the pros and cons of some add-ons.
Part 1 of 2: The principles behind car insurance add-ons
Car insurance add-ons are additional features of your car insurance policy that you “add on” to your plan and that provide you with some sort of special coverage or offer an extra service. These add-ons, as you would expect if you have any experience with the insurance world, are not free and are built into your rates.
When you purchase an add-on you are, in essence, taking a gamble or making a bet with the insurance company. Take one common sort of add-on, roadside assistance, which means you are provided with towing services or a battery jump-start in an emergency.
You are wagering that you will need the service and are willing to pay for the peace of mind. The insurance company, on the other hand, determines the cost based on how likely drivers are to get stranded, for example. So if you need roadside assistance, you have won the bet; if you never use the service, the car insurance company has won the bet.
In short, any add-on you get should be purchased only if you think you will need the coverage or want the peace of mind associated with the coverage. Making your decisions based on actual needs will keep you from overpaying.
Part 2 of 2: How to understand the pros and cons of car insurance add-ons
With these principles in mind, let’s consider a few examples of car insurance add-ons to see what their benefits and possible disadvantages are.
A very common car insurance add-on is gap insurance. When you purchase a car and drive it off the lot, there is instant depreciation on the value of the car, which means the car is worth a lot less than before you bought it.
In other words, what you owe on the car if you financed it is actually more than the car is worth. So if you got into an accident and totalled the vehicle, the insurance company would only pay out what the car was worth, leaving a “gap” between that amount and what you actually owe. Gap coverage, then, makes up this difference so you are not on the hook for a huge sum of money.
This sort of coverage really only makes sense if you have financed your car and still owe a lot of money beyond what the car is worth. If you owe less than that, there is not a gap as described above, so you’re paying for an unnecessary coverage.
Another type of add-on is a vanishing deductible. Your deductible is the amount of money you have to pay before insurance pays out. So, if you have this add-on and you are a safe driver, your deductible will drop by a preset amount over time until it hits zero, saving you money.
The downside of this is that you may end up paying more over the life a policy for this service than it actually saves you. If you had a $250 deductible and paid more than that for the add-on, you’d have lost money.
To avoid this, get a high deductible plan in conjunction with the add-on. You’ll pay less overall for a higher deductible plan, and it will take much longer for you to lose money in the same way. Make sure to evaluate each add-on based on your situation and needs.