The first post in our Car Insurance 101 blog series, Understanding Basic Coverages, went over the three basic insurance coverages – liability, collision and comprehensive coverage.
Now it’s time to dive a bit deeper into the car insurance world with liability limits and deductibles. Fasten your seat belts!
Although we are (painfully) aware that this topic can require some serious caffeine to get through, it’s important for people to clearly understand the decisions they’re making when purchasing car insurance. After all, the wrong decision could land you in a messy situation and end up hitting your wallet hard if you get in an accident.
What are liability limits?
When you set up your car insurance policy, you have to choose a liability limit. Essentially, this is the maximum amount that your policy will pay out for damages you are liable for in an at-fault accident. You are personally responsible for paying any losses above that limit (which could get messy if you’re not properly protected!). In Nova Scotia, there is a minimum liability limit of $500,000 for all car insurance policies. For the most part, insurance companies also offer liability limits of $1 million and $2 million.
How Do Liability Limits Affect Your Insurance Premium?
The higher your liability limit, the higher your insurance premium. Because of this, many people opt to go with the minimum required coverage, but this isn’t always the right choice. What many people don’t realize is that the premium difference is often less than $25 a year between choosing a car insurance policy with a $500,000 liability limit and a $1 million liability limit. In many cases, it is well worth it to spend the extra few bucks for the extended coverage.
Picking the Right Liability Limit for You
If you’re not sure what liability limit is the right for you, your best bet is to call an insurance broker for advice (we hear the brokers at Cheep Insurance give great advice!). As a licensed and educated professional, a broker can recommend a liability limit based on your unique circumstances and how you use your car.
As a rule of thumb, most brokers recommend a limit of at least $1 million to make sure you’re covered in the event of an accident that may have a lot of large expenses tied to it. Don’t forget, in an accident, medical bills tend to creep up. If you have a large family or carry a full car load on a regular basis (think carpooling or driving a van-full of kids to a soccer game), we recommend going with a liability limit of $2 million. Also, if you travel to the US often, we would recommend a liability limit of $2 million… our neighbours to the south tend to be a teensy bit more lawsuit happy than we are!
What is a Deductible?
If you choose to add collision or comprehensive coverage to your car insurance policy, you have to select a deductible for each of these coverages. A deductible is the amount of money that you have to pay out-of-pocket before your insurance policy will kick in.
For example, if you have a $500 deductible and you get in an at-fault accident that causes $800 in damage to your vehicle, you will have to pay the first $500 out-of-pocket, then your collision coverage will pay the remaining $300. If you get in an at-fault accident and totally write off your car, you will have to pay the first $500 out-of-pocket, and your collision coverage will pay the remainder of the cost to replace your vehicle up to your liability limit (for those folks who own a Lamborghini or a Batmobile!).
How Do Your Deductibles Affect Your Insurance Premium?
The higher your deductibles, the lower your insurance premium. When you raise your deductibles, you take on more of the risk yourself. Since this reduces the risk to your insurance company, they will lower your premium.
Choosing Your Deductibles
When choosing your deductibles, you need to compare how much you would save on your policy each year vs. how much you would have to pay out-of-pocket in the event of an accident. In other words, find the right balance based on your personal budget and needs.
If you are really trying to reduce your insurance premium but want or need these collision and comprehensive coverages, you could consider increasing your deductibles to $1,000. This would reduce your premium, but remember… you would then have to pay that $1,000 out-of-pocket in the event of an accident. It’s critical that you ensure that your deductibles are set to an amount that you could actually afford to pay yourself.
The default deductibles that the average Joe in Nova Scotia tends to go with are $500 for collision coverage and $250 for comprehensive coverage. These values are in the range that most people could afford to pay before coverage kicks in, and they generally keep insurance premiums more affordable. Also, a $250 deductible for comprehensive coverage makes sense because it’s commonly used for windshield replacement.
Looking for Advice About Liability Limits and Deductibles?
If you want to talk to an expert about the liability limits and deductibles that are right for you, give the qualified team at Cheep Insurance a call! One of our brokers would be happy to have a chat and provide some advice about your unique situation. We’re happy to write you an insurance policy with whichever liability limit and deductible amounts you choose (and are eligible for).
Give us a shout at 1-866-92-CHEEP or (902) 463-1675. Our team is ready to assist you! Plus, we have the tools and knowledge to find you the best price available for your unique insurance needs.