Scary Reasons to Have the Right Auto Insurance (Plus How!)

I’m in the United States for a few days, and I have been having all the usual visiting America experiences:  shock at all the stores and restaurants, tons of food, and amazement at all the television commercials.

One set of commercials really has me irritated.  It is from a major car insurance company, and it is making a big deal about how regular insurance coverage doesn’t provide enough payment if a newer car is totaled.  This happens frequently when consumers borrow nearly all of their cost of a new car, and then the car is wrecked before they borrower has made enough payments to get the loan balance down below the (also falling) value of the car.

Having the right insurance protects you from owing a bunch of money on a wrecked car, having no car at all, and possibly facing lawsuits for a variety of different issues.  I’m assuming that you’ve already covered the right insurance to cover your car, and other people’s property, and medical bills, and all those other things.  Now I want you to think about whether you have the right coverage to ensure that you don’t end up with a wrecked car and a big balance owed on the loan for that car that can’t be fixed.

How can you avoid being in a situation where a bad car crash will mean that you owe money on a totaled car?  Think smart from the start.

Don’t Borrow The Whole Purchase Amount

The quickest way to keep yourself in the safe zone is to make sure that you always make a large down payment when you purchase a vehicle.  At bare minimum, you want to put down as much as the car is going to lose in value within the first floor months.  The amount actually depends on the make and model of the car, as some cars lose value much faster than others.

Get A Short Loan With A Good Interest Rate

Longer loans mean that you are paying down your loan balance slower, which increases the chance that your vehicle’s value will fall faster than your loan balance.  The same is true of ultra-high interest loans.  If you choose a shorter loan term and find a good interest rate, your loan balance will drop more quickly.  That’s always a good thing.

Don’t Roll Over Debt

One of worst financial moves that a car buyer can make is to carry over debt from a previous car loan into a new car loan.  I’m hoping that this once popular trend has become extinct, but I suspect that there are still some dumb lenders who make these bad loans available to buyers who don’t understand all the implications.

Purchase That Extra Insurance Coverage

Insurance to cover the full loan balance is often available through the car financing company or through your automobile insurance company.  It is often called GAP insurance.  Some other similar policies might call it a new car replacement policy, or a full value policy.  It’s not cheap, but it is cheaper than discovering that your insurance only covers a portion of the loan balance if you get in a bad accident.

Have Cash Reserves

None of this is an issue if you have the appropriate savings to make up the difference in the case of a loss.  It’d be a smarter financial move to put a larger down payment, unless you are getting an interest rate that is less than you’d earn on that money in the bank.  (If you do, please let me know where!)

I have my preferences for which strategy you should use to be properly covered in case of a total vehicle loss, but my preferences don’t really matter.  What matters is that you have a plan and you are properly covered so you don’t find yourself in a bad situation.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • Spencer

    Great topic that a lot of people should think more about. A lot of very valid, relevant points.

    You mention that you hope people are no longer rolling balances into new loans. I haven’t seen any statistics on this but with the current state of subprime auto lending, I fear it may be more common now than ever.

    Lenders are very eager to get people into new cars. Especially those with poor credit because the interest rates are higher.

    Finance your loans with the base credit union. Within a month or so of buying a car you can go the the credit union and get a better deal.

    I think the wisest advice for military is to buy a reasonable, used car and keep it a long enough to pay it off and save up a down payment (or the full purchase price) of the next vehicle. Even better, drive one car until it is no longer financially smart to do so.

    Too many servicemembers driving expensive new cars and trading them in frequently. Build up emergency savings instead.

  • KenLand

    Be aware if you are hit by someone who is uninsured or underinsured, your insurance will have to kick in if you have the coverage.

  • MMMM

    I just got a new car, and I was surprised to see that the dealer was pushing 72 month loans on economy cars.

    So I don’t think the rolling over upside-down cars trend has changed.

    Me: well I do 36 month loans and don’t keep cars past the warranty period.

    I know that it’s wiser to drive it until the wheels fall off from a financial stand point, but I really like the idea of having as safe and reliable of a car as possiable.

    Sure this leaves my family with a permanent 500/month car payment, or 120,000 over a career (316,776 @ 9.28% over those 20 years, 1.4 million if you left it there until 59), but it’s not like you can do less than 20 to retire, and we can live very comfortably on a 20 year retirement alone (don’t worry we’re still saving a min of 20% of take home).

    • guest

      This is a REALLY poor planning decision. Are you forgetting that the retirement gets federal taxes, Medical insurance, SBP payments etc taken out? Knock off around 1k a month for those costs alone. You are giving up, by your own definition, 1.4 MILLION dollars (which in most cases is MORE then that 20 year retirement is worth) just to drive a depreciating asset? And what happens if he doesn’t make it to 20 with the draw downs or injury? Or what if you get a divorce and don’t get a part of the retirement, or a significantly smaller part of the retirement due to the state courts ruling? Or if you get a divorce, get part of the retirement, and he decides not to stay the full time to get the retirement…then you get ZERO.

      Also, those “safety features” you are so adamant about, really don’t change much in 3 years…it’s simply marketed differently each year, that’s what my sister does for a living…runs marketing for Ford. I assure you in 3 years there isn’t that big of a safety leap…every 10 years, yea, 3 no.

      • MMMM


        I appreciate the concern, and since you took time out of your day to address me I can at least rebuttal.

        I personally think it’s a great planning choice for my family, let me tell you why as I address your concerns.

        The amount I have projected to earn in retirement is net. It’s today’s purchasing power against today’s income taxes, SBP and tricare, and still the net amount exceeds our current total expenses less retirement savings (why continue to contribute to retirement once you’re retired?).

        A projected 1.4 million is what I’m giving up, but even if I halved my frequency of purchasing thus dropping my monthly car expense to $250 (and hoping for zero repair costs) I’m still looking at giving up 716,000 for alternating new cars every 10-12 years).

        So really I’m only giving up an extra $700,000 or so.

        Now that’s a whole lot of money, but again I will have a surplus in military retirement based on today’s expenses.

        Remember that I’m also saving 20% of gross (incl BAH and BAS), and at age 67 that savings will be $6.7 million, which again is all in excess of military retirement and at a withdrawal rate of 4% I could spend an extra $266,000 a year on top of the retirement pension forever (and yes that’s all ROTH so it’s tax free growth). So an extra $700,000 wouldn’t really change things for my family.

        Of course there’s the chance of injury or an early out. That’s why we save 20% of net, every single month, and have a sizable emergency fund.

        In regards to divorce: I married my best friend, and I’m not concerned with divorce in the least. If it somehow did happen, no one is going to get burned, there’s too much respect between us.

        As far as safety in cars, there have been big, big safety changes in recent years, sure some of it is marketing, but traffic fatalities are on the down swing and that speaks to improving car structure. Auto stopping devices, blind spot monitors, rear view cameras are certainly a help too.

        Three year loans are my payment cycles, but the cars are kept for 5-6 years (closer to six, we like the single car payment), and that’s a new model year every time, big strides in safety, and fuel efficiency in model year changes. Plus my family requires reliability, my spouses job demands it, and thus both our family car and their car have to run and run well (it would be bad news bears if our family car broke down on the way home from a three day). Murphy’s law right?

        Not saying a car is going to explode at 60,001 miles, but manufactures warranty their cars because the risk of payout is low over the first 60,000 miles.

        If someone wasn’t investing in their future, or if their retirement was going to fall short of their needs I’d agree with you guest. But the extra $250/month I spend on transportation is less than some families spend on their cable/smartphone plan while providing me great ease of mind when it comes to safety and reliability, and it doesn’t move the retirement needle one bit.

  • MMMM

    Oh as far as financing. You can get a risk free 36 month CD from NFCU at 1.50% and they also offer 1.49% 36 month car loans.

    Honda and Toyota both are offering 0.9% for 36 months right now as well (which would do better to offset the tax hit on the CD’s (although for many readers their capital gains rate will be 0% as they are in the 15% tax bracket as their taxable income will be less than $74,900).

    • MMMM

      Also NFCU offers a 3.00% CD with direct deposit, but has a fairly low cap. But that would be a great place to park a would be emergency fund.

    • MMMM

      Err, a would be down payment.

    • MMMM

      I fail. I got stuck thinking of low turnover mutual funds as an alternative place to park a down payment when typing and mistakenly wrote that CD’s are subject to capital gains. They are not, the interest is taxed as normal income no matter the term.

      So parking the down payment in a 36 month 1.5% CD at NFCU makes more sense than using it as a down payment if you’re getting the dealers 36 month 0.9% financing, but not if you’re getting financed at 1.49% through navy federal as the taxes on the earned interest of the CD will eliminate the arbitage.