Why you should put money aside in case of a car accident — even if you have insurance

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There are often costs to pay even with great coverage.

Main points

  • Car insurance provides protection against major losses when an accident occurs.
  • Car insurance does not necessarily cover all expenses.
  • It is important to have savings in case a collision occurs.

Car accidents can be very expensive to deal with, even if no injuries occur. The cost of a collision is the main reason people need insurance. Most people can’t just pay tens of thousands of dollars out of pocket to replace a vehicle if a collision occurs and the car is totaled. Even repairing a vehicle after a serious accident can be expensive for many people.

But while buying auto insurance can transfer much of the risk of loss to an insurer better equipped to handle the cost, drivers shouldn’t assume they’re completely protected from all the financial consequences of a collision. In fact, every driver should have money saved up in case of an accident — even with insurance coverage. That is why.

Drivers may need to pay a discount

Depending on the type of insurance that covers the costs after an accident, it may be necessary to pay a deductible. This is the amount for which a policyholder is liable when a covered loss occurs. A policyholder must pay the deductible before the insurer covers the rest of the losses.

A deductible can range from several hundred to several thousand dollars depending on what the policyholder has chosen when purchasing insurance coverage. Drivers should ensure that, at the very least, they have the money to cover their deductible if something goes wrong and a claim becomes necessary after an accident.

Insurance may not pay enough to get a comparable car

There is another main reason why it may be necessary to save money after a car accident. Insurance may not always pay enough to get a comparable car.

Insurers pay the fair market value of a vehicle if the car is totaled. They will estimate the value of the car and then agree to pay that amount. The problem is that it may not always be possible to get a comparable car for the cost the insurer is willing to pay.

Let’s say, for example, a driver had an old car in perfect condition that held up very well and was very reliable — but because of the car’s age, the insurer rated it too low and gave him several thousands of dollars. Finding a similar reliable car for the same cost may be difficult or impossible, and it may be necessary to pay more money to buy a used vehicle and get back on the road.

Upgrading a vehicle can make sense if purchasing a new one is required

If a car is totaled and the insurer pays to replace it, it might make good sense to get a vehicle that’s a bit newer than the one that was wrecked — even if it means paying more to do so that. That’s because when a driver needs to buy a new car anyway, buying an older model can be short-sighted.

Let’s say a driver had a 10-year-old car that they were going to replace in a year. If the car was totaled and the insurer cut a check for fair market value, they would probably get enough to buy another vehicle that was also about a decade old. But in no time, they will have to trade in this vehicle and buy a new one, as they originally planned to upgrade instead of driving such an old car. It wouldn’t make sense to go through the trouble and expense of buying the old car just to upgrade it so quickly.

Of course, buying a newer car would end up costing more than the insurance would pay out – but with the money set aside in case of an accident, it would be possible to buy something newer, and doing so would be the best financial solution in the end.

For all these reasons, it’s a good idea to have a dedicated savings account in the event of a collision so drivers are prepared for the worst and don’t have to deal with financial stress on top of crash recovery.

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