Something that many people need to understand when it comes to car insurance is the idea that insurance is in place to cover a person for catastrophic occurrences, not for minor occurrences. In fact this concept applies to all insurance, but for now we need to discuss how it applies specifically to car insurance.

The way this works is that insurance rates are based on the likelihood that you will make a claim. Statistically people are much more likely to have minor fender bender or minor collision than they are likely to have a major automobile incident that results in very large costs. As a result of this statistical fact you may find that a car insurance policy with a $100 deductible and a $25,000 maximum may cost more each year than a policy of $5,000 deductible and a $1,000,000 maximum. The fact that the higher coverage is less expensive given the higher deductible reflects the fact that the higher amount of the claim is less likely to occur than the smaller claims between $100 and $5,000, which are the different deductibles on the two polices. Hopefully you understand the illustration. The insurance company charges less because they know that it is less likely you will make a $1,000,000 clam than you would, say, a $4,000 claim. The insurance company feels it is cheaper to cover you for the rare 1,000,000 claim than it is for the common claim between $100 and $5,000.

In know I said the same thing several times in the preceding paragraph, but that is because it is a very important point to understand. The next point to understand is that insurance is there to protect you from financial ruin, not from other claims that you can afford. Insurance is best when purchased to cover catastrophic claims like the $1,000,000 claim and it is best to pay for smaller claims yourself. Therefore always chose a policy with higher maximum limits and higher deductibles than a policy with low deductibles and low maximum coverages. The latter does not protect you nearly as much as the former, and true coverage in a catastrophe is what you really need, not coverage for incidences you can afford.