Is cheap car insurance better than the more expensive?

We have to start with the assumption you want to keep your driving legal, i.e. you will obey the mandate for your state and buy the stipulated minimum liability cover. Because the mandated minimum pays out the lowest amount in the event of a claim, it should be sold at the cheapest car insurance rates for someone with your risk profile. So, whether you are a teen or a 45-year-old driver, you will pay less than others in your age group who buy more than the mandatory minimum. Why might this work better for you?

The recession is officially over but life is still financially tough. Many people have been putting off replacing their old car with a new one. At some point, it becomes uneconomic to maintain and repair. So, if you have an accident, you throw the damaged vehicle away and buy a replacement on the secondhand market. If you have paid off any loans outstanding, it's a waste of money for you to buy more than the minimum amount of liability cover unless you have assets or savings at risk should there be a claim. The minimum and cheapest insurance keeps you legal and avoids the fines — in some states, the local law enforcement officers confiscate an uninsured vehicle and have to right to send it to a scrap yard. But this may be risky if you have assets. Should a third party sue you, the court can order you to pay the difference between the minimum amount insured and the actual amount of damages awarded. This could force the sale of your home or lead to a garnishment order on your pay. Remember it's a condition of every auto loan that you carry collision and comprehensive cover as well as the liability cover.

So here's the calculation for you. It's better to buy cheap car insurance if you have:

(a) paid off any loans secured on the vehicle;

(b) drive a vehicle worth only a few hundred dollars; and

(c) have no assets at risk should there be a claim against you personally.

A compromise position would be to pay for more than the minimum liability cover. This is still relatively cheap car insurance, but it protects your assets against a court order should you hit a vehicle that's expensive to repair and/or there are large medical bills to pay.