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Auto Insurance

The Basics About Auto Insurance

Coverage Amounts

 

Auto Insurance

Buying a new or used car involves more than picking out the perfect make and model. It also involves finding the right car insurance policy. This section provides everything you'll need to know, from the basics of coverage to the nitty-gritty of filing a claim.

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The Basics About Auto Insurance

What Is Auto Insurance?

Owning a car involves several risks. When a car accident occurs, people may be injured and vehicles (or other property) may be damaged. Damage can also occur through theft, vandalism or natural disasters. Auto insurance can protect you against these risks. Insurance companies provide auto insurance through personal auto policies. Essentially, your insurer promises to provide specific coverage for you in return for your payment of a premium.

Why Do You Need It?

All states require you to be financially responsible when driving a car. Depending on your state, you may be required to purchase auto insurance or post a bond. State law, (and/or your lender) often requires you to purchase at least a minimum amount of auto insurance. You may find it prudent to purchase greater coverage, however, in order to protect you auto investment, pay for necessary medical expenses, cover you legal liability, and cover any additional losses related to driving. Consider the following: if you cause an accident and the other driver suffers damages over and above your insurance limits, your personal assets and future earnings may be put at risk.

What Do You Need To Know?

First of all, you need to know how to read and understand and auto insurance policy. Next, you'll want to balance cost against desired coverage. Finally, you should evaluate and compare the various car insurance products to ensure that you get the best deal possible.

  • Understanding Your Policy.
    Your policy is broken into sections. It discusses types of coverage, rights, and obligations under the policy, and exclusions or limitations. Types of coverage include liability coverage (injuries/damage you cause to other people and other property), medical payments coverage (medical expenses that will be paid--up to a specified limit-- regardless of fault), uninsured/underinsured motorist coverage (losses caused by a driver who is uninsured or has inadequate insurance), and coverage for damage to your auto (accident damage and other damage or loss).
  • What Is A Deductible?
    Regarding damage to your own auto, collision and comprehensive coverage's may each include a deductible. A deductible is basically a risk that is self-insured. It's an amount of money that you are required to pay before your insurance kicks in. Deductibles can come in any dollar amount, but are generally $500, or $1000.
  • Coverage VS. Cost
    You need to balance coverage against cost. Choosing the appropriate level of coverage depends on a number of factors, including the value of your vehicle, the value of assets you must protect, the amount of money you can afford to pay out-of-pocket, and your tolerance for risk. If a claim against you exceeds your coverage limits, you will be personally responsible for the amount that exceeds the coverage. Your insurance agent can tailor the policy to your needs. To arrive at the cost of your premium, your insurer will consider the coverage levels you select and will use statistical information about you and your car. There are several ways to reduce the cost of your premium.

When To Get It

You may need to purchase auto insurance whenever you buy a new or used car. You may also need to reconsider your present policy if your family situation changes. Because marital status, number of children, and asset levels may change over time, you should review existing policies from time to time to ensure adequate coverage.

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Coverage Amounts

Auto Insurance isn't a "should I or shouldn't I?" proposition. Most states have laws requiring you to purchase at least some auto insurance. While specific requirements will vary from one state to another, you will typically be required to buy some level of liability coverage. Other types of auto insurance coverage may be optional or required, depending on the state.

In reality, though, there is often a large gap between the insurance you're required to carry and what you should carry. Even in states with the most stringent requirements, many insurance professionals suggest: (1) that you have a broader scope of coverage (i.e., more types) than the state mandates, and (2) that your coverage limits in most areas exceed the required state minimums. The point made by such professionals is that you should ideally have an appropriate amount of auto insurance, so that you're adequately shielded from certain risks.

Personal Factors

What if you can't afford as much insurance as your agent or company thinks you should have? How much coverage you can purchase may be limited by your financial circumstances. If the cost of an all-inclusive policy would place too great a strain on your budget, you may have to settle for less coverage to lower your premium.

Aside from finances, other personal considerations will enter the picture as well. Such factors as your location, how much driving you do, the way you drive (i.e., aggressively or defensively), and the size of your assets should all play a part in determining the range and amount of coverage you need. You should try to tailor your coverage to your unique situation, but there are some general guidelines you can work with.

General Guidelines

Since auto insurance coverage is typically broken down into component parts, each of which provides a different type of protection, it's best to look at each part individually.

Liability Coverage

Liability coverage consists of two separate parts: (1) bodily injury liability, which covers you for losses that result when you or certain other people injure or kill someone with your car; and (2) property damage liability, which covers you from losses that result when you or certain other people damage someone else's property with your car.

The bodily injury portion of this coverage is the most crucial aspect of your auto insurance. The reason: liability claims against you for medical bills, lost income, and pain and suffering when you injure or kill someone in an accident can easily mount to hundreds of thousands of dollars. This is one area where you definitely don't want to be underinsured. Property damage claims can also be huge, especially if you cause severe damage to someone else's expensive, brand-new car. Among other things, you could also strike and damage a power pole, resulting in losses to the companies (phone, electric, etc.) serviced by that pole.

In most states, the required minimum liability coverage doesn't come close to covering the costs associated with a serious accident. That means you could have to pay part of the claim out of your on pocket if you're sued. This is particularly dangerous if you have a home and other large assets to protect. Consequently, it may be advisable to carry both bodily injury and property damage liability coverage's well beyond state minimums.

On the other hand, don't be scared into buying more insurance than you can afford. If you don't have significant assets that could be seized if you were sued following a car accident, then the minimum auto insurance coverage required by your state's laws (or by your lender) is probably sufficient.

Medical Payments Coverage

If you or your family members are involved in an accident, whether in your car or in someone else's car, medical payments coverage will pay medical expenses incurred as a result of the accident. You non-family passengers may also qualify for this coverage if they're injured in your car.

Since the other driver's insurance should cover these costs if he or she is at fault, medical payments coverage comes into play when the accident is your fault. In states that require this coverage, the minimum limit is often as low as $1,000 per person. However, you can usually purchase additional coverage of $10,000 or more per person for a small increase in your premium.

If you have extensive health insurance coverage for yourself and your family, you might think that medical payments coverage is redundant and unnecessary. Be aware, though, that your health insurance won't cover passengers who aren't related to you if they're hurt in an accident in your car. Medical payments coverage often will. On the other hand, if you have a good Health Insurance and usually drive alone, you may be able to go without this type of coverage.

Uninsured/Underinsured Motorist Coverage

This provides coverage for losses you and others suffer as a result of an accident that is the fault of another driver who either doesn't have adequate auto insurance, or has no insurance at all.

If you were in an accident caused by a driver who had no insurance and no assets to compensate you, you might have no recourse. Uninsured/under insured motorist coverage ensures that your insurance company will cover whatever expenses the driver can't meet through insurance and other resources. It may also cover your losses if you're hurt by an unidentified hit-and-run driver.

Although it is optional in some states, the number of uninsured, underinsured, and hit-and-run motorists on the road makes this coverage extremely important. Don't be surprised if your agent suggests $250,000 per person and $500,000 per accident. Although the cost of this coverage is generally low, it often pays only for losses arising from bodily injuries, and not for property damage.

Collision/Comprehensive Coverage

Collision and comprehensive are actually two separate types of coverage. Collision covers you for losses you suffer when your vehicle is damaged in an at-fault collision with another vehicle or other object. Comprehensive covers you for losses suffered when your vehicle is damaged by fire, vandalism flood, and a variety of other events.

In virtually every state, both are optional coverage's that you can purchase for an additional premium. So should you buy them or not? In general, the answer is yes. If you don't buy them and your vehicle is damaged, you will have to pay for the vehicle's repair or replacement out of your own pocket (unless the accident was caused by another driver). Keep in mind, however, both types of coverage are subject to deductibles. They also generally only cover you up to the actual cash value of your vehicle. For this reason, it is generally not cost effective to have collision and comprehensive on older, less valuable vehicles. Any claim payment you'd receive would be minimal and might not even exceed what you pay in premiums and deductibles. With more expensive vehicles, the need for these coverage's may be greater, but the extra premium will be higher as well. You will have to weigh the cost against the potential benefits Bottom line: if you drop your damage protection coverage, you could be responsible for the entire cost of repairing or replacing your vehicle.

Endorsements: Endorsements are optional provisions you can add to your auto insurance policy for an extra premium, to expand you coverage. Typical endorsements include coverage for items such as towing and labor, car rental costs, extraordinary medical expenses, and certain recreational vehicles. The number and type of endorsements will determine the size of your premium increase. Endorsements are not necessary in most cases, but may be advantageous for some people. Again, weigh cost against potential benefits.

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