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Understanding Auto Insurance

6/12/2014

1 Comment

 
Do you really understand your auto insurance policy? 
Are your properly covered? 
Willing to wait until an accident to find out if you bought the right amount of insurance? 

All of us know auto insurance because it is necessary to own and drive our cars, trucks and SUVs.  But do we really understand our auto insurance?  More than likely we all have something to learn here.

Auto insurance comes in three basic flavors: Liability, Comprehensive and Collision.  Let's take a moment to uncover what those different parts are all about.

Liability Insurance at some minimum level is required for drivers in every state in the US.  This insurance covers for bodily injury and property injury for other drivers or passengers for any accident you may cause.  This includes covering for accidental death.  Typically, most states require a minimum of $30,000/$60,000/$25,000 of liability insurance. 

The next logical question is to ask what then are these numbers and why are they arranged the way they are?  Good question.  Liability insurance is sold in this format: Bodily Injury per person / Bodily Injury per accident / Property Damage per accident.  So then, to take the minimum from above and make sense of this, the typical state minimum liability insurance will cover $30,000 of bodily injury per person, $60,000 of bodily injury per accident and $25,000 of property damage per accident. 

You may think these numbers seem quite generous, but you'd be surprised how wrong you might be.  Many people settle for the lowest state limits of Liability Auto Insurance because it is the cheapest coverage, but cheap insurance could cost you a bundle.  Let's say that you carried the typical state minimum liability auto insurance and caused an accident with another car (a $55,000 Lexus that was totaled) that caused 3 people to get injured.  The bodily injury costs to the first person was $20,000.  The bodily injury cost to the second person was $40,000.  The bodily injury cost to the third person was $50,000. 

In this scenario, your minimum state liability coverage of $30,000/$60,000/$25,000 would cover:

Person 1's injuries entirely (because they were under $30,000 per person)
Person 2's injuries up to $30,000 (leaving $10,000 remaining to be paid by you for this person's injuries
Person 3's injuries up to $10,000 (because you used a combined $50,000 of the $60,000 bodily injury per accident amount on the first two people - leaving you with $40,000 remaining to be paid by you for this person's injuries. 
And finally, you will need to pay an additional $30,000 to cover the cost of the totaled Lexus, because your insurance only covered $25,000 of property damage, leaving $30,000 left for you to pay toward the Lexus's $55,000 cost.

If we do the math here, your cheaper liability auto policy at typical state limits just would up costing you a hefty bill for $50,000 in personal injury costs and $30,000 for property damage.  This $80,000 must be paid by you, as you have exhausted your insurance limits and is required in full.  Ouch! 

Fortunately, liability auto insurance really isn't very expensive as you increase your coverage.  It may only cost you a hundred or two a year to increase your liability limits from state minimum to, say, $300,000/$500,000/$300,000.  With these much higher limits, the prior scenario would have left you owing nothing as the entire accident would have been covered.  See how valuable just a little more insurance cost can be?



Comprehensive Auto Insurance: This insurance simply covers you against damages that are not due to a collision.  These can include: Theft, Fire, Vandalism, Natural disasters (like a tornado), Falling objects, Damage cause to your vehicle by animals or a civil disturbance, like a riot.  Comprehensive Auto Insurance is not required coverage, but is a wise purchase in almost every case.  It is relatively inexpensive to buy and with the breadth of items it covers, it's a great way to keep your vehicle protected. 

Collision Auto Insurance: This insurance is also optional and simply covers your vehicle in the event of a collision.  It will cover repairing or replacing your vehicle and will often even include your getting hit while your vehicle is parked.  It is a wise buy if your vehicle is of value more than you can afford to lose.  Consider your vehicle's worth and mathematically see if the cost of this insurance meets properly with what it would return if you were to be involved in a collision. 

Understanding the above basics of Auto Insurance is critical to insuring your are properly insured.  One last item remains, the deductible.  The deductible is your initial, upfront costs associated with each claim for your auto insurance.  Typical deductibles can range from $100 to $1000 per claim.  The higher your deductible, typically the lower your insurance cost for all the above auto insurance types. 

Something to consider when it comes to deductibles: If you have a properly filled Personal Reserve Fund of $1,000, then you may be better prepared to raise your deductible toward the higher limit, as you have the funds in place to cover this cost if you should incur it. 

Proper insurance coverage is a critical part of the Financial Checklist Plan and you can learn more about what insurance you need and don't need by checking out step three of the Financial Checklist. 
1 Comment
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5/4/2021 04:56:19 pm

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