Circle of Safety: How to Protect Yourself with Automobile Insurance ( Part 1)

Circle of Safety: How to Protect Yourself with Automobile Insurance

There are several ways you can purchase insurance for your car (s). You can buy it over the Internet at literally hundreds of different web sites. You can call an 800 number and buy it over the phone directly from an auto insurance company. You can call an insurance agent. In some cases, you can buy it at your bank or credit union.

It’s not surprising you can buy it so many ways.  After all, there are hundreds of insurance companies that sell auto coverage in your area. How do these companies differentiate themselves? Some brag about their superior service when you have a claim. Some tout how easy it is to buy from them. But, often, auto insurance companies try to compete on price, just as if you were buying a plane ticket, a radio or soda pop.
∗ Tip. Some people believe auto insurance is just a commodity. It’s not.
You’re not buying a soda. You’re protecting your financial well being...and the choices you make could affectyou for the rest of your life. But before explaining how complex auto insurance products are, let’s talk about price. It’s pretty complex, too.

No Insurance Company Has the Lowest Price for Everyone

∗Note. No auto insurance company -- no matter what it says in its ads -- offers the lowest price for every driver in every location. There are companies that are often among the lowest. And there are companies thatare usually among the highest. But no company is the lowest for everybody.
∗ Tip. Also, be aware that prices fluctuate. Sometimes companies “buy the market” with low prices to gain new consumers...then their prices gradually – or not so gradually – sneak up.
They also have to change prices based on their profitability, losses and other factors.
Every company has a slightly different appetite for the risks it wants to take on. Some insurers want only very good drivers who have no tickets and no accidents. Some companies, believe it or not, actually want bad drivers. In fact, these companies specialize in insuring people with lousy driving records.
Some companies target drivers who live in certain areas.
There are insurers that really like to do business in big cities, and there are others that would prefer to stay away from highly populated areas.
∗Tip. Remember that sometimes “you get what you pay for.” The cheapest option may not provide you or your family with the best protection. The saying goes, “you don’t need insurance until you have a claim.” When you do have a claim – something that goes wrong – that’s a terrible time to discover you don’t have adequate protection!
If you think auto insurance is a commodity, consider this: A person with a good driving record will pay three, five, even 10 times less than a driver with a couple of tickets, an accident or who has been cited for and convicted of driving under the influence.
A person who lives in a major city -- say Los Angeles, Chicago, Houston or Denver -- will pay three, four, even five times morethan someone who lives in a rural area or small town, even though the two have the same driving records.
∗ Example. The last two paragraphs are average differences. Auto insurers are all over the map on prices in a given area. Say you live in Everywhere, U.S.A. (don’t we all)? Say you have a good driving record. One insurance company might charge you $500 a year for a policy that provides most every coverage available. Another insurer might charge you $1,500.
As you can see, it can pay to shop around. Just be sure:

1. You really understand the different coverages in your policy, or,
2. You have an agent you really trust who can examine coverages and prices for you.

Read also: 

Insurance: How to Reduce The Risk, Protect Yourself and Your Family

Auto Insurance: How Much Should You Buy?

So far, we’ve been talking about “auto insurance” as if it were, well, a commodity. The fact is, you can buy a lot of auto insurance, or a little. Most states, more than 40, require you to have auto insurance.
But they don’t require you to have much. In states that have so-called mandatory auto insurance laws, all you are required to buy is a little bit of liability coverage. This is so you can pay for some of the damage your car does to othercars and otherpeople not in your car.
How much are you required to buy? In most states with mandatory auto insurance laws, the minimum needed is liability that provides 1) $15,000 for any person involved in an accident with you, 2) a maximum of $30,000 for all persons in the accident, and 3) $5,000 for damage to the other vehicle(s) involved. That’s not much. In fact, it’s next to nothing.
∗ Tip. The minimum amount of insurance required by most states is not much. Seriously consider getting more
protection in order to protect your financial health.
∗Note. Notice that mandatory auto insurance laws do not
require you to buy coverage for your own car. Or coverage for your injuries. Or coverage if you are hit bysomeone who doesn’t have insurance.
If you buy just the minimum coverage required by law, you are leaving your assets at considerable risk. Your car, obviously. And your home, if you are at fault in an accident that causes serious injuries to the other parties.
And how far do you think $5,000 will go if you total somebody’s Lexus? Not far enough!

Little Known Fact: There Are Six Distinct Coverages in an Auto Policy

The auto insurance “commodity” is actually a product with sixdistinct coverages:
Let’s look at them here.

1. Bodily Injury Liability-- It pays the medical and other expenses of those people injured or even killed in accidents you cause. This is required by most states, usually with a minimum coverage of $15,000 for any person involved in an accident with you and no more than $30,000 for all the persons in the accident.
2. Property Damage Liability-- It covers the damage your car causes to property. Usually, that’s the other car or cars involved in the accident, but it also covers damage you do to any object you hit. Garages, buildings, lampposts, fences, whatever. This is also required in most states, usually with a minimum coverage of $5,000.
3. Collision-- This is for damage done to your car when it collides with other vehicles (your fault) or other objects (again, your fault).
4. Comprehensive-- This covers damage to your car that results from something other than a collision with another vehicle. An example is damage caused by vandals or a wind-blown tree hitting your car. It also includes coverage for theft.
5. Medical Payments-- It pays medical, and even funeral, expenses for you as well as members of your family and passengers in your car if it is involved in a collision, regardless of who caused the accident. It also covers you as a pedestrian if you are hit by a vehicle.
6. Uninsured/Underinsured Motorist-- This pays for injuries to you and, in some policies, damage to your car if you are hit by a driver who doesn’t have insurance -- or by someone who doesn’t have enough insurance to cover your losses. In most states, more than 10% of motorists don’t have any insurance. In some states, as many as three out of 10 drivers don’t have coverage.

Many of those who do have insurance don’t have enough to cover the damages and injuries that would result in a major collision. If you don’t have this coverage, which is often referred to as UM/UIM, you are taking a risk. UM/UIM also provides coverage for any injuries you suffer if you are hit while walking or riding a bicycle by a driver with inadequate or no insurance.

There Are Even More Coverages Available...

There are additional coverages you can buy. You can purchase towing coverage, which will pay the costs if your car needs to be transported after an accident. If you’re a member of an auto club, you don’t need this coverage.
You can buy rental reimbursement, which will pay for a rental car you use while your vehicle is being repaired. (If the accident was not your fault, the cost of the rental car is automatically picked up by the other person’s insurance company.)

What Are the Various Optionsfor These Different Coverages?

While there are six main coverages in an auto insurance policy, there are numerous options to consider for each coverage.
How much insurance do you need? 

Bodily Injury Liability-- You can buy the minimum required by law, say$15,000 per person, $30,000 per accident. Or you can buy limits as high as $500,000, even $1 million. Remember that someone you hit can sue you for everything you have.
∗ Tip. If you have a home, own stocks and have a decent income, you should probably buy, at minimum, limits of $100,000 per person, $300,000 per accident. If you have more than $300,000 in assets, you should buy higher limits or an umbrella policy (see chapter on Umbrella Insurance). 

Consult with your professional agent about this!
Many auto insurance companies now sell what are called combined single limit (CSL) coverages, which haveno perperson limit. If you buy, say, $300,000 CSL, that means your policy will pay a maximum of $300,000. All of that could go to one person, if needed. Some companies include property damage liability in the CSL, which means that if you total someone’s antique car, your policy could pay up to $300,000 for property damage. CSL coverage costs more than traditional limits, but it can be worth it if you have any significant assets.
∗Tip. Many insurance agents believe CSL is so important to have, they strongly urge their clients to buy it if it is available.

Property Damage Liability-- Several years ago, $25,000 was considered the maximum most people needed for this coverage. Not anymore. There’s a lot of $50,000, $60,000, even $70,000 cars and sport utility vehicles on the road these days.
∗Tip. Because of all the super-expensive cars on the road today, you should seriously consider at least $50,000 of coverage, assuming you don’t have CSL coverage; $75,000 might be preferred.

Collision -- Consider how much you can afford to pay to have your car fixed if you have an accident. Auto policies have several deductible options.
∗ Note. Deductible? That’s the part youpay beforethe insurance kicks in. You can buy deductibles of $100, $250, $500, even $1,000. Obviously, the lower the deductible, the more this coverage will cost.
Unless you’re planning to have a lot of accidents, it’s probably a good idea to have a deductible of at least a couple of hundred dollars. (By the way, the deductible does not apply if you are hit by someone else and that person’s insurance is used to pay for your car’s damages.)
Comprehensive-- Like collision, there’s a deductible with comprehensive, although it is often lower.Forexample, if you have a $250 deductible for collision, your comprehensive deductible will be, say, $100.
∗Note.: While collision and comprehensive will pay for the damage or loss to your car, neither coverage will pay for everything onor inyour vehicle. Most policies exclude things like CB radios, two-way radios, car phones, cassettes and CDs.
Further, if you add special features to pickups, vans or SUVS, these things probably will be excluded as well. In fact, it’s a good idea for you to talk to your insurance agent about any high-tech equipment or special features you have added to your vehicle.
Many, perhaps even most, of these features aren’t covered in the standard policy. It is possible, however, to obtain special coverage for the high-tech equipment or special features in your vehicle. Your agent can advise you of the options.

Medical Payments (also called Personal Injury Protection)  -- Some people elect not to buy this coverage because they believe their health insurance is enough in this regard. That’s true -- to an extent.
∗Note. Unlike your health insurance, medical payment coverage can reimburse you for income lost as a result of injuries suffered in an auto accident. However, medical payments coverage is not nearly as comprehensive as most health insurance plans. Still, medical payments coverage,
which usually costs less than $100 a year, is probably a good buy for most people.
In addition, medical payments coverage provides protection for passengers in your vehicle for medical expenses incurred and income lost. In some states, medical payments coverage is not relevant. These are states that have so-called no-fault auto insurance systems. Basically, regardless of who’s at fault, your insurance company pays for damage to your car and/or injuries you incur. Personal injury protection is included as part of your coverage.
Uninsured/Underinsured Motorist -- For most people, it’s a good idea to have the same limits for UM/UIM as they have for bodily injury liability. But remember, UM/UIM coverage is for you. It pays for your injuries and, in some policies, damage to your car if the person at fault in an accident with you cannot. Since you based your liability limit on what you have to lose, you should do the same with UM/UIM.

Next:   Circle of Safety: How to Protect Yourself with Automobile Insurance ( Part 2)

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