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A Comprehensive Look at Auto Insurance and Why You Need It

Today I’m continuing my insurance series with a detailed look at auto insurance. So far I’ve tackled the big giants of health, life and homeowner’s insurance. Auto insurance is no less important and remains an important piece to a well-maintained insurance plan.

auto insuranceThe reason?

You are going to wreck your car and cause damage. In fact, the car insurance industry estimates the average driver will file a claim for a collision every 17.9 years. So a 16 year old with a new license can anticipate having one accident by age 34 and another by age 52 and yet another by age 70.

But auto insurance is not just about recouping monetary loss for a damaged vehicle. There are also people driving and riding around in these cars that get into these accidents.

These people get injured.

Many even die.

The losses you could face from medical bills or the potential lawsuits resulting from these accidents could bankrupt you.

That’s how serious finding the right type of auto insurance is for your financial security.

What Is Auto Insurance?

Just like all the other types of insurance, auto insurance is a contract you agree to with an insurance company. In exchange for a monthly premium you receive coverage from the insurance company in case of an event.

In general, auto insurance offers protection against these issues related to your car:

  • Against damage to your property (your car)
  • Against damage to another person’s property (their car)
  • Against injury to yourself
  • Against injury to others
  • Against damage from non-accident events (i.e. weather related)
  • Against stolen property

What you receive will be determined by the terms of the coverage set out in the policy.

What Is Covered in an Auto Insurance Policy?

Here’s a deeper look at what is covered in a typical auto insurance policy. I’ll use the language used by the industry in describing each type of coverage.

1. Bodily Injury Liability – Required. This coverage kicks in when you (as the driver or policyholder) cause injuries – even fatal ones – to someone else. You are covered even if you are driving another person’s car.

It’s crucial to have adequate bodily injury liability coverage. If you injure someone the medical bills could be astronomical. Your assets need to be covered in case the injured party/family sues you. And don’t expect them to come after you for a measly $50 – $100,000. They will come after you for $1,000,000. So consider getting more than you are minimally required to get.

2. Property Damage Liability – Required. This type of liability coverage pays for the damage you cause another person’s  property – usually their car. It could also extend to objects such as fences, telephone poles or buildings you might hit.

3. Personal Injury Protection (PIP) – Required. PIP covers injuries to the driver and passengers of your (the policyholder’s) car. You’ll use it to pay for medical bills and in some cases lost wages or funeral bills.

4. Collision – Optional. Our first optional coverage is called collision. Whereas property damage liability covers damage to another person’s property, collision covers damage to your car.

It’s considered optional because:

a) however the damage occurred, it was to your property so…

b) you could chose to pay for it out of pocket (out of your own funds with no insurance payouts)

Still it’s a vital component of the plan, especially if you haven’t built up a hefty emergency savings fund or have adequate investments you could tap to fund the repairs. You would be more likely to drop collision coverage on older vehicles that would not be worth the cost of repairing.

5. Comprehensive – Optional. This part of auto insurance coverage pays you if there is damage to your car resulting from something other than a collision with another car or object. Typically incidences that fall under the comprehensive section would be things such as trees or other items falling, fire, flood, hail, or vandalism.

This is also an optional coverage for the same reasons as collision.

6. Uninsured/Underinsured Motorist – Often required. Uninsured motorist insurance covers you if an uninsured or hit-and-run driver hits you.

Underinsured coverage kicks in if a person hits you, is at fault and does not have adequate insurance to cover the losses.

All of these types of coverage will be itemized in your insurance documentation. Your policy will have three sections to it:

1. The declarations page which displays the specific information about the policy (policy name and numbers, types of coverage, liability limits, premiums, etc.)

2. The base policy details the responsibilities of the insurance company as well as your fundamental                         responsibilities (i.e. paying your premiums and letting them know you’ve been in an accident)

3. Endorsements, which are add-ons that extend or broaden the scope of the base policy

It’s important that you understand what you are reading. Insurance is one of those products that can get fuzzy from time to time in our mind. We think we know but we don’t really know. Take the time to have your insurance agent fully explain your policy and never assume you are covered for something.

How Are Auto Insurance Rates Determine

It’s important to know how insurance companies determine what to charge for a particular policy. Some of the factors are beyond your control. Others you can purposefully alter to affect the price of the policy.

The Insurance Information Institute lists multiple factors that affect your monthly premium. Of course the type and amount of coverage you have will be a big component to the cost. However, these 7 other issues also play a role in determining how much you’ll pay for auto insurance:

1. Your driving record. Outside of the type of policy and amount of coverage you buy, this is the most important factor. What you’ve done in the past affects how insurance companies view you in the future. Accidents, traffic violations (tickets) or if you have not been insured before are all red flags that sound alarms to the insurance company.

2. How much the car is used. What the insurance company is looking at here is how many miles you drive. The more you drive the more chance you have of accidents and the more you will pay.

3. Location of car. Just like real estate, auto insurance premiums can be about location, location, location. Do you live or park your car in a rural or urban area? Those that live where the concentrations of cars and people could lead to higher accidents, theft or vandalism will likely pay higher insurance premiums.

4. Age. Young drivers, especially teenagers will be charged more. Premiums decrease significantly once you turn 25.

5. Gender. Men get into more accidents and have more DUIs than women. And the accidents they get into are statistically more serious. As a result of these factors, men as a group pay more for auto insurance than women.

6. Type of car. What you drive (the features of the car) also impact insurance rates. Factors insurance companies look at here include:

  • the safety record of the model of car
  • the cost of repairs to the model of car
  • its likelihood of theft
  • the cost of the car itself

They also look at its engine size and body construction to determine how much damage might be inflicted on the other car you’d have an accident with.

7. Your credit score. Not all insurers check your credit score. Those who do review your payment history, debt levels and length of credit history. They will search for bankruptcies and collections levied against you, all of which will impact your insurance rates.

How Do I Determine How Much Coverage to Buy?

The issues auto insurance companies review are important to consider when applying for insurance. However, you should always get the type of coverage that best fits your needs, even if that means paying a little bit more. Think about your individual family circumstances, tolerance for risk and the constraints of your budget.

Ask yourself questions like this to help work your way through the process:

1. How much do I make? What is my net worth? Do I have adequate savings?

If you make a lot of money or have built considerable net worth you are at a higher risk if you are found at fault for an accident. You’ll want to consider more coverage if you find yourself in this situation.

2. Is my car new or old? Do I own or lease it? What’s the car’s value?

If you own the car and it’s getting up there in years you may be able to pay less by dropping collision and comprehensive coverage. If you are still paying off the loan or are leasing the car you cannot drop that coverage.

3. What can I afford or am willing to pay to fix my car?

When you look at your net worth, how much could you pay to have your car fixed? Would you be willing to carry a $250, $500 or $1,000 deductible on the vehicle? Remember the deductible is how much you would pay out of pocket before the insurance coverage kicks in. Generally speaking, the higher the deductible (i.e. the more risk you take) the lower your monthly premiums.

4. What does my health insurance cover?

You’ll need to review your health insurance coverage and cross-check that with your auto insurance coverage. As we have already seen, auto insurance coverage can pay for medical bills but you wouldn’t necessarily need an incredible amount of overlap if your health insurance covers those issues as well.

However, if you had no health insurance then you’d definitely want to include a good amount of personal injury protection in your auto insurance policy.

5. Do I have kids driving?

Even the most responsible kid is inexperienced as a new driver. While they are learning you may want to consider more personal injury or property damage liability coverage.

When added to the issues insurance companies look at, these questions can help you determine what type and how much coverage to buy. The big key is to have enough insurance so that if there is significant event it doesn’t bankrupt you

How Can I Save on Auto Insurance?

Unfortunately auto insurance won’t be cheap no matter how much you try to manipulate your policy. It costs a great deal to repair a car and pay for medical bills. Your premiums will reflect that.

I’ve already hinted at a few ways you could save money on auto insurance. Here’s a summary of ways to reduce your monthly premiums and still get the coverage you need:

  • Increase your deductible (the amount you pay out of pocket). A higher deductible means a lower monthly premium.
  • Reduce collision and comprehensive coverage on older cars
  • Bundle your auto insurance and homeowners insurance. Buy them from the same company.
  • Remain accident and ticket-free.
  • Install antitheft devices in your vehicles.
  • If possible, drive less.
  • Pay your yearly bill in full instead of breaking it into installment plans.
  • Some companies offer discounts if you sign up online, get married, are in the military, request paperless communications or set up an electronic funds transfer from your bank account to pay for bills.
  • Maintain a high credit score.
  • Review your policy at least once a year and shop other companies for better rates.

Additionally, if you are insuring teenagers on your policy

  • Look for “good student” discounts. Many states offer discounts on insurance premiums if your child has high grades in school.
  • Have them take a driver safety class that includes a defensive driving course.
  • Keep your teen from driving until they are older. The younger they are the more expense they will add to the bill.

Questions and Myths About Auto Insurance

There is a lot of misinformation out there about auto insurance, including many auto insurance myths that people have come to believe. Here some answers to the most common questions and misconceptions:

1. Does insuring a red car cost more?

No. The color of the car has no impact on car insurance premiums.1

2. Can I legally drive without insurance?

No. Almost all states require that you have auto liability insurance.² (A few exceptions include Virginia and New Hampshire. Click here to see the requirements for your state.)

3. Do I need to purchase rental car insurance?

Perhaps. Check with your insurance agent beforehand. Don’t assume you have coverage.

4. My driving record is awful, so will anyone insure me?

Yes, but your options are limited. You’ll have to contact our state insurance department to see what they can offer through the state or get a policy from a private company that specializes in high-risk drivers. Either way you will pay more.

5. Will my rates go up if I don’t report an accident to my insurance company?

Probably…because the person you were in an accident with may still report it. Additionally, if you were given a ticket it can show up on your driving record and trigger the increase.

(Worse yet you’ll damage your integrity by being dishonest with your insurance company.)

6. Do I need to purchase an umbrella insurance policy?

Maybe…it all depends on your assets. Umbrella policies are designed to protect your net worth by providing additional coverage beyond your basic insurance. They are recommended once you’ve built up significant assets.

7. Whose insurance pays for repairs if a friend drives my car and has an accident?

Yours will…but check to make sure. In most states it’s the insurance policy covering the vehicle – not the driver – that pays for damages from an accident.

Conclusion

Auto insurance is something that I won’t skimp on. I’ll do my best to save money on it but I won’t sign up for the bare minimum coverage.

There are too many chances for accidents to occur. Consequently, there are too many chances for a significant financial event to occur. I don’t want my financial future being impacted because someone sued me for all that I’m worth or because I have to spend months in the hospital recovering from injuries.

That’s the key to all insurances. I can manage through the small financial issues with my emergency savings fund. But I’ll pay for insurance all day long to handle the big events.

Questions: How are you saving on auto insurance? Have you ever dropped collision or comprehensive on a vehicle? Has your auto insurance ever saved you from paying for significant injuries? Anyone ever been sued by being ‘at fault’ for an accident?

Image courtesy of W. Robert Powell at Flickr Creative Commons

Sources:

1. http://www.dmv.org/insurance/six-common-car-insurance-myths.php

2. http://www.iii.org/article/can-i-drive-without-insurance

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Comments

  1. One tip, if you have a credit card many will have roadside assistance with it. So if your insurer asks you if you need check your card first so you don’t overlap coverage and lose money. Thanks!

  2. Very informative article, to help those who don’t know about auto insurance. I also don’t know that much information about insurance as you given. Thank you so much for sharing all this info with us. I don’t about optional of auto insurance. Thanks once again….
    John recently posted…Hello world!My Profile

  3. Thanks for the article, Getting quotes and purchasing car insurance can be confusing and financially taxing if you are unfamiliar with the types of coverage you need. Many people make the mistake of purchasing only the minimum coverage, but just as many others make the mistake of purchasing too much

  4. Great article, really informative for people who don’t know much about car insurance, like me! I was unsure what auto insurance would cover, so the list you have is really helpful. I didn’t know that some of it is optional though, that makes it important to find a company that will cover all that I need. Thanks for sharing!

  5. Very useful article, Brian. I have learned a lot. I wonder, how the profession of the policyholder affects car insurance rate, or it doesn’t?
    Patrick W. recently posted…Definition of ‘Down Payment’My Profile

  6. I never really realized that comprehensive and collision coverage were different things. I really appreciate the simple way you explained them. We don’t have either in our policy because our car is really old, but we are hoping to buy a new car this spring, so we’ll need to know what to add to our policy for the new vehicle.

  7. Wow, I think I definitely have filed at least one claim per year the past 3 years. I wonder how that affects the average of filing every 17.9 years! I’m obviously way over that average. Thankfully, most haven’t been my fault. However, there have been a couple that were. Getting in so many accidents has absolutely taught me the importance of having insurance!

  8. My mother and father in law have some of the worst luck with car accidents. They live on a “collector street” (residential, but people tend to drive much faster, and treat them like shortcuts to other main city streets) and have had 4 cars totaled in the last 10 years, multiple people have backed into their cars, and this summer my sister-in-law was rear ended at a stop light by someone driving 55 miles per hour! They have to buy low-deductible insurance and have full comprehensive coverage, plus extras like tow and rental coverage, thanks to where they live and how much they have to drive. I feel so bad for them, because we spend half as much on our insurance!

  9. We all need auto insurance, we cannot predict what will happen in the way. There will be always reckless drivers and violators. After I have learned how to operate a car I immediately search for an auto insurance that would fit my budget.

  10. Do most types of car insurance include coverage due to non-accident events? I know that the weather in my area can get pretty extreme later on in the year, and I’ve heard of more than a few cases of cars being damaged or destroyed because of it. I’d just like to know if that’s something I should specifically look out for in a car insurance policy, or if I should generally expect to have that regardless of what I get.

  11. It’s interesting how common knowledge can be so wrong, like how insuring a red car supposedly costs more. It may not be the most pernicious myth about auto insurance, but it’s worth correcting, so I appreciate that you do so here. I’m at the age where my friend’s children are getting insured, and I think I’ll suggest they read this to get a better understanding of just what that means. Thanks for the clear and concise article.

  12. Wow, what a comprehensive analysis of auto insurance. I have auto insurance and don’t even own a car, just so that I continue to be covered when I rent. I get it through USAA, which has really been fantastic to me.
    Mario recently posted…Three things I wish I knew in my 20s about life, turning 30, and personal financeMy Profile

  13. What a great summary, Brian! I very lucky in that my mom works in insurance and has always explained exactly what I need. Thankfully, I’m covered all the way around. I cannot imagine not having good insurance.
    Natalie recently posted…Asset Allocation: The Most Important Part of Your Investment EquationMy Profile

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