Note: The following is a guide to help you better understand the coverage associated with automobile insurance. Because the laws in states vary, some of the information provided may differ in your location. Where necessary, always consult with a licensed insurance agent to help you understand the fully the laws and coverage in your state.
Automobile insurance. Doubtfully the most fun topic you will encounter in your life, but one that affects most of us at one time or another. Whether it is an accident that you are involved in or simply the fact that you have to pay auto insurance premiums year after year, auto insurance is a fact of life if you are a licensed driver. Because of this, it would make sense that we should clearly understand the coverage associated with our auto policy and how it works, but, most of us don’t. We simply take it for granted and just keep paying it bill after bill after bill. The one time we DO think about it is if we are involved in an accident, which is oftentimes too late. You can’t change your coverage AFTER your have an accident, so you had better make sure your policy makes sense for you RIGHT NOW.
This report aims to do just that. We will go over each coverage that pertains to automobile insurance policies, explain what it means, and give you some tips as to how you might want to tailor your own policy as it pertains to premiums and claim situations. In addition, we will try to be a little more fun than your average stuffy insurance agent…
Ok, ready to go? Let’s jump into the world of automobile insurance!
Liability Coverage
Ok, to begin with, liability coverage is EXTREMELY important. Think of the word LIABLE. This means AT FAULT. If your liability coverage is coming into play, it means you were at fault (at least partially) for an accident. This is the coverage that protects YOU financially in the event of an accident. Many people want to stick with the MINIMUM coverage required by their state, but this could put you in serious jeopardy financially if a claim occurs, you are at fault, and your policy is not sufficient to cover the amount of the claim. Let’s take a look at the coverage, what each part means, and how it could affect you in the event of a claim:
Bodily Injury/Property Damage
Liability coverage is broken up into two categories, bodily injury and property damage. For instance, most of the time this coverage will be represented by 3 numbers and will look something like this:
100/300/25 (the numbers may vary of course)
In the example above, the 100 represents bodily injury PER PERSON in the event of an accident. The 300 represents bodily injury AGGREGATE (which means all persons in the vehicle) and the 25 represents property damage that arose as part of an accident. So, if you are at fault in an accident and 100/300/25 was your liability coverage, you would have $100,000 coverage for EACH person in the other vehicle, a MAXIMUM of $300,000 coverage no matter how many people were in the other vehicle, and $25,000 coverage for property damage caused by the accident. This sounds pretty good, huh? Well, not so fast.
You see, medical expenses of course can be astronomical. If you injured 2 people in an accident and they required extensive medical treatment, you could eat up that $300,000 pretty quickly. And as far as the $25,000 for property damage, well, look around at all the cars on the highway the next time you are out and about. See any worth more than $25,000? You bet you do. If you total a car that costs more than $25,000, where do you think that overage comes from? Your pocket, that’s where.
SIDE NOTE: if you are at fault for an accident, and your liability pays out for the other person, this CAN affect your insurance rates. Most companies review the claim AFTER it has been closed to make a determination as to if it will have an impact on your premium.
Remember, liability coverage is there to protect you and your families assets, but you have to have enough there to do the job. Make sure to quote different levels of liability as you might be surprised as to how inexpensive jumping from one coverage level to the next is. Some may balk at paying another $50 every six months, but if that $50 just about you $100,000 worth of protection, it just may be worth it…
Uninsured/Underinsured Liability
Another aspect of liability on your policy is the uninsured/underinsured liability coverage. This is often denoted by UM or U on your policy paperwork. This coverage works very similar to regular liability, but, it covers YOU, not the other person. Let’s say someone hits your car and then leaves the scene, a hit and run. Well, if they aren’t there to give you insurance info, your policy can step in and pay the bill. This is where this coverage is helpful. In addition, if someone hits you but their policy is not enough to cover the total amount of the loss, this coverage can help here as well.
Oftentimes, people skimp on this coverage and have less than their regular liability amount. This is a personal choice, but since this coverage protects YOU, wouldn’t you want the maximum coverage? This coverage is also generally less expensive than regular liability having lower limits really doesn’t save that much money. The important thing is to have the correct coverage in place at the time of an accident.
Personal Injury Protection/Medical
Next we move to personal injury protection or PIP, often called medical in some states as well. This coverage exists to help pay YOUR medical expenses in the event of a claim. It is often called NO FAULT coverage because it can be utilized no matter who was at fault for the accident. In addition, because of this, it doesn’t go against your policy in the event it is used. It is usually represented by one number and the coverage is available up to the number itself. For instance, if you have P5000 on your policy (or something similar) you have personal injury protection available up to $5000. This coverage can be used for a variety of expenses that may arise in the event of an injury due to a covered claim such as:
- Paying deductible for underlying medical insurance
- X-rays or emergency medical care
- Chiropractic care following accident
- Lost wages due to missing work
- and more
Many states require this coverage as it helps to lessen the burden of medical care in the event of a covered claim. The cost of this coverage is usually negligible as well and it often makes sense to take the maximum coverage available from your insurance company. In many cases this is as much as $10,000 or even more.
Physical Damage Coverage
Now it’s time to look at the body of your car. Dents and dings happen for a variety of reasons. Some are because of accidents, but other can happen because of weather (hail, sleet, windblown debris) vandalism, or even a limb falling from a tree. If the body of your car is damaged and NOT because of someone else hitting you, it might be physical damage coverage that comes to the rescue. Let’s examine the two types and how they work:
Collision
Collision coverage exists to fix YOUR car in the case of an accident that YOU are at fault for. For instance, if you hit someone else and it was your fault, it will be the collision coverage on your policy that will fix your car. You might have guess, if you are using collision coverage to fix your car, this CAN negatively affect your rates. Because of this, you might want to lessen the amount paid by your insurance company by utilizing your deductible. A deductible is the amount that YOU will pay in the event of an accident for a particular coverage. Let’s say your collision deductible is $250. If you have an accident and it will cost $1000 to fix your car, then the insurance company will give you $750 and you will pay $250 out of pocket. The less the insurance company has to pay, the lower your premiums, so you might want to look at a deductible as high as $500 or even $1000 depending on the value of your car. In addition, as the value of your car drops, you might even consider dropping collision altogether. Remember, when using this coverage, it CAN affect your rates, so the less you use it, the better.
SIDE NOTE: Even though it might seem like a collision, hitting an animal accidentally with your vehicle is often not deemed a collision, but instead a comprehensive claim. Make sure to check with your insurance company for their specific definition.
Comprehensive Coverage
In a nutshell, comprehensive coverage is anything OTHER than collision. In fact, many companies refer to this coverage as OTHER than collision. If you car has gotten damaged and there was no accident involved, chances are it will fall under this category. Let’s look at some common situations that would be covered by comprehensive coverage:
- vandalism
- hail damage
- falling limbs
- car door opening on your car causing damage
- hitting an animal in the road
- Rock flies up and hits windshield
Now, while the cost of this coverage can be mitigated by a deductible as well, because it is so much lower in cost than that of collision, it makes sense to get multiple quotes before deciding on a high deductible. That coupled with the fact that having a comprehensive claim doesn’t necessarily negatively affect your rates (it CAN play a factor in overall rating, but is generally not as severe as a collision claim) then you might want to consider a low or even ZERO deductible. Nothing is more frustrating than having a rock fly up and crack your windshield and you having to come out of pocket several hundred dollars to get a new windshield. If you have comprehensive coverage with a $0 deductible, your insurance company will pay for the new windshield and the claim (generally) won’t negatively affect your rates.
Car Rental Coverage
This coverage is one that gets confused by many. You would be surprised at the number of insurance agents whose clients think that this coverage will pay for their rental car while they are on vacation…well, it might, but only in the event they have been in an accident FIRST.
Car rental coverage is designed to help pay for you to get a rental vehicle while your car is in the shop being repaired after an accident. It is most closely tied to collision coverage and it may only be enacted when the accident is YOUR fault. (this is not always the case, but is a general rule) Therefore, many policies state that if you remove collision coverage, you are no longer eligible for rental car coverage. Make sure to become familiar with your coverage and what the limitations are.
Most policies don’t pay 100% for rental car reimbursement but instead pay a portion. For instance, on your policy, if you have this coverage, it may read something like this:
R80%-$500
This means that your insurance company will pay 80% of the cost of a rental car (in the event of a covered claim) up to a maximum of $500. This is important to keep in mind if you do find yourself needing this coverage. Some people want to try to get the best car possible when their car is in the shop due to an accident, but, the nicer the car, the more expensive, and the sooner your coverage will run out. Once it runs out, YOU are paying 100% for the cost of the rental. Again, this coverage is not that expensive and it often makes sense to grab the maximum coverage your company allows.
Now, while the following scenario is not related to this coverage, I thought it a good place to mention it. What if you DO rent a car while on vacation…will your regular insurance policy cover it? The short answer is YES, but there ARE limitations. For instance, most US companies will require that the rental be in the 50 States. In addition, if you drive a small car, but rent a huge truck (let’s say you are using it to move or something) the coverage may not apply. As always, it makes sense to discuss the scenario with your agent. The fact is, in many cases you do not have to purchase the insurance offered by the rental car company, but do the research first.
Emergency Road Service/Roadside Assistance
Sometimes, no matter how well we plan, we find ourselves stuck…on the side of the road, and we need to call a tow truck. These scenarios are exactly why this coverage was invented. This coverage is designed to pay a reasonable cost to get your car back on the road or to tow it to the nearest facility for repair. Keep in mind it DOES NOT cover the actual repairs. Here is a short list of some of the things that Emergency Road Service/Roadside Assistance might cover:
- running out of gas
- flat tire
- car won’t start, needs to be jumpstarted or towed to repair facility
- car needs to be towed as a result of an accident
Now, in the scenarios above (keep in mind this is an abbreviated list) the coverage may pay a portion or ALL of the expense associated with the particular scenario. For instance, if you ran out of gas and a tow truck company brought you gasoline, your coverage may reimburse you for the cost of the gas AND the service charge of the two company. In addition, some insurance companies will pay for the service directly (via bill) while others require that YOU pay and simply submit your receipt for reimbursement. Make sure to read the wording of your individual policy to see how your coverage works.
In all cases, Emergency Road Service/Roadside Assistance coverage is inexpensive, often costing less than $10 per year. While some people have AAA coverage, having this coverage on your auto policy gives you more flexibility as you are usually not limited as to who you use for service. If the AAA guy can’t make it to you for 3 hours, but you can call another facility 2 miles away, you will be happy you had this coverage in place. In addition, in most cases, turning in claims under this coverage will not negatively affect your rates.
Death/Dismemberment Coverage
While certainly a morbid topic, all range of injuries and of course death can and often does occur as a result of automobile accidents. Death/Dismemberment coverage provides money to the insured or their family in the event of loss of limb or death. The amount varies from policy to policy and is usually not enough to take the place of health or life insurance, but this coverage can come in handy in the event of a serious accident. This coverage is usually not expensive and often provides benefits in increments of 5 or 10 thousand dollars. It often makes sense to have this coverage in place for additional financial protection for you and your family.
Conclusion
Hopefully, you now have a little bit of a better understanding of the coverage associated with a typical automobile insurance policy. Your particular area may offer additional coverage’s, but the above represent the most common. No matter how you tailor your policy, make sure it makes sense for the needs of you and your family. There is no question about it, when you have an accident you want to be sure your policy will cover you. The time to make sure that coverage is in place and in full effect is NOW, BEFORE you have an accident…waiting until after is often waiting too late…
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