One of the most frustrating things about many insurance products is their complexity. Just when you think you’ve answered the question: “How much will I get if…” something else surprises you about how the benefits are structured.
Over the past year, I’ve been knee-deep in research on health and car insurance products as a result of some trips to the ER and a few fender-benders. I’m in awe about how such seemingly simple products can actually have layers of complexity you didn’t even know existed.
I’d like to look more closely at car insurance, and share with you what I know today that may help you understand your own coverage and prompt you to change it if needed.
Components of Car Insurance
Thankfully, the typical components of car insurance are easily broken down and studied individually, though they are not treated equally, as I’ll explain in the next section. Let’s take a look at what we’re dealing with first:
- Liability Coverage: This protects you from legal action against you for injury caused while you were driving. It’s the one coverage that has perhaps the most potential downside if not properly insured, and the one people tend to go light on because of the cost.
- Property Damage Liability Coverage: Similar to above, except that this protects you from damage caused to other people’s cars and property.
- Collision Coverage: Contrary to property damage coverage, this items pays for damages to your own car sustained in an accident. It is usually subject to the insurance deductible you selected when you wrote your policy.
- Comprehensive Coverage: This part of the policy protects you if your car is stolen or damaged, whether it’s by flood, hail, fire, a falling tree, a stray shopping cart, or something similar. This coverage is also subject to a deductible.
- Personal Injury Protection: When you’re in an accident in a no-fault state, this insurance will pick up payments for your injuries and lost wages and for a personal injury lawyer, typically regardless of who caused the accident.
- Medical Coverage: Many policies offer stand-alone medical coverage that pays for your medical bills or even death benefits if you’re involved in an accident.
- Uninsured Motorist Coverage: Just as its name suggests, uninsured coverage protects you in the event that the other people involved in the accident don’t have auto insurance. Similarly, many policies can also protect you if the coverage the other people do have is not enough.
- Loan Payoff Coverage: Usually subject to limits, this coverage which is also known as a “gap” policy, will pay the difference between the value of the car you just totaled and what you owe to the bank. On newer vehicles, this can be a substantial amount.
- Roadside Assistance: More and more auto insurance companies are offering roadside assistance coverage for an extremely low cost. For example, we pay $12 a year for coverage on 2 cars.
- Rental Car Reimbursement: As another nifty feature of many policies, insurance companies will give you a daily rental allowance if your vehicle is disabled as a result of a claim and you need to rent a car.
- Mechanical Protection: Some policies now offer a car warranty-type arrangement, where the insurance company will pay for catastrophic failures to your car’s biggest systems (think transmission, engine, etc.), even if they’re not caused by damage or an accident.
- State-Specific Costs: Some states will assess extra fees through the insurance company. For example, Florida charges toward a “hurricane catastrophe fund” on every policy.
The Many Gray Areas
Not everyone will want or need all of the policy types I’ve mentioned, but at least there’s a nice buffet to choose from. Though it seems cut and dry, things can get muddy very quickly when dealing with car insurance. Consider some of these variables:
- What’s required. Many states will require that you carry coverage to protect other people from your mayhem (bodily & property liability insurance), but most don’t require that you insure your own car. This is why we cancelled comprehensive coverage on our older car a few years ago.
- Other state laws. States have countless other laws about car insurance–for example, some states legislate when you can sue someone else for your injuries, either by a monetary damage value or the actual injuries you sustained.
- Coverage limits. In addition to the self-evident limits you sign up for with your insurer, there may be other, less obvious limits. For example, insurers are only willing to pay out comprehensive or collision claims if the payout is less than the value of the vehicle–otherwise, they will consider the car totaled.
- Whose policy will cover what. Determining which insurance company will pay for what can be a drawn-out battle, sometimes resorting to use of the courts. If you carry multiple policies or drive a vehicle that is not your own often, it can get even more complicated.
- Deductibles. While your chosen deductible is pretty self-evident when you review your policy, its application may be less so. Does it apply when you hit somebody, or when someone hits you? What about a hit-and-run? Sometimes, the only way to find out is to go through the claims process.
- Who’s at fault? Even in a no-fault state (which has to do more with how insurance is applied and not how an accident is investigated), fault in an accident is usually assigned to someone, or at least split evenly. Who’s at fault can affect whose policy will pay for damages and how deductibles will apply.
- Discounts and other factors. How your policy is written can affect what happens when you get into an accident. For example, some insurance companies offer “accident forgiveness” arrangements where no deductible is paid. Others let you claim a certain number of accidents every so often to keep preferred status.
How to Get Informed
These are only a few of the variables that play a part in how your car insurance works when you actually need it. I have a few suggestions on how you can get more informed about what your policy covers and be ready for whatever might come your way:
- Read your policy. It might sound obvious, but many people simply rely on their insurance agent or even the insurance company itself to give them the coverage they need. I don’t mean the fine print, either–start with the big numbers and work your way into the details.
- Research state law. State regulations have the biggest impact on what insurance you need and how you’ll be affected by an accident or claim. Search for your state’s laws to get an overview of what could impact you.
- Research what-ifs for your state. Similarly, research various scenarios for your state, like what happens when someone uninsured hits you, drivers from out of state, and the impacts of anything from a fender-bender to a serious injury. Chances are that someone out there has been through it before and wrote about it online.
- Check with a lawyer or insurance agent. If you have a lot to lose, it’s probably advisable to consult a lawyer about your potential liability in any kind of accident. Even if you don’t consider yourself “wealthy,” if you have a high-paying job, you may have liability on your future pay. Better to spend a few hundred dollars now than to lose thousands or millions later.
To Sum Up…
Please note that the information above is based on my general familiarity with the insurance world and personal experience. It’s not meant to be definite advice about specific insurance products or which insurance you might need–that is exclusively your decision and I strongly recommend that you, at the very least, do some of the research I described.
Unfortunately, a lot of this stuff is very specific and only learned through experience based on where you live, which for some people ends up being a very expensive lesson. Be as proactive in your understanding of this stuff as you can–among all the insurance products available to us, car insurance is actually one we will frequently use during our lifetime. Stay safe!
One thought on “Clearing Up Car Insurance Confusion”
Here are my 2 cents, as a risk manager of a fortune 100 company. I know a lot about commercial insurance, but not a personal lines specialist, so take it for what it’s worth:
1) The most important thing is to get quotes from 5-6 insurance companies, and repeat the process every 3-5 years. Every state’s insurance commissioner puts together a comparison of auto insurance costs for a hypothetical driver based on filed rates. You can see which insurers are more aggresive than others in your state. Here is an example from my state of VA: http://www.scc.virginia.gov/boi/pubs/auto_sampprem.pdf
2) Purchase auto and homeowners policy from the same carrier. In addition to discounts, if you back your car into your garage, with single carrier, higher deductible will prevail. With 2 carriers, you will have 2 deductibles.
3) If you are renting, consider a renters policy. Frequently, the discount you get on automobile will pay for renters policy, so you get content coverage for free.
4) If you have meaningful assets and earning potential, do not carry state minimums. If you seriously injure another party, there are countless examples out there of awards being in 1m to 3m range, and that assuming no punitive component. Umbrella policy, providing 1m or 3m in coverage costs less than you think.
5) Purchase uninsured/underinsured motorist coverage in the same limits as your insurance. There are way too many idiots on the road, and chances are, those same idiots are carrying minimum limits, which in some states could be as low as 15k. In some places, many people are also driving illegally, completely uninsured. This coverage covers you and people in your car you care about, don’t skimp on it.
6) Take a defensive driving class. In some states, you get discounts on insurance, but even if you don’t, you will be a much better and prepared driver. You can’t control what others do on the road, but you can anticipate common traps and defensive driving classes will teach you that. I can point to at least 4 times which I’m convinced would have resulted in me being involved in an accident had I not taken a class. Even if accident isn’t your fault, its unpleasant, time consuming and increases your premiums.
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