There are many types of coverage to choose from, and each has its own variations. Some coverages can be very complicated. Choosing the best coverage for you depends on many factors:
- The value of your vehicle;
- The value of the assets you have to protect;
- How much you can afford to pay, and
- How you feel about self-insuring.
The coverage you need depends on what you plan to use auto insurance for. Auto insurance coverage is generally used for four broad purposes:
- To protect your auto investment;
- To pay your medical expenses;
- To cover your legal liability, and
- To cover additional losses related to driving.
Let’s take them one at a time.
Protecting Your Auto Investment
A new car may be one of the most expensive purchases you make in your lifetime. Even “economy” cars may cost in excess of $10,000. With this being the case, most people use auto insurance to protect their new car.
Part D of the standard PAP provides coverage for damage to your auto. This is also known as physical damage coverage. This protection actually consists of two separate coverages—”collision” and “other-than-collision” (more commonly known as comprehensive). You can purchase either or both of these coverages for each car you own.
Collision Coverage
Under the terms of your auto policy, collision coverage protects the value of your car in case of “the upset of your covered auto or a nonowned auto or their impact with another vehicle or object.” Collision coverage applies to situations you think of as a crash, such as hitting another vehicle or running into a tree.
Comprehensive Coverage
Comprehensive coverage includes all other physical damage to your auto that is not covered under collision. Comprehensive coverage is very broad and covers damage to your vehicle from such things as fire, theft, flood, wild animals, and vandalism.
Deductibles
Collision and comprehensive coverages may each include a deductible. A deductible is basically a risk that is self-insured. It’s an amount of money that you are required to pay before your insurance takes over. Deductibles can be in any dollar amount but are generally $100, $250, $500, or $1,000.
Example: You have a $500 deductible for collision damage. You are involved in an accident that causes $2,500 damage to your car. Result: You have to pay the first $500, and the insurance company pays the remaining $2,000.
Payment of Loss
Under the physical damage section of your PAP, the insurance company has the right to settle the loss by paying the cash value of the vehicle, by repairing the vehicle, or by replacing the vehicle. Insurers will pay the cash value of the vehicle only if it is “totaled.” A vehicle is totaled when the cost of repairs exceeds the value of the vehicle.
Do you need physical damage protection?
State law never requires you to purchase physical damage protection. Whether or not you need physical damage protection depends on the value of your auto. If you’re driving an older car with a low replacement value, you may want to drop your damage protection coverage to reduce your total premium.
Caution: If you cause an accident that damages your auto, you will not be reimbursed for your loss, so you should drop your damage protection coverage only if you are willing to be responsible for the entire cost of repairing or replacing your vehicle.
Tip: If you want to save money on physical damage protection, instead of dropping the coverage altogether, it may be a better option to increase your deductible instead. This will reduce your premium, while still providing some measure of physical damage protection.
Tip: Many experts recommend that if your monthly insurance premium amounts to more than 10 percent of the value of the car, it’s probably time to retire your collision and comprehensive coverage.
Remember, there are situations when physical damage protection is required. If you finance the purchase of a new vehicle, your lender may require you to purchase collision and comprehensive insurance as part of the financing agreement.
What Deductible Should You Choose?
The amount of the deductible you choose depends on the cost of your physical damage premiums and how much of a deductible you can afford. The rule of thumb is that the higher the amount of the deductible you have, the lower the cost of the premium.
From the insurer’s point of view, if you agree to pay the first $500 of a collision claim, they can charge you a lesser premium than if they have to pay the entire amount. Deductibles also save the insurer the expense of administrating small claims.
Tip: A $500 deductible can result in a 40 percent reduction on your collision premium.
If the premium on your physical damage protection is expensive, you should consider selecting as high of a deductible as you can afford to pay. Even if the premium is not that expensive, a $250 or $500 deductible will reduce your premiums significantly.
Medical Payments Coverage
As part of your PAP you can purchase insurance that will pay for medical expenses up to a certain limit resulting from an automobile accident. Part B—Medical Payments (“med pay”) Coverage provides this option.
The purpose of med pay is to provide payment for immediate medical treatment of people who are injured in an auto accident without waiting to see who is at fault and ultimately liable. Med pay covers you and your family members while riding in any motor vehicle. It also covers anyone else who is riding in your car and any pedestrians who are struck by your car. Med pay coverage can be purchased in any amount but is typically $5,000 or $10,000 per person. The premium for this coverage is typically quite inexpensive.
Do You Need Medical Payments Coverage?
Med pay coverage is optional in some states and mandatory in others. One benefit of med pay is that it covers many different people in the event of an accident. If you have good health insurance coverage and you do most of your driving alone, however, you might not purchase med pay coverage to avoid having two policies cover the same injuries.
If you often have people other than your family members riding in your car, you should consider purchasing med pay coverage. In the event of an accident, your passenger’s medical bills would be covered up to the med pay limit.
Covering Your Legal Liability
Covering your legal liability is your single greatest auto insurance concern. Compared with collision coverage, which is limited to the value of your auto, liability claims for injuries and pain and suffering damages can be virtually limitless. The Part A–Liability Coverage section of your PAP separates liability coverage into two sections: bodily injury coverage and property damage coverage.
Bodily Injury Coverage
Liability coverage for bodily injury insures you against injuries you cause to other people in an automobile accident. Injuries from automobile accidents can be very costly. This is an area in which you do not want to be underinsured.
Property Damage Coverage
Liability coverage for property damage insures you against damage you cause to other people’s property in an automobile accident.
Example: You cause a car accident that results in $5,000 damage to the other car. Your property damage coverage will pay for the damage.
Limits of Liability
Your insurer will not pay the entire amount of every claim against you. There are pre set monetary limits to the insurer’s liability. If a claim against you exceeds the stated limit of liability, you are personally responsible for the amount that exceeds the coverage. It’s crucial, therefore, that you have enough liability insurance to protect yourself and your assets.
The liability limits are stated on the Declarations Page of your policy. Bodily injury limits can be stated as either one total dollar-amount liability limit or two split limits. Split limit policies have specific limits of liability per person and per accident. In many states you have the choice of a single limit or split limits. As a general rule, split limit policies are more flexible and offer better rates than single limit policies. The liability limit for property damage is expressed as a single dollar-amount limit. The total liability limit is often expressed as three numbers divided by slash marks.
For instance, you have an auto policy that provides a limit of liability for bodily injury of $50,000 per person and $100,000 per accident. The policy limits property damage liability to $25,000. This would be expressed as 50/100/25 coverage.
How Much Liability Protection do You Need?
As mentioned earlier, virtually all states require some form of liability protection. These laws vary from state to state. Your state may have a minimum amount of liability coverage that you must purchase. Other states may require that you post a bond to prove that you are capable of paying a liability claim against you.
State minimums are just that—minimums. Your state minimum may not be enough to adequately protect you. Before deciding on how much liability insurance to purchase, the first thing you should do is take an inventory of all of your assets. Your assets are the things you could potentially lose if you injure someone in an accident and are sued. Add up the value of your home, your car, your stocks and bonds, and other assets. It is that total amount you should protect with liability insurance. You don’t have to be rich to have assets to protect. In a state that has a minimum liability requirement of $40,000, even a modest home can easily exceed that amount. Most experts recommend purchasing bodily injury coverage of $100,000 per person and $300,000 per accident. Your property damage coverage should be no less than $25,000. Depending on the value of your assets, you may need more or less coverage. Insurance companies commonly offer liability limits of $100,000 or $300,000. If you still need more protection, personal umbrella liability policies are available in amounts of $1 million or more.
Caution: Resist the temptation to minimize your liability insurance. The possibility of injuring or killing someone with your auto is the largest risk you face as a driver.
Covering Additional Losses Related to Driving
In addition to the aforementioned types of coverage, your insurer offers many other miscellaneous coverages to handle almost every situation. In some states, these coverages may be required.
Uninsured/Underinsured Coverage
Uninsured motorist (UM) coverage and underinsured motorist coverage are two separate coverages. They have similar qualities, although they protect in different ways. UM coverage protects you if you are involved in an accident with a person who does not have liability insurance.
Tip: UM coverage also protects you from damages caused by an unknown hit-and-run driver.
Underinsured motorist coverage protects you if you are involved in an accident with someone who doesn’t have enough insurance to cover your damages. Some states require you to purchase a minimum amount of uninsured motorist insurance. Even if it’s not mandatory, you should consider purchasing it. If you don’t purchase it, you could be left in a situation where you have extensive medical bills and no money to pay them. Although underinsured coverage is almost never required coverage, it can provide the same valuable protection.
Tip: It’s usually a good idea to purchase the same amount of UM coverage as you have for bodily injury liability.
Loss of Income Benefits
Your PAP may offer loss of income benefits. An auto accident may put you out of work for an extended period of time. The lost income could put a tremendous strain on your financial situation.
This coverage pays a certain portion of your lost wages in the event of an auto accident. If you don’t have health or disability benefits, this coverage can be useful. If you have good disability insurance through your employer, however, this coverage is probably unnecessary and duplicative.
Towing and Rental Coverage
Towing and labor and rental car replacement are two separate coverages you can purchase with your PAP. Your PAP can cover the costs of towing and labor charges if you break down, and the cost of a rental vehicle if your vehicle is stolen or disabled from an accident.
For a small premium you can purchase towing and labor insurance. This coverage will pay any towing and labor charges (up to the specified limit) incurred when your vehicle is disabled or needs a jump start. This coverage can be used any time your car breaks down and not just when it’s in an accident. If you have a roadside assistance program through another source, this coverage may not be necessary. Rental car replacement coverage pays a set amount per day for the costs of a rental car if your car is stolen, or is being repaired because of an accident. A typical rental car limit is $30 per day, up to a maximum of $900. For an additional premium, the per day limit can be increased.
Caution: To receive the rental benefit, the accident has to be one that is covered under the physical damage section of your PAP.
If you own two vehicles or if you have access to alternate means of transportation, you may be able to get by without this coverage while one vehicle is in the shop.
Endorsements
An endorsement is a change to your standard policy form. There are many common endorsements that can be added to your policy to add optional coverages that are not included in the standard policy. You will usually have to pay an additional premium for these extra coverages.
Endorsements are commonly used to increase the liability limits in certain sections of your PAP or to cover items or vehicles that are excluded in other sections of your policy (such as motorcycles and all-terrain vehicles). If you have particular items or vehicles that are not sufficiently covered under the standard PAP, you may consider adding an endorsement to cover them. Physical damage coverage on antique cars, for example, is often insufficient to protect the real value of the car. In that case, you can add an endorsement to your policy that covers the antique car up to the value you choose (the stated value). The insurer will come up with a premium for that amount of coverage, and you’re protected.
If you have auto insurance questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
