The primary function of auto insurance (like any insurance) is to protect your assets. The liability coverage provided through your personal auto policy (PAP) is required coverage in most states. Auto insurance protects you in many other ways as well. You can insure the value of your car, protect yourself against uninsured motorists, and purchase rental reimbursement insurance. Your auto insurance choices are covered at length in Premiums and Coverage.
Before purchasing auto insurance, you should evaluate and compare the various products offered. In addition, because your personal and financial obligations change, you will occasionally need to review your PAP to ensure that it adequately meets your needs. If it doesn’t, you may have to modify or replace your policy.
How Much Insurance Do You Need?
Covering your legal liability is the single greatest auto insurance concern. Lawsuits and claims are being filed more frequently than in the past, and the cost of defending yourself may be high. If you don’t have adequate liability insurance as part of your PAP, you may be left in a position where the amount you owe exceeds your insurance coverage. If this happens, you are personally responsible for any amount that is above and beyond the limit of your coverage. If you don’t have the money to pay those damages, your assets and future earnings can be legally seized, subject to some legal restrictions.
Many experts recommend purchasing bodily injury coverage of $100,000 per person and $300,000 per accident. Property damage coverage should be no less than $25,000. Depending on the value of your assets, you may need more or less coverage. In addition to liability protection, the PAP contains many different coverage options. See Premiums and Coverage for more information. Because there’s no optimum amount for every individual, how much auto insurance you need depends partly on your tolerance for risk. Can you afford to pay the cost of a claim out-of-pocket, or would even a small claim threaten your finances? If you already have an auto policy, take a look at your current policy. Determine whether your liability limits are high enough, whether your vehicle is adequately protected, or if there are any coverage gaps you’d like to fill. Your insurance company can recommend the liability and physical damage limits you should carry to adequately protect yourself and your property.
Minimum Requirements
The amount of auto insurance you carry may not be completely up to you. First, the state in which you live may require that you purchase coverage with certain minimal liability limits. Second, the financial institution that holds the lien on your car may also require that you purchase a certain amount of collision and comprehensive coverage.
Evaluate the Coverage You Already Have
Before buying new or additional coverage, review the coverage you already have. It’s a good idea to sit down with your insurance agent or financial advisor to look over your auto policy. Talk about your current and future insurance needs. You may be able to increase your liability coverage or make limited changes to an existing policy if you find that the coverage you have is inadequate. There may also be occasions when you need to purchase an entirely new policy.
Events that Trigger a Review of Your Auto Insurance
The following is a list of some common events that should trigger a review of your personal auto policy:
Your annual policy is up for renewal: If you’re like most people, your PAP is issued on a yearly basis. Before you renew your policy, you should take the time to review it and make any necessary changes. For example, collision coverage may become less necessary as the value of your vehicle decreases. The day the quote from your current insurer comes (usually a month or so before your policy expires) is an ideal time to shop around and compare the rates of other insurers.
Your family status changes: Because the PAP covers not only you but frequently family members who live with you, it’s time to review your PAP when you get married, get divorced, are widowed, have children reaching driving age, or become an empty nester. You may become more concerned about protecting assets after you get married, or you may wish to purchase more liability coverage (or collision) after your son or daughter gets a driver’s license.
Your property increases in value: Your home is your most valuable asset. Without adequate auto liability protection, your home could be seized to pay a judgment against you. As the value or the equity in your home increases, so too does the amount of protection you need. Purchasing additional liability coverage can provide that protection.
Your net worth increases: As your net worth increases, you will have more assets to protect, and you may become more and more concerned about protecting those assets. It’s an unfortunate fact, too, that wealthy people are sometimes targeted for lawsuits. Increased liability coverage can, again, help you protect these assets.
You buy a new (or additional) car: When you buy a car, you’ll need to change your automobile policy to insure it. Take a few minutes to review your liability coverage under that policy, and make sure that your liability limits are still adequate. It’s also a good time to make a few calls to other insurers and compare your current insurance company’s price.
Comparing Auto Insurance Policies—Policy Terms and Conditions
The main objective when buying any type of insurance is to buy coverage that will insure you adequately. However, for most people, price is also a factor. It may even be a big factor. Insurers evaluate risk factors differently. In states that do not have standardized rates, it’s not uncommon for one company to charge significantly more than another company for the same coverage. Shopping around for the best rates can really pay off.
Although automobile insurance policies are standardized to a certain extent, it’s still important to compare policies in terms of price, coverage, exclusions, and the reputation of the insurance company. When comparing auto policies and coverages, here are some points to consider:
Shop around: Check with some of the larger carriers in the market. They will give you a basis to compare coverage and cost. Don’t forget about quote services that will give you several quotes over the phone or on-line, making it easy to compare policies.
Make sure you are comparing similar policies: You can’t fairly weigh one policy against another unless you are comparing similar policies. Before you compare auto policies or coverages, decide which coverages you need, what deductible you would like to have (usually the higher the deductible, the lower the cost), and what limit of liability you would like to carry. In addition, determine whether the policies you are comparing contain similar coverage provisions and exclusions.
Weigh the policy cost against coverage and service provided: When buying auto insurance, your goal should be to buy the best-quality coverage offered that will adequately protect you at a price you can afford. First, review each policy carefully to determine what coverages it offers and what things are excluded from coverage, and then determine if they meet your needs. If the policies are standard forms, you may not find much difference from one policy to the next, but you may find that one policy may include a type of coverage as standard that another policy offers only as an option. This may affect the premium you pay. In addition, each insurance company is allowed to set its own rates, within limits, and you may find that coverage at company A might simply cost more than the same or similar coverage at company B. As mentioned, prices for the same coverage can vary widely. However, price should not be your only concern. For instance, the premium that company A charges may be higher than the premium company B charges, but company A may be the company you want as your insurer because you’ve had a good experience with them, or because they have a good reputation in the industry. Finally, you may be satisfied with the service you receive at your current insurance company and may want to continue doing business there. You may even find that the premium you pay will be less if you own multiple policies with the same company.
Evaluate the strength and reputation of the insurance company: It’s important to buy auto insurance from a financially sound, reputable insurance company. You (or your insurance agent) may rely on the ratings published by one of several companies, such as A. M. Best, Moody’s, Standard & Poor’s, and Fitch (formerly Duff & Phelps). These ratings can tell you how financially sound an insurance company is. In addition, try to find out something about the claims-paying practices of the insurance company by talking to your agent or any friends or family members who may have dealt with the company in the past. Does the company settle claims quickly? Does it refuse to pay certain claims? Does the company have a good reputation in the industry? These intangibles can be very important to your overall satisfaction with the insurance company.
Why Conserve, Rather than Replace, Your Existing Auto Policy?
Because it wouldn’t be cost effective to replace your existing coverage.
Sometimes, after evaluating your existing PAP and comparing it to other policies out there, you may conclude that replacing existing coverage would not be cost effective. First, the new coverage offered might be more expensive (or not substantially less expensive) than the coverage you already own. Second, if you are replacing coverage to lower the cost, you may end up with a policy that offers less protection than you really need.
Because your policy adequately meets your needs.
After analyzing your auto insurance needs, you may conclude that your coverage is adequate. After comparing your policy to those offered by different companies, you may decide that your policy is fine.
Because you only need to make limited changes.
Unless you have a good reason to replace your existing auto coverage, don’t. The benefit you receive by being a steady customer may outweigh, for instance, the slightly cheaper rates that the new company has offered you, not to mention the time and effort it takes to change your policy.
Need help deciphering your options? Contact the Insurance 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.
