Preparing for the Unexpected: Automobile Insurance

Photo from Wikipedia

We've all seen the commercials for the lawyers who promised big checks to people who are in car accidents.  They make it sound like a car accident is a way to riches--and it is--for the lawyers.  That money has to come from someplace and that someplace is usually an insurance company.  Today I'm going to talk about car insurance.  

Different states have different laws about what types of automobile insurance are sold in those states but these are generally the kinds sold:

Collision:  

This pays to fix your car if you are in an accident.  The insurance company will get an estimate, generally from a repair shop, of what it will cost to fix your vehicle.  They compare that estimate to the value of the vehicle and decide whether to repair the car or "total" it and pay you its book value.  Remember the adage that insurance is to protect you against things you can't afford to have happen.  Generally, you can afford to replace an old car, and you will be disappointed at how much (or more precisely, how little) you are paid if you are in a wreck.  Check with your agent every year or two about the amount you would be paid if a car was totalled.  Decide if it is worth paying the premiums to get that amount of money if the car is wrecked.  You can reduce your premiums by increasing your deductible--the amount you pay out-of-pocket before the insurance pays anything.  

Comprehensive:

This pays to replace or repair the vehicle if it is stolen or damaged in some non-collision manner, like hail or flood.  Again, it is not going to pay more than the car is worth, and again, the way to lower premiums is to increase deductibles. 

Liability:

This pays for harm you cause to others.  In other words, if we are in an accident and the accident is your fault, your liability insurance will pay to fix my car, pay my medical bills and pay another other damages I incur as a result of the accident.  Most states require that you carry a certain amount of this as a condition of driving on public roads.  In Louisiana, the requirement minimum is "15/30" meaning that a policy will pay up to $15,000 per person and up to $30,000 per accident.  The maxium my insurance company sells is $500,000/$500,000.    The amount you need depends on your assets, your earning power and your conscience.  In short, you want enough insurance so that if you are in a bad accident, the attorney for the person you hit will be satisfied with the insurance, and will not come after your personal assets.  If you are a low wage earner with no real assets outside of a retirement plan, a 15/30 policy may be enough.  If someone gets a judgment against you, you can file bankruptcy to get rid of it, and though your credit rating will take a beating, you will get over it and life will go on.  On the other hand, if you are a high earner with a lot of assets, no plaintiff lawyer worth anything is going to take a 15/30 policy for a serious injury because you have assets they can get.  

Uninsured/underinsured motorist:

If you are in an accident and the at-fault party does not have enough insurance, this coverage pays after the at-fault party's insurance.  You purchase this coverage and agents often recommend you carry the same limits as you do in liability.  Most of the  time you cannot purchase more UM coverage than you do liability coverage.  This coverage seems like something that can be skipped if you are trying to save money, but if you are in a serious accident that is the fault of someone with little or no insurance, this is the insurance that could replace your lost wages and pay for your pain and suffering.  

No Fault Coverage:

Some states have "no fault" insurance, either totally, or up to certain limits.  This means that following an accident, each party's insurance fixes their own cars and pays their own bills, at least up to a point.  The idea behind no-fault was to reduce cost by getting lawyers out of the minor car accident business.

  

Medical Payments:

Most policies include a certain amount of "med-pay" and do not allow you to waive it.  Again the idea is to provide coverage that pays without the need for suit to be filed or even blame to be assessed.  The limits are usually only a few thousand dollars, but it is enough for an ER visit and a doctor's visit or two.  

Used with Permission

Umbrella or Personal Liability Policy

This policy pays on top of your homeowner/renter policy and your auto policy.  It is protection for people with high net worths or high incomes.  If a claim exceeds the value of their auto or homeowner's policy, this policy pays.  Since it doesn't pay very often, it can provide a high amount of coverage for a relatively small price.  

As with any other insurance, you need to consider your personal situation in deciding which coverages to purchase, and how much of each.  If you finance a car, the lien holder will require you to purchase collision and comprehensive insurance, and maybe even a "gap" policy which would provide enough money to pay off the car in the event that it it totalled, since most people owe more than the car is worth for at least the first year they finance it.  If you are driving an older vehicle you an afford to replace, then skipping the collision and/or comprehensive makes financial sense.  Skimping on liability coverage could come back to haunt you--but carrying too much doesn't make sense either.  

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and She Picks Up Pennies*