This won’t be a post about how you could save money by shopping around for car insurance. This is a post detailing what each type of coverage means and what options you should weigh when choosing the level of coverage.
If you drive a car you need auto insurance. At least that is the law.
Unfortunately, according to CarInsurance.com, 14% of the nation’s population drives uninsured. Some states are more at risk than others, though. The main reason I include this information is because it could actually affect how you decide to adjust your coverage.
The states they found with the highest amount of uninsured motorist include Colorado at 34%, Mississippi at 29%, Alabama at 28%, New Mexico at 27% and California with 26%. The five states with the lowest uninsured driver estimates were Maine at 4%, Vermont at 6%, Massachusetts at 6%, New York at 7%, and Nebraska at 8%.
Hopefully you find yourself in one of the states that has more insured drivers on the road.
Now on to the meat of the article, what different types of coverage are included in an auto insurance plan?
Bodily Injury Liability (BI)
When you crash your car into another car and are deemed responsible, who pays for medical bills, loss of income, or pain and suffering that may be incurred by the people in the opposing vehicle? And in the worst case scenario, who would pay if somebody (heaven forbid) died?
If someone from the accident decided to take you to court, who would pay legal fees? Hopefully not you, legal fees are astronomical. Your emergency fund would implode. The word implode doesn’t even describe what would happen if the judgement from the court case was ruled against you.
This is a required part of your policy in most states. Most companies make you carry the same amount of coverage on each vehicle since BI covers injury to people NOT property.
How should you make your coverage selections? First and foremost, know that if you set your coverage too low and something were to happen you may be creating a huge financial risk for yourself. If you choose $20,000 in BI but the claims exceed that by $20,000, you are on the hook for $20,000. Ouch. What would you do if that happened to you? Empty your emergency fund? Liquidate property or assets?
Make sure you protect your future by choosing wisely. Don’t let a low monthly savings (by reducing coverage) lure you into risking your future financial state.
Property Damage Liability (PD)
In direct opposition to BI, PD pays for the other person’s property. Usually that means it pays for the damages to their car. However, this is not always the case. What if you swung around a corner a little too fast and took out a mailbox and a fence? PD pays for that, too. Or even worse, have you ever seen a news story where a person jumps a curb and crashes right into a house or a store front? If that person had low PD coverage they will not be a happy camper.
Just like in the previous example any legal fees will be covered under PD coverage. And just like in the last example, the amount that you would be responsible for is the total judgement minus your total coverage. I would be pretty hesitant about driving crazy around Lexus’ and Mercedes’ if you don’t have a lot of PD coverage.
How should you make your coverage selections? The same rule applies, essentially. If you skimp on coverage you could be setting yourself up for a lot of financial risk. If your coverage is for $10,000 and you hit a brand new $50,000 Lexus, you have to kiss $40,000 goodbye in an instant. And that is just if they only have PD claims.
You should not factor in how much your car is worth when deciding on your PD coverage.
Personal Injury Protection (PIP)
Now that we have covered both the personal and property liabilities of the opposing car (or property) in the accident, we can start choosing coverage that will protect ourselves. PIP is only available in some states and will cover the medical, hospital, and (heaven forbid) funeral expenses of the policy holder along with anyone who was in the car. In some states it will also cover a pedestrian who winds up in the accident. This is a great rule because it means we do not need walking insurance (knock-on-wood… never know when they’ll think of that!).
One state that I know requires PIP is New Jersey as I live in the North East. As always, check your local laws!
No declaration of fault is needed for PIP to cover expenses but there are limits that are sometimes defined by the states.
Who should look into getting good PIP coverage?
- People who do not think their health insurance would be good enough to get them out of a bind if they got into an accident.
- People who tend to be the chauffeur in their group of friends.
- And people who car pool a lot, perhaps for work.
Why carpooling? Because if the driver doesn’t have PIP, you can use your own PIP to cover yourself. Again, this depends on the state, but that is a nice benefit.
Collision coverage will pay for any damage to your car when you get into an accident with another vehicle or object regardless of fault. The coverage will pay to fix the vehicle minus whatever deductible you choose. For example, you get $1,000 worth of damage to your car and have a deductible of $200, the insurance company will pay $800 of the $1,000 total.
Their are some catches, though. If you want to keep your insurance premiums affordable, consider setting the deductible as high as you would feel comfortable paying out of pocket (hopefully you have a car repair fund!). As long as you don’t get into any accidents then you will save money on your insurance and have extra padding in your bank account.
Another thing to consider is that if you do not have a car that is worth much (read: if you have a junker) then you should consider dropping collision coverage altogether. Why? Because the amount coverage will pay out is the value of your car. If your car is worth $1,000 and you get into an accident and cause $1,200 worth of damage, the insurance company will only pay you the $1,000 value of your car. After you pay your deductible and add up the extra expense of carrying collision coverage it would probably wind up that you are worse off. If you choose this option just make sure you set up a separate emergency fund just for your automobile.
Unlike a few of the other coverage options, this is not required by the state. However, if your car is leased or loaned the lender may require you to carry collision coverage. Why? To cover their butt when you total the car… they want to get paid.
To sum up collision coverage: Adjust your deductible to get a good balance between what you can afford to pay out of pocket and an affordable monthly payment. If you have a junker consider not purchasing collision coverage. Newer cars or cars that are financed will probably be required to have collision.
Comprehensive coverage covers your vehicle from losses that may happen from something other than a collision. What does this encompass? Theft, flood, fire, animals (deer, mainly), etc.
Just like collision, you choose a deductible. So use the same logic when choosing your comprehensive coverage. Choose as high of a deductible as you feel comfortable with and don’t have coverage if your car isn’t worth it.
The state won’t require comprehensive but the lender usually will.
Things to consider when making a decision in regards to comprehensive coverage:
- Do you live in an area that has a lot of burglary? (DogAteMyFinances comes to mind)
- Do you live in an area that has a lot of wild life , which leads to a higher frequency of deer accidents?
- Do teenager idiots go around smashing windshields?
- Do you live in a flood zone?
When all is said and done and you weight the value of your car, your comfort level, and environmental/community influences you should have a comprehensive selection you are happy with.
Finally, we get to the uninsured motorist section. I have mentioned this to a few people over the past few days and have received strikingly different responses. Random people are shocked at how high the number is. Cops and fireman seem to be shocked at how low it is. Take that for what you will… but it seems the general public is not aware of the danger and our servicemen are well to aware of the danger.
This coverage will pay for any injuries you incur when you get into an accident with an uninsured motorist. Why does this exist? Because normally the other driver’s bodily injury liability (which the state requires) would pay for your injuries. Obviously uninsured drivers do not have this coverage then. So in an effort to keep you protected the uninsured motorist coverage exists.
If you do not have health insurance, or if your coverage is inadequate, then this coverage is a must. You will be on the hook for any injuries that happen to you if you were to get into an accident with an uninsured motorist and don’t have good health insurance. So make sure you also set your limits high enough that you feel safe.
There are different types of uninsured motorist plans. Some wrap the bodily injury and property damage aspects together. Some separate them. If they are separated you have the option of getting just the bodily injury (more important in my opinion) and skipping out on the property damage.
Same as above with the exception that the opposing vehicle does have insurance. It just isn’t sufficient to cover all of the damages you have incurred. This policy will cover the gap between the damage you incurred and the damage their insurance company will cover.
This is also sometimes broken up into bodily injury and property damage. So if your car is worth $10,000 you probably would not need to get the property damage portion of the under-insured motorist coverage.
So What Do Those 10/20/10 Numbers Mean?!
Insurance policies are usually written in this “code.”
- The first number is the amount in thousands that you have in bodily injury liability per person in an accident.
- The second number is the total amount in thousands you have in bodily injury liability per accident.
- The third number is the total amount in thousands you have in property damage per accident.
So in our example, per accident you have $10,000 in BI liability per person, $20,000 BI liability total, and $10,000 property damage total.
What Does No-Fault Mean?
Some states have no-fault rules. This means that your insurance carrier will cover your bodily injury and property damage claims no matter who was actually at fault (up to a degree). The idea is that court time will be minimized and thus costs will be lower.
Hopefully this helps out if you have to navigate the auto insurance jargon anytime soon. Comment if you have any comments, suggestions, or questions!