If you’re just stopping by for the first time, this is a class in a series of classes over the next few months which will culminate in the development of a complete financial plan. Stop by the orientation class HERE first for class orientation/overviews and HERE for more information about the website.
Class Objectives: To understand the basics of why auto insurance is necessary and what coverage you need.
Handout: Current Auto Insurance Coverage
Assignment: Insurance information for quotes in Excel| Google Docs (previews in lecture material)
People purchase insurance to shift the risk of the possibility of future financial loss from themselves to an entity (an insurance company). In return for amounts paid as premiums, one can have peace of mind that an incident of some sort will not cause you to lose a significant investment of cash or assets.
Basically, in return for a relatively small payment of money (premiums), the insurance company is agreeing to be willing to pay a significant amount in the future if certain incidents arise, and up to certain specified limits.
Auto insurance is a type of insurance that covers you in the event of an auto accident causing damage to your own and/or other people’s property or causing bodily injuries to someone else. It also covers you in the event that your car is damaged by someone else or stolen. This insurance will cover not only your vehicle, but also you and your passengers.
The biggest value of auto insurance lies in the liability portion of the insurance. Damage to vehicles or structures is generally not extremely significant (it averages around $9,000 per accident), but medical payments and lawsuits can cost hundreds of thousands of dollars.
MY EXPERIENCE WITH THIS INSURANCE
Don’t wait until you have to you use your insurance to check your current coverage and deductible amounts. When I was working my way through college at a grocery store, I went out to the parking lot after my shift and found that my car (a brand new lease) had been dragged over 10 feet in the parking lot and had significant damage. I talked to people at nearby stores and gathered that there was a large moving truck parking lot earlier, much bigger than should have been in the tight space there was. It clearly had just a little trouble getting out of the parking lot (seriously, they let anyone drive those things-not good!). At that time, I had no idea how insurance really worked and was surprised that I had a large $1,000 deductible, which I had to cover since the person that caused the accident didn’t take responsibility. I fortunately was able to cover the deductible, but it was a huge hit for my tiny budget. The good thing was that I had car insurance, as it would have been very difficult for me to pay the full cost of the damage caused, which was more than the $1,000 deductible. I wish I could say that I learned more about insurance at that time, but really all I did was decrease my deductible a little to make sure it was more manageable during the rest of my poor college student days.
WHAT DOES THIS INSURANCE COVER?
There are three categories of things that auto insurance covers–property & medical, liability and other coverages.
PROPERTY & MEDICAL COVERAGES
- Collision coverage: This coverage pays for damage to your car if it is involved in an accident. This includes hitting another car or non-moving object or if your car is hit while it’s parked (yep-this is what coverage I used in the situation above!). There is a deductible that applies to collision coverage (yep-you definitely want to know what yours is ahead of time!).
- Comprehensive coverage: This coverage pays for damage if your car is stolen or damaged by things like vandalism, animals, fire or certain acts of nature (such as hail, tornadoes, hurricanes and earthquakes). There is a deductible that applies to comprehensive coverage.
- Medical payments coverage: This coverage includes medical payments that you and the passengers in your vehicle have related to an auto accident. It also covers you and your household family members if you are a pedestrian hit by a car. This is useful even for those with health insurance, as you can use it to help with your medical deductibles or copays. Examples of medical expenses include medical appointments, hospital stays, lab tests, ambulance charges and professional care.
- Uninsured or underinsured motorist coverage: This coverage, which may be two separate or one combined coverage, pays for bodily damage and loss of income to you and passengers in your vehicle when another person caused the accident and does not have auto insurance or their insurance is insufficient. Uninsured coverage also kicks in when you are injured in a hit and run accident. It does not cover damage to property (that would be covered under collision coverage).
- Personal injury protection (PIP) coverage: This coverage is in addition to medical expense coverage and includes additional medical expenses not covered by medical insurance, funeral expenses, loss of income, child care and other expenses for car accident injuries for you and your passengers. It is required in some states (including my home state Michigan).
- No-fault insurance: A portion of states require this coverage, which requires auto policies to pay out no matter which driver is at fault in an accident. No-fault insurance includes personal injury protection coverage, property protection and bodily injury liability insurance.
- Bodily insurance liability: This coverage pays for injuries to the other party(ies) involved in the accident as well as funds for your defense in the case of a lawsuit. Examples of expenses that are covered include ambulances at the accident, medical payments for the injured, loss of income compensation and funeral expenses.
- Property damage liability: This coverage pays for damages to other people’s property when you are the cause of the accident as well as funds for your defense in a lawsuit. Examples of these types of payments include amounts to cover vehicle damage and structural damage to objects and buildings.
- Rental reimbursement: This coverage pays for the cost of renting a car if your vehicle is in an accident that your policy covers. My experience has been that dealerships and repair shops often have loaner cars that they are willing to let you borrow, so I don’t personally have this coverage.
- Towing & labor: This coverage includes roadside service for things such as jump-starting your vehicle, towing or flat/popped tires.
- Sound system: This coverage specifically covers the cost of damage or theft of audio and video equipment in your vehicle.
HOW MUCH OF THIS INSURANCE DO I NEED?
It is vital that you have adequate auto insurance, especially due to the likelihood of getting in an auto accident as compared to any other insurance-related claim.
As for collision and comprehensive coverage, you may not need this at all if you own your vehicle outright (no loan). If you have a bank loan on your vehicle, you will be required to have both of these coverages to protect the bank in the event of an accident. If you have an older car that isn’t worth a lot AND you have an emergency fund to be able to cover damage or a new vehicle if your vehicle is damaged, you may want to consider dropping this coverage. Insurance will limit the collision and comprehensive coverage to the actual cash value of your car. Compare your car’s value to the annual premium you are paying for these coverages to decide whether it’s worth it to you. Be sure you have enough in savings to cover the loss if you are in an accident.
Liability insurance coverages are the most important, due to the repercussions of being sued as the result of an auto accident. Each state has laws that dictate minimum auto insurance liability coverage amounts. For example, in Michigan the requirements are $20,000 for injury to an individual, $40,000 for injuries to multiple people and $10,000 property damage.
The liability insurance portion of auto insurance is often expressed in a number such as 20/40/10. These numbers mean:
- 20 is the dollar amount (in thousands-so $20,000) of bodily injury liability your policy covers for a single person’s injuries.
- 40 Is the dollar amount (in thousands-so $40,000) of bodily injury liability your policy covers in total for everyone you injured.
- 10 is the dollar amount (in thousands-so $10,000) of property damage liability your policy covers in total.
You should consider getting liability insurance limits that cover the value of your assets. Hopefully you’ve completed your net worth statement so that you have a good idea of how much insurance you need. If you have a higher net worth than the maximum liability coverage offered by insurance companies ($300,000-$500,000 for most companies), you should consider getting a Personal Umbrella Liability policy, which we’ll discuss in a later class. Otherwise, your assets could be at risk in the event of a lawsuit for an accident at which you were at fault.
WHAT IS THE DEDUCTIBLE?
An insurance deductible is the amount (if any) that you are responsible to pay personally toward the damage caused in each and every accident (not annually like medical insurance) before the insurance company will pay the remaining amount. It is only applicable to the collision and comprehensive portions of your policy. In states with no-fault insurance, you will be required to pay your deductible regardless of who caused the accident. In other states, you may receive a partial or full refund of your deductible paid based on who is deemed liable for the accident.
Auto insurance policies have deductibles that range from $0-$2,500 but the typical deductibles are $250, $500 or $1,000. Of course, the lower the deductible you select, the higher the premium payment required on the policy since the insurance company is taking more of the risk.
To illustrate, suppose you are in an auto accident resulting in about $3,000 worth of damage. You have collision coverage with a $500 deductible. You will be required to pay $500 toward the damage and then the insurance company will pay $2,500. In a no-fault state, your $500 will not be refunded to you. In other states, the insurance company will determine the amount of your liability and if you are deemed not liable at all for the accident, you will receive a refund of your $500 deductible. If you are deemed partially liable for the accident, you will receive a refund for the portion you deemed you were not liable for.
Things to consider when you are choosing your deductible include:
- Your previous driving record (past history of accidents and traffic tickets) and those of others covered on your policy (those with high-risk teenage drivers should consider lower deductibles since they are more likely to submit claims)
- Your driving habits such as aggressive driving, regularly driving at night, etc.
- The current value of your vehicle
- How much money you have in an emergency fund
- How much risk you are willing to take personally (insurance is for peace of mind!)
- The difference in premiums when analyzing different deductible amounts
To see the impact that raising your deductible can have on your insurance premiums, go to this article at carinsurance.com. Just don’t forget that just as it’s essential that you have an emergency fund that covers the cost of your vehicle if you choose to forgo collision and comprehensive coverage, it is also essential that you have enough cash in an emergency fund to cover the amount of your deductible. It won’t be helpful to choose a $2,500 deductible to lower your premiums if you only have $500 in savings!
HOW MUCH DOES IT COST?
There are a huge range of premium costs for auto insurance. The current average cost to insure a vehicle is around $1,325 annually based on this study here. And, my beloved home state Michigan wins the prize for most expensive car insurance premiums (oh yay!). The cost of your auto insurance depends on:
- Your driving record/history
- Your age, gender and marital status
- Your profession
- Your credit score
- Discounts you may qualify for (alumni associations, credit unions, professional organizations, military service, etc.)
- Your location (even within your state)
- The age, make and model of the vehicle(s) you want to insure
- Vehicle features that can decrease premiums (anti-lock brakes, theft systems, air bags, etc.)
- How often and far you drive
- The liability insurance coverage limit amounts you’ve selected
- The deductible amount you’ve selected
- Whether you are paying annually/semiannually or monthly premiums
Policies are generally written for either 6 or 12 months and those with good credit can pay monthly for the policies, but will be paying an additional fee if the monthly option is selected. You definitely want to do your research to see which insurance agency will offer the best rates and coverage for you.
WHERE DO I OBTAIN COVERAGE?
Auto insurance can be obtained from a variety of different insurance companies. If you’re not purchasing auto insurance from a major company, be sure to check their financial strength rating. A few types of companies include:
- Direct sellers such as Geico,Progressive, and Esurance
- Large national insurance companies such as Allstate, State Farm, USAA (veterans and military), Farmers, Liberty Mutual, AAA, Nationwide, etc.
- Independent insurance agents that offer insurance policies from multiple companies (I highly recommend that you ask friends and family for referrals and use an independent agent).
Obtaining a 6-month or 12-month policy does not mean that you have signed a contract with that company for that amount of time. You should compare quotes whenever you have a significant life change (such as marriage, purchasing a home, changing jobs, etc.) as well as every year or so even if you don’t have any major changes. Rates change all the time and you can find a significant change between companies even in a short amount of time.
I’ve created this spreadsheet for you (homework!) to organize the information you will need to send to the different insurance companies. They will also ask you for your social security number to receive your credit score, but you want to provide this separately. If you’re not sure how much liability coverage you need and what deductibles to select, talk to an insurance agent and they will answer any questions that you may have. Don’t hesitate to ask for a variety of quotes based on different coverage limits, deductibles and including and excluding collision and comprehensive coverage. It’s easy for them to adjust the numbers and give you all the different premium options available.
HOW DO I MAKE A CLAIM?
At the sight of the accident, you should do the following:
- Consider urgent medical needs and call 9-1-1 if needed
- Contact the police to file a report and fill out an accident report. This is generally required to be able to submit your claim to your insurance company.
- Do not ever admit fault at the scene of the accident.
- Share your information with the other party involved, if any. Give them your insurance company name and policy number as well as your name, address and phone number and get the same information from them. Be sure to note the other party’s license plate, car make and model.
- Note any details about the accident that may be significant such as the time and date of the accident, the weather conditions, where the cars are damaged, the exact location of the accident and the number of passengers involved. Take photos at the sight of the accident.
- Contact your insurance company as soon as possible to report the accident.
After the accident, the procedure to follow to submit a claim includes:
- Ask the insurance company to provide a list of all the necessary documentation to submit a claim.
- Fill out and submit all required documentation (this generally includes a written claim form, the police report, and a sworn statement of the details of the accident).
- Get necessary documentation in place for medical care and authorizing the insurance company to receive copies of all your medical bills.
- Get estimates for repairs for your vehicle and complete the repair work (including paying your portion of the deductible).
- Meet with an insurance adjustor to discuss your coverage if necessary
Note that you may want to consider getting an attorney to help you with the claims process, especially if you are at fault in a serious accident where other people have been injured.
The key points you should take away from this class include:
- The purpose of auto insurance is to limit the amount you may have to pay in the event of an accident (including property damage and bodily injury).
- Your current liability coverage should be sufficient to cover your assets in the case of a serious accident.
- Your emergency fund should be able to cover the loss of your vehicle if you don’t have collision and comprehensive coverage and enough to cover your deductibles if you do have collision and comprehensive coverage.
- Do sufficient research to determine the right insurance agency whether you use a direct seller, national agency or independent agency. Don’t focus on premium cost alone, but also the financial strength rating of the company, the liability limits that fit your situation and the deductibles that are appropriate for your situation.
EXAMPLE: THE SMITH FAMILY
The Smith family of course has auto insurance coverage on their vehicles, but they weren’t even sure before of their exact liability coverage amount and their deductibles. After pulling out their policies they find that their coverage is:
Vehicle #1 – Jim’s car (2006 Ford Taurus)
- Liability Coverage: 100/300/100
- Collision Coverage: actual cash value
- Collision Deductible: $1,000
- Comprehensive Coverage: yes
- Comprehensive Deductible: $250
Vehicle #2 – Mary’s car (2012 Chevrolet Equinox)
- Liability Coverage: 100/300/100
- Collision Coverage: actual cash value
- Collision Deductible: $1,000
- Comprehensive Coverage: yes
- Comprehensive Deductible: $250
They decide that their liability coverage is an accurate amount, since they have around $100,000 in assets (see the previous net worth class).
They decide they should probably lower the deductible to $500 on their collision coverage, as they don’t have a very good emergency fund set up yet and would struggle to pay $1,000 in the event of an accident. Also, although Jim’s car is only worth around $3,000 they would like to drop collision and comprehensive coverage altogether, but need to wait until they have some more money in the emergency fund, since they currently don’t have enough to cover a replacement car. They put that on their financial goal list.
They then use the spreadsheet to request quotes on their auto insurance policies based on the new coverage that they’ve requested and find an independent insurance agent based on the recommendation of a friend.
In the end, they end up getting a policy that is about the same premium as their current premium, but with lower deductibles, so they’re happy that they spent the time to get updated quotes. And, they’re also happy that they know a little more about how it works and that they don’t have to worry about whether they’ll be covered in the event of an accident.
If you haven’t received updated insurance quotes in the past year, and/or you have had a significant life change, such as marriage, divorce, change in career, etc. you should get some updated quotes now.
- IMPROVING– At a minimum, check your current auto liability insurance coverage and make sure that it is sufficient to cover your assets. Check your deductibles and make sure that you have sufficient money in savings to cover those amounts if needed.
- INVESTED– Check your current auto liability insurance coverage and deductibles (as with improving) and get some auto insurance quotes online or with some local agents using the information in the spreadsheet.
- UNSTOPPABLE– Check your current auto liability insurance coverage and deductibles (as above) and both get insurance quotes online from a variety of direct sellers (Progressive, Geico, etc.) and fill out in detail and send the spreadsheet to an independent insurance agent or multiple other agents.
Note here, though, that you may want to send your auto and homeowner’s information together, as many policies will offer discounts (around 15% is common) for combining these policies at the same insurer. Homeowner’s insurance will be covered in the next class IN202.
Keep your insurance quote information and related policy request information digitally in a separate file folder where your other personal finance information is kept so that you can easily obtain new quotes on a regular basis.
Here is a nifty document you can use to write in your current auto insurance policies and keep in the front of your auto insurance binder section in your Financial Plan Binder. Then if you have any questions, you’ll easily be able to see your coverage at a glance.