Welcome to the latest installment of the Financial Planning 101 series. This post will continue to cover insurance based topics with a focus on auto insurance this time. I’ll cover the different sections of an auto policy and try to shed light on what the various sections cover. The goal will be for you to better understand the type of coverage you have so you can be better informed to make sure you are adequately covered but also be aware of opportunities to save a few dollars on your premiums.
Car accidents are the most common type of injury and property cases that end up in court. Statistics show that there is a car accident every ten seconds on average in the United States. As a result most states require by law that certain coverages (mainly liability) are in place for a driver. Outside of health insurance this is by far the insurance most likely to actually get used for an individual and why it is important to understand what coverage you actually have.
Your auto insurance policy may also be known as PAP (Personal Auto Policy) and will have a declarations page which will be the summary for the coverage in the policy. Here you will information on the car itself, the insured driver and the coverage limits. The policy will cover the stated vehicle in the policy as long as it is owned by the named individual or their spouse. In addition, if a child in the house owns a car that will require a separate policy.
Part A – Liability coverage
This section provides coverage for the car owner and/or driver that causes an accident that results in injuries and/or property damage to someone else. This is the most important type of coverage and the one usually required by law. So basically if you hit someone or cause an accident this is the coverage that will pay for the other person. This is also the portion of the policy that requires the most coverage. Injuries from an accident can be substantial and the damages can run well over $100,000 in certain cases.
The coverage you have on your policy will typically be shown as a series of three numbers that look something like this; 100,000/300,000/100,000. The first number represents the amount of bodily injury damage covered for a given injured individual in the accident. In this case if a person is entitled to $40,000 in claims they will be covered in full but if there is $150,000 in claims the policy will pay $100,000 and the policy holder is responsible for the remaining amount. The second is the total amount of bodily injured covered by the policy. This comes into play if you are involved an accident and say there are four people in that car that all get hurt. While each individual may be entitled to receive up to $100,000 in claims the policy will only pay a maximum total of $300,000. In this example let’s say that the three people sustain injuries in the amounts of $150,000; $60,000; $50,000 for a total $260,000. In this case the insurance will pay the full amount for the $50,000 and $60,000 claims but only $100,000 of the $150,000 even though the total amount of claims is less than $300,000. Finally, the third number is the amount that the policy will pay out towards property damage.
One important note with this coverage is that while the policy may be for a given vehicle and driver this coverage attaches to both even if the driver drives a different vehicle or someone else is driving the covered vehicle. This means that you are covered if a friend or family member borrows the car or if you drive your spouse’s car for the day. Rental cars are included in this as well.
This portion of your policy should be coordinated with any umbrella policy you might own. Umbrella policies will be discussed in the next blog entry.
Part B – Medical Payments coverage
This section is pretty straightforward. It provides protection for medical expenses incurred by the driver and passengers incurred while in an accident in a covered vehicle. The amount of coverage is typically in the $1,000 - $10,000 range per individual as this coverage would be coordinated with medical coverage for the insured. There are usually no deductibles with this coverage.
Part C – Uninsured Motorist Coverage
This optional coverage comes into play when you are involved in an accident with another driver who is at fault and does not have coverage. This essentially replaces the liability coverage from the other driver and pays the policyholder. The coverage amounts are usually the same as those in Part A but there is an option to have them different. The lower the amounts the lower the policy premium.
There is also an option for Underinsured Motorist Coverage which is very similar but is for when the driver causing the accident has liability but not enough to cover the damages. Say for instance you are an accident caused by a driver who is carrying a minimal amount of liability like $10,000 per individual and $20,000 in total liability. An accident that results in $50,000 is more than that drivers liability covers so their policy will kick in the $20,000 and the Underinsured Motorist portion of your policy would be there to kick in the remaining $30,000.
Part D – Coverage for damage to your auto
There are two parts of this coverage. One is for damage as a result of an accident, known commonly as collision, and the other is for damage from non-accidents, more commonly known as comprehensive. These again are optional coverages and are not required for the policyholder. Damages from these claims are based on an actual cash value basis up to the extent of the value of the vehicle. If you are an in accident while driving a brand new BMW and the vehicle sustains $8,000 of damage the policy will pay that amount less the deductible. If on the other hand you are driving a 1983 Nissan Stanza, like my first car, valued at say $500, the policy will only pay out the maximum of $500 less the policy deductible. In the case of a vehicle with low value the policyholder may want to think if this coverage is worth it. Also, having a higher deductible is a good way to save a few bucks on your premium if you can afford paying the deductible out of pocket on the rare case you need to make a claim.
Policy Endorsements – Potential add-ons for your policy.
Much like was discussed earlier with homeowners policies you have the ability to add optional items to your policy. Some common examples of this are:
* Coverage for drivers who don’t own vehicles but drive regularly. This is perfect for a child once they have a license but not their own car.
* Other vehicles can be added such as motor homes, motorcycles, snowmobiles, etc..
* Special coverage for antique or restored vehicles in the case of a stated limit in Part D that may be insufficient.
Finally, here are a few notes on how policy premiums are determined and how you can save. Age, gender, vehicle and driving history are the biggest factors in determining your premium. We all know young drivers can be very expensive to insure as they tend to be less safe drivers. That said savings can be had if a student has good grades, has taken defensive driving classes or is away at school without a vehicle. Discounts are available on automobiles depending on safety features, anti-theft devices, air bags, running lights and certain geographical locations. Also, many insurers will give a break if you have multiple types of coverage with them.
If you have questions about your coverage please talk to your insurance agent or a fee-only financial advisor to review what you have and get guidance for what coverage you actually need. Thanks for reading and hopefully you learned something that can help with your own situation. The next blog will focus on personal umbrella policies.