A couple of Sundays ago, Ben was on his way to his parents’ house in Indiana to spend some of his spring break with his family. About 15 minutes after he left, I got a text saying, “I’m coming back home, I don’t have the updated insurance card.” When he stopped to get gas, he noticed that our insurance had expired the day before, and the most recent cards were still in our mail bin.
I couldn’t have felt prouder that my husband has developed healthy personal finance habits like checking our car insurance cards. I also was relieved that he noticed because I often imagine worst-case scenarios when Ben travels by himself. And having expired car insurance can cause a lot of problems.
As a part of my insurance series, today I tackle car insurance. I’ll discuss why it’s important and point out some essential items to look for when picking coverage.
Why It’s Important
Most states require some minimum form of car insurance coverage, although the amounts vary from state to state. Also, some states allow you to give a cash bond instead of insurance. This requirement helps protect the health and safety of everyone on the road. Yet even with this requirement, many people lack proper coverage without even knowing it.
Driving without insurance puts your entire net worth at risk. If you get in an accident you could be personally responsible for damages to another person’s property and injuries, as well as to your own property.
What’s the worst-case scenario? According to the Insurance Institute for Highway Safety Highway Loss Data Institute, there were 32,166 fatal motor vehicle accidents in 2015, in which 35,092 deaths occurred. Additionally, more men than women have died due to the increased likelihood of men engaging in risky behaviors.
Even if you come out okay, a car accident can set you back a lot of cash. I’ve had a couple of readers run into insurance issues lately, including a friend who was in a car accident and was very thankful for her insurance and insurance company.
There are different types of auto coverage including liability, uninsured or underinsured motorists, medical payments, collision, and comprehensive. You can also spring for optional provisions like car rental, travel expenses and emergency roadside service. Here are the key elements to consider.
Liability Insurance
The liability portion of your coverage is the weird multiple number that you see on the policy — 100/300/50, for example. This number tells you how much the insurer will pay if you become legal responsible for damages from an auto accident. The first two numbers represent the limit the insurer will pay per person/per accident for bodily injury. In my example above, the insurer would pay up to $100,000 for each person in the accident, capping at $300,000 total for the entire accident. The third number is the limit for property damage caused by the accident. So $50,000 here.
When picking the amount of liability protection, you are likely to be offered the minimum amount required by your state as a baseline. (You can find your minimum coverage here.) However, you should purchase enough to protect your assets and total net worth, if someone were to sue you. For younger families with moderate income and not much wealth 100/300/50 should meet your needs. Just make sure to increase your coverage as you accumulate assets, like a home or retirement savings. Additionally, if you have minimal assets but high income, you’ll also want to increase the amount of your coverage.
If you find that your wealth and/or income require larger than a 250/500/100 limit, you should ask your insurer about a personal umbrella policy (umbrella policy, for short). This policy can extend your liability coverage to anywhere between $1 million to $5 million, if needed. In addition, it applies to potential liability from a home or boat incident.
Underinsured/Uninsured Motorist coverage
According to the Insurance Research Counsel, about one in eight drivers is uninsured. With odds that high, you should also have uninsured and underinsured coverage. It pays your expenses should an uninsured or underinsured motorist hit you. The amount of coverage mirrors your liability limits (e.g., 100/300).
Medical Payments Coverage
The medical payments coverage pays your medical bills if you’re injured in an accident. This portion of the policy covers you, your passengers and authorized drivers of your vehicle. It also applies to you and your family, if you’re injured in someone else’s car or as a pedestrian. It helps with expenses like your copays, x-rays, and even prostheses. A good amount of coverage here would be $5,000 – $10,000, which will likely meet your out-of-pocket maximum of your health insurance.
Comprehensive and Collision Coverage
Lastly, we have collision and comprehensive coverage. These policies covers how much you need to repair or replace your car. Collision covers damage when your car is hit, or hits, another vehicle or object. Comprehensive pays for damages caused by perils other than a collision, such as damage from flood, fire or even if your car is stolen.
You definitely want both comprehensive and collision if you have financed a vehicle. (You don’t want to be stuck with no vehicle and a loan payment.) I also suggest keeping some collision and comprehensive even if you own your vehicle outright. You should be aware, though, that both of these provisions have a deductible (i.e., an amount you have to pay out of pocket) before the insurance kicks in. The higher the deductible, the lower the premium.
Paying for Insurance
The overall cost of your insurance will depend on many factors, such as your age, how you use your vehicle, the type of vehicle you have, your sex, and your marital status. You have to figure the amount of coverage that you can afford. However, don’t just take into account the monthly premium. Do a cost-benefit analysis of what you could lose should the worst-case scenario happen.
Would love to hear if you’ve discovered that you’re underinsured. Email, message or tweet me at the links below.