Insurance isn’t the sexiest topic to discuss. Most of the time, reading about personal finance involves articles on budgeting, paying off debt, or investing.
But insurance plays an important role in protecting your overall financial plan by making sure one bad event doesn’t undo all of your hard work. Therefore, as unsexy as it may be, you need to have and understand the five essential types of insurance. Since I’ve elaborated on health and life insurance, I want to cover a couple that I haven’t tackled yet.
Today we discuss auto insurance.
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. Auto insurance protects against the loss of use of your vehicle and your personal liability in an accident.
Most states require this insurance, although many people are underinsured without knowing it. The different coverages include 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.
The liability portion of you 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 likely have a minimum amount required by your state. (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 most middle income families 100/300/50 should meet your needs in the beginning. Just make sure increase your coverage as you accumulate more wealth. 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 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 expenses resulting from auto-accident injuries. 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 provisions apply to the vehicle itself. In other words, it covers how much you would need to repair or replace your car. The difference between them stems from the type of damage sustained. 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.) And I 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.