Automobile Insurance Basics

    This month we decided to explore the oh-so-exciting and increasingly complicated topic of automobile insurance, which can be a great blessing or a great disappointment. Our hope is to never need to use it and often feel we are paying too much for the coverage, but the reality is everyone needs auto insurance if they are operating a vehicle. One incident without insurance could bring about financial hardship even to the seemingly financially sound. However, the truth is we do not have to over-pay for high-quality coverage. With the advent of the internet, it takes little effort to shop and compare car insurance policies. Conveniently, many carriers provide quotes online. Even if you need to pick up the phone to get a quote, it is worth shopping around. This is especially true given the savings one could receive.

    The goal of this article is to provide you with the background knowledge needed to successfully shop for the right policy for you. The first step is to understand what types and levels of coverage you need. There are many features to an auto insurance policy, some necessary, others not. It is important that your policy is tailored to your personal situation. For example, do you really need that collision coverage on the clunker that you just drive around town? One question you could ask yourself is, “Where could I save without exposing myself to greater risk?”Let’s begin by exploring the different types of coverage available:

    Liability Coverage
    Liability coverage under an auto policy protects you against financial loss when you are held responsible (at fault) for an auto accident that causes injury, death, or property damage. This coverage protects you and other members of your immediate family, and anyone else who drives your car (with permission). There are limits to the coverage, which are typically expressed as three numbers divided by diagonal lines, i.e. 100/300/50. The first figure is the maximum amount the insurance company would pay for one injured person in thousand (in this example, $100,000). The second figure is the maximum amount they would pay per accident ($300,000). The third number is the limit for property damage per accident, $50,000 in our example. Liability coverage ismandatoryin California with minimums set at 15/30/5. However, these minimum limits are almost never sufficient and you may still have to pay out-of-pocket for damages above and beyond.

    To determine how much liability coverage you should buy, you should first determine how much coverage you can afford in your monthly premium. Then weigh how much of your assets you would be willing to lose or how much of your income you are willing to have garnished if you happen to cause a serious accident. If you own property, have retirement savings or are gainfully employed, you may want to consider springing for a higher level of liability coverage, as you have more to lose.

    Consider this scenario: would $5,000 be enough to pay for the damages to another party’s luxury vehicle? What if you caused a multi-vehicle accident? The purpose of liability coverage is to make sure you are properly protected. Additional liability coverage is typically a small and affordable difference in premium price.

    An additional form of protection that is recommended for most people with assets is an “umbrella” policy. This is separate from your auto policy but can provide liability protection above and beyond the limits of the auto policy. Anyone with driving teens should absolutely have this protection. We have all experienced the driving habits of teenagers. Research shows that teenagers take more risks while driving which is the reason your teenagers are costing you a fortune to insure. For that reason, it is advisable that those with teenage drivers have an umbrella policy of at least one million dollars. One freak accident can ruin the financial well-being of anyone—regardless of how well off they were beforehand. The cost, $150 to $300 annually, for a $1 million umbrella policy, which protects you against most liability claims, is well worth it.

    Comprehensive and Collision
    Comprehensive and collision coverage provides for the cost of repairs or replacement of your vehicle if you are at fault (i.e. you hit another car or a tree). Collision reimburses you for the full cost of repairs or replacement of your car after an accident. Comprehensive, or “other than collision,” insurance covers you in the event your car is damaged or destroyed in events other than a traffic accident. They include, but are not limited, to having your car stolen, vandalism, and natural disasters. Unlike liability coverage, comprehensive or collision coverage is not required by law. This coverage may be required by the lender if your car is financed because they want to be sure they are indemnified if the car is damaged.

    As a car depreciates in value, the cost of comprehensive and collision coverage decreases. Eventually (after about 10 years), the cost levels out and no longer decreases with the cars actual cash value. If you have an older vehicle or drive your vehicles until they expire, a time will come when maintaining collision and comprehensive insurance coverage isn’t financially worthwhile. A general guideline is to drop collision and comprehensive coverage on vehicles worth less than ten times the cost for that portion of your auto policy.

    Unlike a typical auto liability policy, comprehensive and collision coverage almost always have deductibles. The deductible is the amount the insured must pay out-of-pocket before the insurance kicks in. As we all know, the more claims filed the higher the cost of insurance. I have come across many people who have deductibles well below the amount they are willing to pay out-of-pocket before filing a claim (say, $100 vs. $500). Folks mostly do this for peace of mind. But, you pay for that lower deductible! Remember, the purpose of insurance is to protect you against big losses. Filing lots of small claims may cause an insurance company not to renew your policy or increase your premiums. So, review that deductible and make sure you aren’t overpaying in the premium department for a $100 deductible, when you can easily afford $500 if you have an incident.

    Medical Payments & Personal Injury Protection (PIP)
    Medical payments coverage pays for injuries incurred by you or any member of your family while you are in a car. It not only covers people riding in the car, but you and your family are covered if you are hit by a car while walking or injured while riding in someone else’s car. Even if your state does not require medical coverage in your auto insurance policy, consider having this coverage if you are going to be transporting others frequently (think: carpool). Whether your passengers are family or friends, you will want to make sure they are protected in case of an accident. Auto accidents can happen to even the most careful drivers, and if you frequently use your vehicle to drive others around then you will want to be sure that you are protected by auto insurance medical coverage in your policy.This coverage could provide the necessary payments to cover any medical costs after an accident. There are limits to the coverage, but it is an affordable $50-$60 a year for a $2,000 limit. It is important to note that the insurance company pays regardless of fault.

    Uninsured/Underinsured Motorist
    Even though insurance coverage is mandatory in most states, many drivers still do not carry insurance or are underinsured. Uninsured/underinsured motorist coverage pays for medical costs for you and your family in the event you get in an accident with either a hit-and-run driver or a driver who does not have enough auto insurance to cover damages incurred. These policies usually cover bike and pedestrian accidents, too. Given the prevalence of uninsured drivers nationally, this coverage is essential. On average, it costs less than $40 a year for $100,000 worth and will make up for anything your medical insurance doesn’t cover. Consider more coverage if you don’t hold any short or long term disability insurance, in case you are unable to work post-accident.

    Rental Reimbursement/Loss of Use
    For an additional premium one can add rental reimbursement feature to their policy. This feature is just how it sounds; it reimburses you for rental expenses (up to a daily limit)onlyin the case where you need a rental car because your car is damaged as a result of an accident. You will not be reimbursed if you need to rent a car because yours is in the shop for some work not related to an accident. This is really an individual decision. Imagine that you were in an accident and you couldn’t use your car, would you be in a jam because you do not have another vehicle? If so, it may make sense to add this feature. If, on the other hand, you have other cars or have friends or relatives willing to lend you theirs, then there probably is no need to pay for something you likely won’t use. Furthermore, it’s a little known secret that most body shops have negotiated rates with the big rental companies (Hertz, Enterprise, Budget), so you can get a car for only $16-$30 per day. From our research, the cost is not worth the benefit.

    Accident Forgiveness
    Accident forgiveness is the newest selling feature for auto insurance companies. There is no industry standard definition of accident forgiveness; it can vary from company to company. The basic idea is that the auto insurance company will “forgive” your accident by not increasing your premiums. That sounds great! Who wouldn’t want that type of protection? Before picking a company based on this ‘accident forgiveness’ feature they offer be sure you understand the feature. Some companies charge a higher premium to add accident forgiveness; others require the insured to qualify by having a clean driving record, being a loyal customer, etc. It’s important to understand that accident forgiveness does not mean it’s forgotten. If you change insurance companies, the accident (when at fault) will still show up on your driving record. It is not something that is expunged from your record because you have a certain insurance policy.

    How Premiums Are Determined
    There are many factors that an insurance company takes into consideration when determining the appropriate rate. They are all centered around risk. The greater the perceived risk, the higher the insurance rate.

    Where you live:If you live in San Francisco, there is a good chance that you are going to be charged more for your insurance than a like-driver who lives in Walnut Creek. Reason being is that urban cities, like San Francisco, tend to have high rates of congestion, theft, and greater chance of auto accident, meaning you are more likely to file a claim.

    Type of vehicle:Cars with a high frequency of claims, i.e. sports cars, involve higher premiums. Also, bigger and heavier cars tend to have lower premiums because the damage it will incur in an accident will likely be less expensive than for a smaller, lighter car.

    The # of miles driven each year:The more miles you drive, the greater chance of an accident. If you drive lower than the average number of miles per year (less than 15,000) you will pay less. Some insurance companies will give discounts to policyholders who carpool.

    Driving record:The better your driving record, the lower your premium. Those who have had accidents or serious traffic violations will pay more than someone with a clean driving record.

    Credit score:Many insurance companies take your credit score into account when determining your rate. It depends on the company, but in general the lower the score the higher insurance premium.

    Age/Sex/Marital status:Young men usually incur higher rates than young women. Male teenagers are involved in more accidents than female teenagers. Married people also have fewer accidents than single, and they are also viewed to be more responsible.

    Not a factor
    Color of car:A common myth regarding car insurance is that cars that have certain colors, i.e. red cars, cost more to insure. This is not true. The color has no impact on the cost.

    Foreign vs. Domestic car:This is not necessarily true. That’s not to say a foreign sports car won’t cost more to insure than a domestic sedan, but it isn’t the fact that the sports car is foreign, it has to do with the fact that it is a riskier vehicle to insure.

    There are other factors not mentioned in this article that can affect auto insurance rates. For those who have teenage drivers, their age and inexperience goes against them when it comes to insurance rates, due to their high-risk. But, young adults who have good grades in school can often receive discounts on their policy. This is true for both high school and college students.

    Policy Security
    Not all insurance companies act alike when it comes to premium increases following an accident. It’s important to know what type of rate increase you are subject to if you were to file a claim. Understanding this will help you make an informed decision whether or not it is worth filing a claim.
    California places limits on termination. A company can only cancel the policy if the driver makes fraudulent statements to the insurer, does not pay premium when it is due, or there is an event occurs that greatly increases the risk that the insurer takes on. It’s important to understand how your insurance company deals with rate increases due to accidents or traffic violations.

    Company solvency
    You want to make sure that your insurance company will be there to pay when you need them the most. Fortunately, every state has an insolvency guarantee fund. If in the rare case that the insurance company becomes insolvent, you may have to deal with the inconvenience of receiving reimbursements, but you can be sure that your claim(s) will be covered.

    Customer Service
    When searching for the best possible price for a policy, you may not consider customer service as factor in your decision, but you should. This often overlooked aspect of insurance is extremely important. When you need the policy the most is typically after an accident. You want to be sure that filing a claim is easy, the customer service representatives are easy to work with, and for those who are internet-savvy, the website should be user-friendly.

    California Low-Cost Automobile Insurance Program
    The California Low-Cost Automobile Insurance Program (CLCA) was established to help drivers with low incomes afford the costs of maintaining legally required auto insurance levels. The program is available only to “Good Drivers” who meet other requirements regarding income and the value of the insured vehicle. The CLCA provides only minimal coverage, and although optional coverage for medical payments and uninsured motorist bodily injury is available, physical damage coverage is not available. The program is administered by the Department of Insurance. For more details, you can call 866-602-8861.

    Before you go off and make any changes to your existing policy, make sure you are aware of the current discounts or price breaks you are receiving. Is your homeowner’s policy bundled with your auto policy? What would be the effect if you changed one or both? If you do decide to switch policies or carriers, you want to be sure you aren’t disqualifying yourself from any discounts you were receiving.

    Those of you with existing relationships with an agent, be sure to review your policy(ies) with him or her. Make sure that the policy you purchased years ago is still in line with your current financial situation. Do you have too much comprehensive and/or collision insurance for the clunker that you own? Are your deductibles in line with what you are willing to pay out-of-pocket before filing a claim? Do you have an adequate amount of liability protection? Is an umbrella policy necessary?

    Finally, consider the type of insurance agent you are using. “Captive” agents work for one company like Farmers or State Farm and cannot give you quotes outside of that company because they are essentially an employee of the Company. This limits their ability to comparison shop for you. However, one benefit of a captive agent is that he or she is very likely to understand every nuance of every type of coverage offered by that company. An insurance “Broker” is independent and able to shop all of the insurance companies to get you the best policy available. We like these folks for their ability to provide unbiased advice.

    As with most insurance policies, your auto policy should be tailored to your individual situation. Not everyone is alike, and not everyone needs the same coverage. You need to decide what is most important to you when picking an insurer — lowest premium, customer service, policy features, etc.

    I this article has provided you with enough information to help you make the best car insurance decisions. Please feel free to contact us if you have any questions about this topic, or if you would like a referral to an agent. If you think your family and friends could also benefit from this advice, then by all means share it!