In the next several chapters, you will learn about how automobile insurance is designed to protect you financially, what coverages you need to adequately protect you from financial disaster, and techniques you can use to lower your automobile insurance premiums.
WHAT IS AUTOMOBILE INSURANCE?
Owning and operating an automobile is a necessity for most people today. Unless you live in a large, compact city with a sophisticated public transportation system, you need an automobile to go to work, run errands, and visit friends and family.
Although owning and operating a motor vehicle is often a necessity rather than a luxury, having an automobile drastically increases the amount of personal risk you assume on a daily basis. Every time you get behind the wheel of an automobile, you are placing yourself and the other occupants of the vehicle at risk of physical injury or even death. You also run the risk of damaging or destroying your motor vehicle in an accident or causing damage to another motor vehicle or
the personal property of another person.
Even when your automobile is parked, owning a motor vehicle still increases your financial risk. Your motor vehicle could be damaged or destroyed by a wide range of hazards, such as falling trees, theft, vandalism, or severe weather, such as wind, hail, or falling ice. If you park your automobile on the street, your motor vehicle is also at risk of being struck by another vehicle.
Automobile insurance is designed to financially protect you against losses that may result from these kinds of risks. A typical automobile insurance policy contains several coverages, each of which protect you against a specific type of financial loss.
Depending on the types of coverages you choose, automobile
insurance can pay for injury or death you cause to others as a result of an accident for which you are cited by the police or otherwise found at fault; for property damage you cause to the motor vehicles or possessions of others; for injury or property damage you sustain as a result of an accident or loss; and some of the incidental expenses you may be responsible for after a loss.
You should choose the coverages that best fit your financial needs based on a variety of factors, including the value of your vehicle, other insurance you may already carry, and the savings or other financial reserves you have available to pay for expenses resulting from a motor vehicle accident or loss.
WHY DO YOU NEED AFFORDABLE AUTOMOBILE
Few people would disagree that owning, operating, and maintaining a motor vehicle is an expensive proposition. Simply purchasing areliable motor vehicle is expensive - even the economy cars offered by major automobile manufacturers are becoming as expensive as the near-luxury cars of a decade ago. If you have a family and need a full-sized sedan, you can expect to pay more than $20,000 for a new
model. This can take $400 to $500 out of your budget each month,before the other expenses of owning a motor vehicle are considered.
Once you have purchased an automobile, there are a variety of other expenses that can further deplete your budget. Routine maintenance, such as oil changes, tire rotations, and transmission flushes are required to ensure the continued reliability and safety of your automobile. Add gasoline costs, registration, and inspection fees, and you can easily spend another $200 to $300 per month just to drive your motor vehicle.
It is little wonder most people wince when they see the amount automobile insurance will add to their household expenses. In the United States, drivers pay an average of about $815 yearly for automobile insurance. In the most expensive states for automobile insurance, New York and New Jersey, drivers pay an average annual premium of more than $1,100; in the least expensive states, Maine
and Iowa, drivers still pay about $600 yearly.
Although it represents a significant expense for motorists, automobile insurance is required under the laws of many states. Failure to purchase and maintain at least the minimum amount of automobile insurance required by the state you live in can result in fines, impoundment of your vehicle, or even time in prison.
Mandatory state insurance requirements aside, automobile insurance is a necessity because of the risk of substantial financial loss you face when you own and operate a vehicle. A single accident can cost you hundreds of thousands of dollars in legal liabilities for damage or injury to others and medical expenses or property damage sustained by you or your family.
Since automobile insurance is a necessity that helps you and your family prevent financial disaster, it is important that you budget for automobile insurance premiums along with your other expenses. It is also important that you take advantage of every opportunity available to reduce your premiums without reducing your needed coverages.
Knowing the types of coverages available and how they can help you protect your family's finances is the first step toward obtaining the automobile insurance you need at a price that you can live with.
TYPES OF AUTOMOBILE INSURANCE
To help you better understand what automobile insurance does and help you decide which coverages you need, this section will describe the types of coverages offered under an automobile insurance policy so that in the Chapter 13 you can understand the types of policy packages an insurance agent or company is likely to offer you.
Types of Coverage
Bodily Injury Liability Coverage
If you are found at fault for an accident with another vehicle or if you strike a pedestrian with your automobile, you will be held liable for the physical injuries caused to other people in your own vehicle, occupants of another vehicle involved in the accident, and pedestrians stuck by your vehicle or injured while avoiding being struck by your vehicle.
Bodily injury liability coverage pays for the injuries you cause while operating a motor vehicle, up to the policy limits you select when you purchase your automobile insurance policy.
You should select your bodily injury liability limits based on the
maximum amount of injury you or your agent think could be caused by a single accident and the net worth of your personal assets that would be at risk if you did not have bodily injury liability coverage in place. Policy limits for bodily injury liability coverage can be expressed as either a split limit or a combined single limit.
A split limit means the insurance policy provides one maximum payment for bodily injury to one person and a higher limit for bodily injury to two or more people. For example, let us suppose you purchase a split bodily injury liability coverage limit of $100,000I$300,000. Here are the maximum amounts your policy would pay for bodily injury you cause to others in several scenarios:
• If you cause an accident in which Joe Smith was the sole
occupant of the vehicle and Joe sustained $80,000 in physical
injuries, your policy would pay Joe $80,000.
• If you cause an accident in which Joe Smith was the sole
occupant of the vehicle and Joe sustained $120,000 in physical injuries, your policy would pay Joe $100,000 because $100,000 is your bodily injury liability coverage limit per person. You would be responsible for the additional $20,000 of Joe's injuries.
• If you cause an accident in which Joe and Jan Smith were the only occupants of the other vehicle and both Joe and Jan
sustained $120,000 in physical injuries each, your policy would pay Joe and Jan a total of $200,000 because payment for each person's injuries is capped at $100,000. You would be responsible for the remaining $40,000.
• If you cause an accident in which Joe, Jan, Jerry, and Jim Smith sustain $50,000 in physical injuries each, your policy would pay each injured person $50,000 for a total of $200,000 because each person's injuries are within the $100,000 per person limit and the total of all the injuries is within the $300,000 policy limit.
• If you cause an accident in which Joe, Jan, Jerry, and Jim Smith sustain $100,000 in physical injuries each, your policy would pay each injured person $75,000 because your policy has a total bodily policy limit of $300,000, regardless of how many people are injured. You would be responsible for the remaining $100,000.
A combined single limit means payment for injuries is subject to a single policy limit per accident, regardless of how many people are injured. For example, if you purchased a policy with a combined single limit of $300,000 and you caused an accident in which a single driver sustained $200,000 in injuries, your policy would pay the entire amount of that driver's injury expenses. Ifyou caused an accident in which four people sustained $100,000 in injuries each, your policy
would pay each injured person $75,000 because the total of all drivers' injuries would exceed the combined single limit of $300,000. You would pay the remaining $100,000.
Property Damage Liability Coverage
Like bodily injury liability coverage, property damage liability coverage protects your financial assets if you are found at fault in an automobile accident. This coverage pays for the damage you cause to another vehicle in an accident. It also pays for damage to the personal property of others that results from an accident you cause.
This includes damage to personal property being transported in another motor vehicle involved in an accident; fixtures such as light poles, utility poles, or fences; and homes and other buildings.
Property damage liability is expressed as a single limit, which
represents the highest amount that your insurance company will pay for property damage resulting from a single accident. This limit does not change regardless of how many people's property you damage or how much total property damage you cause.
As with bodily injury liability coverage, you should select your policy limit based on the amount of financial assets you and your agent believe are at risk and the maximum amount of property damage you believe you could cause if you were at fault in an automobile accident. It is important not to underestimate this amount, because you will be legally liable for any damages in excess of your property damage policy limit.
Medical Payments Coverage
Many companies offer medical payments coverage as a part of their automobile insurance policies. This coverage pays for medical expenses you or the occupants of your vehicle sustain as a result of a motor vehicle accident, regardless of who is at fault. Medical payments coverage is offered at limits that are substantially lower than your bodily injury liability and property damage liability limits.
Medical payments coverage is not meant to replace health insurance coverage but rather to pay for medical expenses not covered by your health insurance for a variety of reasons. This can include amounts not payable by health insurance because of deductibles or coinsurance requirements or because of health insurance policy limits.
For this reason, some companies label this coverage Excess Medical Payments to emphasize the fact that any available health insurance must pay for your injuries and those of the other occupants of your vehicle before this coverage will pay under your automobile insurance policy.
Personal Injury Protection Coverage
Personal injury protection coverage is available only in a small
number of states. Elements of this coverage are mandated by states in which this coverage is available.
The elements of personal injury protection coverage are designed to cover expenses other than property damage expenses, that you or an additional insured sustain as a result of a motor vehicle accident. This coverage is not available to occupants of your vehicle that are not listed as additional insureds on the declarations page of your policy.
Personal injury protection is considered no-fault coverage, which means each person's insurance company is responsible for that person's injuries. Legislatures of states that require insurers to offer personal injury protection believe a no-fault system reduces the number of lawsuits brought against other motorists.
Here are the personal injury protection coverages that may be offered by insurance companies under your state's insurance laws. The specific coverages vary by state, and your state may require insurance companies to offer some, all, or none of these coverages:
• Medical expenses. This element of personal injury protection
coverage is similar to the medical payments coverage described previously, but it does not necessarily require health insurance to pay for your medical expenses before this coverage can be used.
• Rehabilitation expenses. This element pays for expenses for
rehabilitative services you or an additional insured require while recovering from injuries sustained in a motor vehicle accident.
This can include physical therapy or other services designed to help you return to mobility and employment.
• In-home service expenses. Care services that require a
healthcare professional to come to your home to perform the
services are covered under this element of personal injury
protection coverage. This coverage is valuable if your injuries
confine you to your home for an extended time but you still
require ongoing medical care.
In-home services coverage may also pay for a variety of
nonmedical services. In some states, these can include hiring
professionals to get your groceries, clean your home, or even
mow your lawn. States that require insurers to offer this
coverage set a maximum amount of coverage per day and a
time limit beyond which insurance companies are not required
to make continued payments.
• Disability income loss. This element pays for a portion of your lost wages if you are unable to work because of injuries
sustained in a motor vehicle accident. Each state that requires
this coverage sets a time limit and a maximum monthly amount for payments made to you under this coverage.
• Funeral and burial expenses. If you are killed in a motor vehicle accident, the funeral and burial expenses element of personal injury protection coverage will pay a set amount for your funeral and for the cost of your burial or cremation.
• Extraordinary medical benefits. This element pays for high
medical expenses that exhaust your medical expenses or health insurance coverage. This element is inexpensive to purchase because of the low likelihood your injuries will be severe enough to trigger payment under this coverage.
• Survivor benefits. This element of personal injury protection
coverage pays your survivors if you are killed in a motor vehicle accident. Payments may include a portion of the wages you would have earned if the accident would not have occurred or continued medical or nonmedical in-home services.
Uninsured Motorist Bodily Injury Coverage
Although the laws of many states require all drivers to carry
automobile insurance, some drivers choose not to purchase
insurance for their vehicles. If you are struck by an uninsured driver, either as an occupant of a vehicle or as a pedestrian, you will be responsible for paying for your own medical expenses unless you have purchased uninsured motorist bodily injury coverage.
Uninsured motorist bodily injury coverage pays for physical injuries that you or the other occupants of your vehicle sustain as a result of a motor vehicle accident caused by an uninsured driver. It also pays for injury to you or an additional insured on your policy if you are struck by an uninsured motorist while not occupying a vehicle.
Like bodily injury liability coverage, uninsured motorist bodily injury is sold as either a split limit or a combined single limit coverage. Split limit coverage provides a maximum per person limit for bodily injury to one person and a higher per policy limit for accidents where two or more people are injured as a result of an uninsured driver's actions.
Combined single limit coverage provides a per accident limit,
regardless of how many people are injured. You can purchase
uninsured motorist bodily injury coverage limits up to or equal to your bodily injury liability limits.
When your insurance company pays you under your uninsured motorist coverage, it reserves the right to attempt to collect amounts it has paid to you from the uninsured driver. This right is called the right to subrogation. This means that, once your insurance company has paid you for your injuries, you will no longer have the legal right to seek payment from the driver who caused the accident.
Different states have varying laws regarding accidents in which the driver at fault cannot be identified, such as a driver who left the scene of the accident before police arrived. Most will allow you to recover under your uninsured motorist coverage if you can provide evidence that another driver caused the accident, such as testimony from another vehicle occupant or a third party that was not involved in the accident. Some states do not allow insurance companies to require evidence before providing payment for an accident under your uninsured motorist bodily injury coverage.
Underinsured Motorist Bodily Injury Coverage
If you carry high bodily injury liability coverage limits and you are struck by a motorist that carries lower liability limits, the other driver's insurance company will not pay for any injuries above the other driver's bodily injury liability limits. This creates a situation in which you are providing more protection for other drivers on the road than you are being provided by the driver who caused the accident.
Some states require insurers to also offer underinsured motorist bodily injury coverage, which pays for bodily injury amounts above the other driver's liability limits. You can purchase underinsured motorist bodily injury coverage with limits up to or equal to your bodily injury liability limits. Like bodily injury liability, underinsured motorist bodily injury coverage can be purchased with either a split limit or a combined single limit.
To give an example of how underinsured motorist bodily injury
coverage works, let us suppose you carry bodily injury liability limits of $100,000 per person and $300,000 per accident. Suppose you are in an accident for which the other driver is at fault, and you sustain $100,000 in injuries as a result of the accident. When you contact the other driver's insurance company, you learn the driver carries bodily injury liability limits of $25,000 per person and $50,000 per accident.
The other driver's insurance company will pay you $25,000 for your injuries because that is the maximum amount payable per person under that driver's policy. If you have purchased underinsured motorist bodily injury coverage with limits equal to your bodily injury liability limits, your policy will pay you $75,000.
Now, let us suppose the same driver causes an accident in which you and another occupant of the vehicle each sustain injuries of $150,000 each. The other driver's policywouldpayyou $50,000 for injuries, andyourunderinsured motorist coverage would pay $150,000 of the remaining amount for injuries because of the $100,000 per-person cap on this coverage.
Uninsured motorist bodily injury and underinsured motorist bodily injury are sometimes sold as a single coverage, which simply means that your insurance company will charge one premium for the two coverages, instead of charging for the coverages separately. Each state's insurance laws dictate whether uninsured motorist bodily injury and underinsured motorist bodily injury are available as a single coverage or separate coverages.
Uninsured Motorist Property Damage
Some states require insurance companies to offer uninsured motorist property damage coverage to automobile insurance applicants.
Uninsured motorist property damage pays for damage to your vehicle or personal property that results from an accident caused by an uninsured motorist. If your insurance company offers this coverage, you can purchase uninsured motorist property damage coverage with a limit of up to or equal to your property damage liability limit.
As with uninsured motorist bodily injury coverage, when you accept a payment under uninsured motorist property damage coverage, you may give up the right to pursue payment from the driver who caused the accident.
Comprehensive Coverage (Also Other than Collision Coverage)
Comprehensive coverage pays for damages to your motor vehicle that happen as a result of an occurrence other than a motor vehicle accident with another vehicle or a single-car accident in which your vehicle collides with a stationary object, such as a tree, a building, or the ground.
The following occurrences are examples of comprehensive losses:
• Your vehicle collides with an animal, such as a deer, bear, or
• Your vehicle is struck by a bird, gravel, or other airborne object.
• Damage to your vehicle is caused by fire that originates from
within the automobile, such as in the engine.
• Your vehicle is vandalized while parked on the street.
• Someone other than a resident of your household steals your vehicle, and it cannot be recovered.
• A tree falls on your parked vehicle.
Payment for a comprehensive loss to your motor vehicle is payable in one of two ways:
• If the amount of comprehensive damage to your vehicle is less than the actual cash value of your vehicle at the time of the loss, your policy will pay the amount required to repair the vehicle.
• If the amount of the comprehensive damage to your vehicle is greater than the actual cash value of your vehicle at the time of the loss, your policy will pay the actual cash value of the vehicle.
Because the likelihood of a comprehensive loss to your motor vehicle is significantly lower than the likelihood of collision damage,
comprehensive premiums are lower than collision premiums.
Collision coverage pays for damage to your motor vehicle that is
caused by a collision with another vehicle or a collision of your
vehicle with a stationary object.
The following occurrences are examples of collision losses:
• While driving your motor vehicle, your vehicle travels left of
center on a two-lane road and strikes another vehicle.
• While driving your motor vehicle, your vehicle slides off the
shoulder of the road and collides with a tree.
• While traveling on a freeway, the traffic in front of you suddenly comes to a halt, and you collide with the vehicle in front of you.
Like comprehensive coverage, collision coverage pays the lower amount, whether it is the damage or the actual cash value of the vehicle at the time of the loss. When you are involved in an accident that is classified as a collision, collision coverage pays for damage to your vehicle regardless of who was at fault in the accident.
There are certain circumstances under which payment may be denied for collision coverage. For instance, if you were engaging in an illegal activity at the time of the accident, such as fleeing a law enforcement officer or transporting controlled substances, your insurance policy may not extend coverage for damage to your motor vehicle.
Some insurance policies also offer coverage that pays for you to rent a vehicle if your own motor vehicle is damaged or destroyed in an accident. This is offered as an optional coverage.
Rental coverage pays a specified amount per day for vehicle rental and is limited to a specific number of days or until your damaged vehicle has been repaired or replaced, whichever comes first.
Towing and Roadside Coverage
Another optional coverage offered by many automobile insurance companies is towing and roadside coverage. The specifics of this coverage vary from company to company some may pay for towing only if your vehicle is in an accident; others pay for towing for accidents and mechanical breakdowns; and still others pay for additional services, such as tire changes, winching, and gasoline delivery.
Insurers that offer towing and roadside coverage place restrictions on how much they will pay for towing and other services and limit the number of times you can make claims under this coverage during a given policy period. If you do not subscribe to a roadside assistance service, such as the American Automobile Association (AAA), this can be a valuable coverage to add to your policy. The premiums for this coverage are quite reasonable, and the coverage can be valuable if you become stranded while driving.
With the cost of cars rising, many people have no choice but to take out a lease or loan on a vehicle because they do not have the funds available to buy the car outright. To keep payments lower, many auto finance companies and banks have begun to offer longer-term loans.
It is not unusual to have a five- to six-year loan if you purchase a brand-new or newer used vehicle.
What many people do not realize is the value of your car depreciates, or decreases, almost as soon as you drive the car off the lot. This is true for brand-new vehicles that can decrease in value by thousands
of dollars before you park in your driveway for the first time.
Now you are left with a vehicle that you paid $20,000 for but that is worth only $17,000 by the time you get it home. But this does not change the fact that you are left paying off your $20,000 loan. You are responsible for the balance of this loan no matter what happens. Now, let us say about a week after you buy the vehicle, you are traveling and lose control of the vehicle and go off the road. You are all right, but you have managed to do enough damage to your vehicle for an insurance adjuster to rule it a total loss.
You have insurance, so the loan with your bank or finance company will be paid off and you will simply go purchase a new car, right?
Wrong. Your insurance company will pay you only the depreciated value of the vehicle, leaving you responsible for paying the thousands of dollars left over with your loan company.
Now, not only are you going to have to finance another vehicle, but you are going to be left paying the remainder of a loan for a vehicle you do not have anymore - unless you have purchased gap insurance.
Just as the word "gap" indicates, gap insurance will pay the difference between the depreciated value your insurance company pays and the loan balance. This will leave you completely free from the loan on your totaled vehicle and able to start fresh with a new vehicle.
Gap insurance is normally not costly and can be built into your car payments if purchased when you buy the car. Many dealerships will offer gap insurance when you are signing the paperwork on your new vehicle. Gap insurance policies normally range anywhere from $250 to $500, and the coverage lasts for the life of the loan. This is an extra expense, but it is well worth it. It is always a good idea to check with your insurance agent about gap insurance before purchasing a new vehicle. It does not take long to quote, and many times your insurance agent can offer you a lower rate than you will be offered by a car dealership. The only possible disadvantage to purchasing gap from your agent is you will not be able to have it built into your loan payment, unless you are with an insurance company that also offers vehicle loans. Another possible disadvantage is some gap insurance companies require your agent to collect the entire fee for the policy up front.