Introduction to Auto Insurance and My Experience
The first combustion automobile was invented in 1886, and the first auto insurance policy was issued in 1897. Both have undergone tremendous change over the last century and more.Regarding personal finance, no other area of insurance has as many ways to protect you or cause changes in your finances as auto insurance.
From 1993 to 1996, I worked for Progressive Insurance in their auto insurance division. I started by quoting insurance policies to agents and direct customers, then became a personal insurance policy representative and an underwriter.
This tenure has given me insights into how personal auto insurance works and what options you have to substantially impact your finances through policy changes.
State Requirements
All states in the U.S. require minimum auto insurance to operate an automobile legally. The minimum levels and coverages vary from state to state and are also susceptible to change.Since I live in Texas, my examples will mainly pertain to this state, but you can find a list of each state's minimum auto insurance requirements here.
An auto insurance policy has several sections. Some are required in some states, while others are not. Let's review the different sections and what they each protect against.
Liability
Liability coverage protects the other party (person(s) or property). There are two types of liability coverage: Bodily Injury and Property Damage.Bodily injury covers some or all of the costs related to the other party's injuries.
Property damage covers some or all of the other party's property costs. This property can include a vehicle, a house, a fence, or a tree, among others.
Uninsured and Underinsured
This type of coverage protects you if you are hit by a driver who does not have insurance or a driver who does not have enough insurance to pay for all the damages caused. Uninsured and Underinsured coverages may be used for property or medical damages, depending on the state.Comprehensive
Comprehensive coverage protects you against damages caused by "acts of God," such as flood, fire, or hail. It also protects against theft and vandalism. To receive the benefits of Comprehensive coverage, you must pay (meet) your deductible before the insurance takes over any repairs.Comprehensive coverage is not required by law but is usually needed for the theevehicle'sienholder (lender) or leaseholder.
Collision
Collision coverage repairs your vehicle if you are in an accident with another car and the accident is your fault. Collision coverage protects you when you hit an object, such as a fence, building, or tree. Like Comprehensive coverage, you must also pay (meet) your deductible before the insurance takes over any repairs.Although collision coverage is not required by law, it is usually needed by a vehicle's lienholder (lender) or leaseholder.
Medical
Medical coverage can pay for the costs associated with the injuries of you and/or your passengers who are injured in a vehicle accident. The covered expenses include hospitalization, surgery, ambulance, and X-rays.Personal Injury Protection
Personal Injury Protection (PIP) is similar to medical coverage. In addition to helping cover the costs associated with the injury, PIP may also cover other expenses incurred due to the accident, such as lost income.Additional Coverages and Add-Ons
In addition to the types of coverages already shown, many optional coverages and add-ons can be added to your insurance policy.Emergency Roadside Assistance
This addition assists should you need a tow, run out of gas, lock yourself out of your car, or have a flat tire.Rental Reimbursement
This coverage will reimburse you for a rental car while yours is being repaired. The amount refunded is typically for basic transportation, not extravagant.Gap Coverage
If your car is totaled (totaled means that the vehicle costs more to fix than it is worth) by the insurance company and the payoff you receive is less than what is owed on the car, this insurance pays for the difference. It fills the "gap" between the amount owed and the payoff amount you received.
New Car Replacement
With the rate at which cars depreciate, it is possible that if your car is totaled while it is still relatively new, the price you receive from insurance will not be near the amount you paid for the vehicle. This coverage protects against this possibility. In the event of a total loss, you will be paid the amount it would cost you to buy a new version of your car.Windshield Coverage
While Comprehensive coverage can be used to repair or replace your windshield, the deductible is usually higher than the cost of the repair or replacement. The price is waived with windshield coverage.
Vanishing Deductibles
For each year that you are a safe driver and do not have any accidents or claims, the deductible is reduced by a set amount. For example, if your deductible is $500 and the reduction is $100 each year, then if you have a claim after 3 years of safe driving, your deductible would only be $200 instead of $500. Once you have a claim, the deductible resets to what it initially was, and you start over on the year-after-year safe driving.Zero Depreciation
We all know that cars decrease value faster than almost any other item. If you have owned your vehicle for several years, it will be worth much less than what you initially paid for it to replace the vehicle. When you receive compensation for a car that has been totaled, a standard insurance policy will consider the depreciation cost of the vehicle when determining the payout. This can cause the payout to be much less than the vehicle's replacement cost. With Zero Depreciation, this determination is not used, and you receive the total amount that the car was valued at the time of assessment for the addition of Zero Depreciation to your auto insurance policy.Accident Forgiveness
Typically, when a driver has an at-fault accident, the premiums on their insurance policy go up upon renewal. With accident forgiveness, the insurance company does not penalize the policy's renewal cost for the first at-fault accident. However, additional at-fault accidents during the same policy term are not forgiven, and they will likely cause an increase in premiums at renewal.Not all drives are eligible for accident forgiveness either. See your specific insurance company about this add-on and its qualifications.
Engine Protection
Engine protection covers the cost of engine repairs, such as labor and/or parts. This covers the costs of repairing wear and tear on the engine and repairs caused by natural events, such as flooding.Not all vehicles are eligible for engine protection coverage. Typically, vehicles older than 5 years are not covered.
Discounts
Discounts on auto insurance policies usually fall into three categories: safe driver, safe vehicle, and loyalty. Let's look at each category in turn.Safe Driver
Accident-Free Discount
If you do not have an accident, whether your fault or not, four policy premiums will drop at renewal for a set period.Defensive Driving Discount
If you take defensive driving courses, you can earn up to 15% off your premiums. You can take the course yearly and receive a discount each year.Good Student
If you are between 16 and 25 years of age, and you keep your GPA at or above 3.0, you can earn up to 25% off your premiums.
Safe Vehicle
Airbags, anti-lock brakes, anti-theft systems, and daytime running lights are all improvements that make vehicles safer. If your covered vehicle has any, some, or all of these features, you may qualify for discounts up to 25%.Loyalty
Multi-Vehicle
Multi-Vehicle discounts are applied when having 2 or more vehicles on the same policy.Multi-Policy
Multi-policy discounts are applied when you have multiple insurance types with the same carrier, such as auto and homeowners insurance. This discount, up to 15%, benefits each insurance policy.Recommendations
Remember, insurance companies are not in the business of losing money. They have analysts and actuaries who are hard at work determining what to charge so they will come out ahead if they have to pay a customer. If you use the add-ons, they still make money. If you never use the add-ons, they make even more money. It is a win-win for them, not you.Are State Requirements Enough?
I live in Texas, where the state requires 30/60/25 coverage, which translates to $30,000 for injury per person, $60,000 for total injury coverage, and $25,000 for property damage coverage.
New cars can cost more than $25,000, and a hospital visit with an ambulance ride can easily cost $30,000 or $60,000. With this in mind, my wife and I have increased our coverage to more realistic limits. We carry 100/300/100 coverage. The price difference between this and the minimum is not 3 times, but only about double. Insurance is there to protect you from life. Our additional premium is a small price for us, knowing we'll likely not be sued should we get into an auto accident for damages and injuries more than what state minimums can cover. We also keep these higher limits on our Uninsured and Underinsured coverages.
Vanishing Deductible
Sounds great, right. Read the fine print,t though. The additional cost may add up to more than $100 per year. Also, if you never have a claim, you will continue paying the higher premium without taking advantage of it. For example, the insurance company is way ahead if you don't have a claim for 8 years, and the additional premium cost for this add-on is $10 per month. They knock $500 off your deductible, and you've paid them an extra $960. You may be better off putting the $10 per month into an Emergency Fund, then you'll have your $500 deductible plus an additional $460.
Zero Depreciation
Like with the Vanishing Deductible, this add-on has an additional premium. If you saved the extra premium, you could cover the cost of depreciation and some.Check the cost vs. the benefit amount of all add-on coverages to see if you come ahead over the policy terms. In most cases, you will come out ahead by saving the price of the add-on in an Emergency Fund. You'll be able to pay for whatever the add-on covers and have money left over.
Also, regularly get quotes from other carriers, especially at your renewal. You may be surprised that you could get the same coverage for less or more for the exact cost with another carrier.
We get premium quotes yearly with applicable discounts to see what is best for our family. I've been using Everquote and Insurify for years to compare policies. I've also used independent agents who can shop multiple carriers and know their ins and outs to get you pricing and discounts you may not be able to find on your own.
Comments
Post a Comment