Before the car crash: how much auto insurance do you need? Unfortunately a lot of people only start thinking about whether they have enough auto insurance after they have been in a car crash. By then it is too late to make sure you have enough coverage. In this post I will discuss explain the different kinds of coverages commonly sold with auto policies.
A simple way to think about whether you have enough coverage is to ask yourself if you can comfortably afford to pay the costs of an accident that your insurance company will not pay. Could you handle it if you were suddenly forced to pay $45,000? What about if your insurance company paid the first $25,000 and you were left to pay the last $20,000?
Why We Purchase Insurance
The purpose of insurance is to transfer the risk of unexpected loss to someone else. The chances of the loss actually occurring may be small, but if you are unlucky they are catastrophic. Your savings, your home equity and all of your assets can disappear because someone was careless for just a moment.
Insurance companies solve this problem by spreading this risk over a large group of people. Everyone in the pool pays a little money to the insurance company and the insurance company pays a lot of money to the person who is unlucky.
When buying insurance it is tempting to skimp. Instead of paying $100 a month we decide to pay only $50 a month. It is easy to think that as long as you have some insurance you are going to be OK. The reality is that insurance is only as useful as you have designed it to be. There are many kinds of coverages designed to protect you against different kinds of risks associated with car and truck accidents. If you haven’t gotten proper coverage, you are still exposed to the problem you were trying to solve. Thus it is useful to understand the different types of coverage and determine how much of each you require.
The Myth of Full Coverage
Before I talk about the different kinds of coverages available under an auto policy, let me clear something up: I often speak to people who have been in a car crash who tell me they have “full coverage”. I assume they are repeating something their insurance agent told them when he or she sold them the policy but it is a meaningless statement. THERE IS NO SUCH THING AS “FULL COVERAGE” INSURANCE. “Full coverage” sounds comforting–like telling someone that they have all their bases covered no matter what happens–but it conveys very little about whether insurance coverage is adequate or not. It is just a sales phrase designed to get you to sign on the bottom line.
Six Kinds of Auto Coverage
Insurance companies offer six basic kinds of auto coverage:
- Bodily injury liability
- Property damage liability
- Medical payments coverage
- Uninsured and underinsured motorist coverage
Bodily Injury Liability
This is a very important part of any auto insurance policy. Bodily injury liability provides coverage for injury and death claims in the event that you or the driver of your car is legally responsible for the accident. Most states require vehicle owners to maintain some bodily injury liability coverage. Section 49-1229 of the Idaho Code requires that every motor vehicle owner maintain at least $25,000 per person and $50,000 per incident in bodily injury liability coverage.
Because of the high cost of medical bills, the minimum coverage requirements are often inadequate. At Parke Gordon it is not unusual for us to see cases where a single persons medical bills exceed $50,000 or even $100,000. If the bodily injury coverage falls short, an individual may be personally liable for payment. In most cases, I would recommend that a person get at least $100,000/$300,000 in bodily injury liability coverage.
Property Damage Liability
This is the part of a policy that pays for damage to someone else’s property if you or the driver of your car is at fault for the accident. For example, if you run a red light on State Street in Boise and crash into someone else’s car, you will be legally liable for the property damage to the other car and the insurance company will pay up to the property damage liability limits to repair the other car. The Idaho Code requires motor vehicle owners to maintain at least $15,000 of property damage liability.
Medical payments coverage (often abbreviated to “med pay”) pays for any medical bills related to the accident incurred by you or passengers in your car regardless of whether or not you are at fault. If you have health insurance, your health insurance will often cover any injuries you sustain in an accident. Today many health insurance policies are not comprehensive and health insurance policies will often deny coverage of a necessary treatment such as a neck surgery. Med pay coverage, on the other hand, will pay for any accident related treatments up to the med pay coverage limits.
Uninsured and underinsured motorist coverage
This is a very important, often overlooked, part of your auto insurance coverage. Both uninsured and underinsured motorist coverage (commonly referred to as UM and UIM coverage) protect you against drivers who are legally responsible to pay for your injuries but do not have enough money to do so.
Uninsured motorist coverage is designed to step in and pay your medical bills and compensate you for pain and suffering when you are not at fault but the other driver did not maintain bodily injury liability coverage. In some instances, even if the at-fault driver did not maintain bodily injury liability coverage it may be possible to recover payment for your bills directly from him or her. This is only possible, however, if the at-fault driver has personal assets against which you can get a judgment. In my experience most uninsured drivers do not have significant financial resources—which explains why they did not purchase insurance in the first place.
The reasons for getting uninsured motorist coverage also apply to underinsured motorist coverage. If a driver who maintains only minimum bodily injury coverage crashes into your vehicle, you can easily be saddled with injuries that cost many times more than the at-fault driver’s policy limits. Underinsured motorist coverage is designed to bridge the gap between what the at-fault driver’s insurance company is required to pay and the actual damages which result from the accident.
Collision coverage pays for damages to your own vehicle in a car crash. It is generally required if your vehicle is financed but always a good idea for anyone who drives a nice car. Keep in mind that this is one type of coverage where many people pay for more coverage than they can use. If the fair market value of your car is only $10,000, there is no point purchasing collision coverage for anything more. Your insurance company will only pay up to the fair market value of the vehicle no matter what. This is known as “totaling out” the car. If you buy more than $10,000 in collision coverage you are paying the insurance company for a service they won’t provide. Far better to use that money and purchase additional bodily injury liability or UM/UIM coverage.
Comprehensive coverage pays for damages from things like vandalism, acts of nature and theft. It is almost always subject to a deductible.
In a future post I’ll discuss specific examples of how coverages applied to actual accidents Parke Gordon has been involved in (I will modify certain details to ensure confidentiality). I will also discuss things to consider when determining how much of any kind of coverage you need. As a rule of thumb, don’t try to skimp when considering personal injury liability and UIM/UM coverage and don’t buy more collision and comprehensive than the fair market value of your vehicle.