Boring Insurance Stuff You Need to Know: Part 2 | Financial Planning Chapel Hill l Old Peak Financial Advisors

Boring Insurance Stuff You Need to Know: Part 2

July 11, 2024

auto insurance part 2

Boring Insurance Stuff You Need to Know: Part 2

July 11, 2024

This is part 2 of our series to help you review insurance basics. We know, we know, it's not exactly a gripping topic. So, we've identified the important elements of insurance and will leave the fine print to the contract.

We previously wrote about what is probably your biggest insurance expense: homeowners' coverage. Next, we clarify what you need to know about one of the most commonly purchased insurance policies: automotive.

Auto Insurance

Most people understand the basics of auto insurance, but not the nuances. That’s fine – until you have a claim and learn the policy doesn’t cover what you thought it did. Here’s a guide to what you need to know. Because most of you will have several auto claims over your lifetime, a quick review will pay off.

The Basics You Might Already Know

  • Collision coverage is what most people think of when they think of auto insurance. It covers damage to your car from collisions with other vehicles or objects. Usually, it covers the market value of your car, not the replacement cost. So, if you total your 5-year-old car and replace it with a new one, you'll be out of pocket.
  • Comprehensive coverage pays for non-collision-related damage to your car (e.g., glass and windshield damage, theft, fire, damage from animals, natural disasters). This is separate coverage from collision, with separate limits and deductibles.
  • Liability coverage may be the most critical element of the policy for anyone with a significant net worth. It pays out if you are at fault in an accident. State minimums are low – often $25,000 per person, $50,000 per accident for bodily injury, and $25,000 for property damage. In an accident, your brokerage account, bank account, and secondary home are not protected from a lawsuit; only your primary home and retirement accounts are safe (and even some of your primary home's value may not be safe). So, many people need a lot more coverage than $50,000. The maximum is usually $500,000/$500,000. You can supplement that with a separate umbrella liability policy.
  • Medical payments or personal injury protection (PIP) covers medical expenses for you and your passengers, regardless of fault. This usually has a low cap, from $1,000 to $10,000. Some people like to get coverage up to their health insurance deductible. Some people decline med-pay and rely on their health care insurance, although passengers will need to rely on their own policies.
  • Uninsured/underinsured motorist coverage covers you if you're hit by a driver with insufficient or no insurance – which is probably most of the driving population in the US.
  • Deductibles are the amounts you pay out of pocket before your insurance coverage kicks in. Commonly listed separately for comprehensive and collision coverages. If you have a high net worth, think seriously about a high deductible.

Stuff You May Not Know

  1. What happens when someone else drives your car?
    • Car insurance follows the vehicle, not the driver. When you allow a friend, family member, or babysitter to borrow your vehicle, they also borrow your car insurance. Your insurance becomes the primary coverage.
    • If a friend is at fault in an accident in your car or gets a traffic violation, it will impact his insurance and driving record, not yours.
    • But, if you did not permit the person to drive your car, or if it's a family member specifically excluded from your coverage – perhaps they have a bad driving record, and you excluded them to lower your premium – they are not covered.
    • If someone not on the policy drives your car regularly, they should probably be added to the policy. For example, a nanny. Warning: their driving record will impact your premium.
    • If you lend your car to someone who should not be driving—say, someone underage, with a suspended license, or a DWI—your insurer will probably deny coverage. The lesson, with apologies for stating the obvious: be careful whom you let drive your car.
  2. Adult Children
    • If your adult child lives with you and drives, they should be on your policy unless they own a car in their name. If they own the car they drive, you can decide whether they have an individual policy or are on yours. If the child is away at college – even out of state and with a car – most insurers will let them stay on your policy.
  3. Rental Car Coverage
    • Your auto insurance policy often extends to rental cars, so you might not need to purchase additional coverage from the rental car company. Your credit card may offer coverage, too. Check this out before you buy coverage from the rental car company because their rates are high.
  4. Rental Car Coverage Overseas
    • Most US policies do not cover auto rentals overseas, except in Canada and Mexico. You can buy separate policies from insurers in the US, which can be less expensive than buying them from a rental company overseas. Some credit cards will provide some insurance in some countries, but it depends. In some countries (e.g., Italy), a foreign driver must buy collision damage waiver insurance from the rental car company. In an accident, you are not out of pocket for anything (not even the deductible). Figure this out before you leave.
  5. Comprehensive vs. Collision
    • As mentioned above, they cover different risks. Think about the following: Do you really need a low deductible for comprehensive coverage on an older car? You may feel differently when a tree falls on your 1990 Camry and leaves a dent than you would if it falls on your new Lexus.
  6. Personal Property
    • Auto insurance generally doesn't cover personal property inside your car. For example, if your laptop is stolen from your car, it's usually covered under homeowners' or renter's insurance, not auto insurance.
  7. Credit Scores Impact Premiums
    • Your credit score can impact your auto insurance premiums. Insurers use credit information to predict risk, believing that those with higher scores are less likely to have claims.
  8. Age and Gender Factors
    • Premiums are almost always higher for younger drivers and males. Insurance companies view young drivers as less experienced, and males are statistically more likely to be in accidents. But after your teen has three years of a clean driving record, ensure your carrier is aggressively reducing the premium. They should.
  9. Mileage Affects Rates
    • The more you drive, the higher your risk of an accident. Consequently, lower annual mileage can lead to lower premiums. If you have significantly reduced your monthly mileage (e.g., working from home), inform your insurer and expect a modestly lower premium.
  10. No-Fault Insurance
    • In no-fault insurance states, your insurance pays for your injuries and damages regardless of who is at fault in an accident. This system aims to reduce litigation and speed up the claims process. Twelve states apply this system: FL, HI, KA, KY, MA, MI, MN, NJ, NY, ND, PA, and UT.
  11. Gap Insurance
    • If you finance or lease your car, gap insurance covers the difference between what you owe on your vehicle and its current market value if it's totaled or stolen. Without it, you could be left paying out of pocket even after the insurance payout.
  12. Claims Frequency vs. Severity
    • Insurers consider both how often you file claims (frequency) and the cost of those claims (severity). If you can afford it, consider settling an at-fault accident without involving your insurer – especially a smallish claim.

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This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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