The Basics of Car Insurance Coverage

Many people find buying car insurance confusing. They know they are required to have it, both by the state motor vehicle divisions, as well as leinholders (also known as the company with whom your car loan is through). Although any car owner is therefore an auto insurance consumer, most of these consumers have no idea what they are purchasing, or why they are purchasing it. By understanding the basic concepts of purchasing auto insurance, a consumer can become informed on this important purchase, and also better protected.

The concept to understand is that there is an insurance game you must play, and the rules are written by the insurance companies. However, once you learn and play by the rules, both parties will win the game. As a consumer, the goal is to get the appropriate amount of important coverages needed to protect your net worth, and then deciding which more expensive “convenience coverages” you want to pay for. The less an insured reports small claims, the bigger discounts the insured can qualify for over time. Paying a $500 or $700 claim out of pocket may allow the insured to qualify for a claims-free discount saving thousands over just a few years.

The important coverages to be familiar with are: “liability” (also known as “bodily injury/property damage”- BIPD), “uninsured & underinsured motorist,” “comprehensive,” and “collision” coverages.

-“Liability” protects your net worth, and is the amount of money that will be paid out to other parties if you are found at fault for an accident. When considering net worth, you should take into account amount of savings, equity in a home, and wages. In Arizona, for example, a lawsuit against you can result in the garnishment of wages- 1/3 of total income for a period of 10 years, or until the lawsuit amount is fulfilled. These things considered, this is the amount of liability insurance you want to purchase. For some, this may be $50,000, for others $500,000. Liability coverage is actually the least expensive part of a policy- you may be able to protect yourself for $300,000 instead of $100,000 for just $20 or $30 more!

-“Property damage” covers property when you are at fault in an accident, including other drivers’ vehicles and public or private property, such as homes, block walls, or a stop sign. Keep in mind that most vehicles on the road cost $20- $30,000 or more- what happens if you hit more than one vehicle in an accident? Be sure to purchase enough property damage coverage.

-“Uninsured & Underinsured Motorist” coverages protect you, the consumer, if you are to get hit by a driver who has minimum or no insurance. Purchasing these coverages are an inexpensive way to protect yourself and your family from other drivers.

-“Comprehensive and Collision” coverages, required by leinholders, allows the consumer to cover the cost of the vehicle should it be damaged in an accident after being found at fault, or after a theft of the vehicle, for example. This coverage allows you to pay a small percentage of the cost of the vehicle (usually $500 or $1000) while the insurance company pays for the remainder of the costs. Play by the rules- carry a higher deductible to lower the amount of insurance you pay each month. If you are willing to pay a little more, such as $1000 or $1500, the insurance company will reward you by giving a bigger discount. If you go 3, 5, or more years without an accident, you will save thousands of dollars!

In addition to the above coverages, insurance companies offer other “convenience” coverages such as towing, roadside assistance, glass coverage, rental car coverage, medical coverage, and more. Because these coverages are often overused, the insurance companies charge more for these coverages. Take for example glass coverage. You will likely pay $60 to $100 per year per vehicle to carry glass coverage, so that if you get a broken windshield, you don’t pay anything out of pocket to fix it. However, most drivers report replacing windshields only once every 5 or 10 years. Over this time period, this could be a cost of $300 to $1000 for the luxury of a “free” glass replacement. Most insurance agents work with glass companies to offer an out of pocket windshield replacement for around $180- $200. By not carrying this coverage, and paying for the windshield out of pocket, you could save upwards of $800!

Once you understand the basics of insurance, you can find yourself financially secure and protected. By understanding the basics, and playing by the rules, you can be secure and keep hundreds or thousands of dollars in your own pocket, instead of the pockets of the insurance companies.