Car Insurance: how it works, why you need it, and how to make the best of it.

The next tool in our insurance arsenal is car insurance. I have a feeling this one is going to blow your mind, just like it did mine.

In my former career, I was a lawyer. In some of my work, I helped clients navigate filing claims against insurance companies for serious car crashes. They struggled financially waiting for a result for an insurance company, a judge, or a jury. A lot of times, the available insurance was inadequate.

Driving a car is one of the riskier activities we engage in, and the risk is compounded the more we drive. The average person will be in 3 to 4 car accidents in their lifetime. Yet oftentimes we are woefully unprepared for what happens if we are the unlucky one who ends up in a crash. Especially if we didn’t have good coverage or the person who caused the crash didn’t have adequate (or any) insurance and we weren’t prepared for it.

So, today, I am going to talk about car insurance, what the common terms mean, why you need it, and how it fits into your financial plan. Having adequate car insurance is about more than protecting your vehicle.

Nationwide, approximately 1 in 8 drivers don’t have car insurance. In my state, New Mexico, that number is closer to 1 in 5. In the least insured place (Mississippi), that number is more like 1 in 3. Beyond the number of uninsured drivers, the requirements for having insurance do not place a burden on carrying a high dollar amount of insurance. In New Mexico, under law* you must carry insurance and you must have insurance that provides $25,000 of bodily injury or death protection for each person involved in a crash with a maximum of $50,000 per crash (i.e. there was more than one person in the car) and $10,000 of coverage for property damage (these terms will be explained more below).

So, let’s say I’m driving down the freeway and I get hit by someone driving under the influence of alcohol – they didn’t just have one drink, they are wasted. Unfortunately for me, they don’t have insurance, so the only insurance available to protect me is my own. If I don’t have the proper insurance, or enough, I am (very likely) out of luck.

Let’s go with that same scenario, but this time, I have really good insurance. I have high limits of what is called underinsured or uninsured motorist coverage. As the wording implies, this insurance covers me when the person who hits me doesn’t have insurance or doesn’t have enough insurance to cover my damages. With 1 in 5 people driving without insurance around me, and the minimum required insurance being what it is, I am mitigating serious risk carrying under/uninsured motorist coverage.

Beyond the concerns of someone else not having insurance, or enough insurance, if you cause a crash and don’t have enough insurance, you could be found personally liable for the damage beyond your insurance limits. So, if you caused a wreck and only had the minimum liability limits, the other party could get a judgment against you for what insurance doesn’t cover. 

If you drive a car, auto insurance is very important.

Let’s talk through each of the terms you’ll commonly see in your automobile insurance policy:

Liability insurance contains two parts and is designed to protect others for damage you cause:

• Bodily Injury (BI) – This covers costs of injuries you caused to others. This includes medical expenses, pain and suffering, and lost wages.

• Property Damage – This covers costs of damage, or loss, of another’s property. This might include costs to repair someone’s vehicle or repairs damage to a building that was crashed into.

Medical Payments – This coverage, also known as Med Pay, pays for medical and funeral expenses for a covered person. A covered person is the policyholder, passengers, or a member of a policyholder’s family. Interestingly, Med Pay provides coverage for a covered person for an injury in any automobile accident, whether they are driving, a passenger, a passenger in another person’s vehicle, riding public transportation, or even as a pedestrian.

Personal Injury Protection (PIP) – Much like Med Pay, but PIP is intended to be broader and cover health costs and lost wages.

Comprehensive coverage – This is coverage you’re very glad to have if your car is damaged by anything but a collision – think weather (hello, hail!), theft, fire, vandalism, or hitting a deer. This coverage will pay to repair or replace your vehicle.

Collision coverage – Collision coverage is used if your vehicle hits, or is hit by, another vehicle or object. This covers repairs or replacement of your vehicle.

Car Rental & Travel Expense – Car rental coverage will provide you a rental car if your car is being repaired. If you are in a crash away from home, travel expense coverage will offset the cost of meals, lodging, and transportation.

Uninsured/Underinsured Motorist Coverage (UM/UIM) – This coverage provides protection when you’re not at fault in an accident and the other driver had no, or inadequate, insurance to cover your damages. This is like liability insurance, but for you.

GAP coverage – Guaranteed Asset Protection insurance is coverage you are offered when you finance a vehicle as a lease or purchase. GAP insurance is intended to pay the difference in the value of a totaled vehicle and the amount owed on a loan or lease. Let’s say you buy a car for $30,000 and 6 months later, you get in a wreck. Your insurance determines the value of the vehicle is now only $25,000, but you still owe $27,000 on the loan. The GAP coverage will pay the $2,000 difference in what you owe and what your insurance provides you. This is not necessary if you own your vehicle outright.

Understanding the risks and the commonly offered coverage, what do you need?

Always carry at least what your state requires. You can see a list of auto insurance requirements for your state here. If you’re uninsured, that could also mean an expensive ticket or court visit. As you can see looking at state requirements, a lot of states only require that you have coverage when you are at fault – nothing to protect you.

Forbes has put together a chart of best practices when it comes to insurance. Forbes and PolicyGenius recommend liability and UM/UIM in amounts ranging from $100,000 - $250,000 per person for bodily injury liability, $300,000 - $500,000 per accident for bodily injury liability, and $100,000 - $250,000 for property damage. They also recommend carrying collision and comprehensive coverage as well as the maximum PIP offered and Med Pay.

Generally, the advice is that you want to have enough coverage to protect your assets if you are at fault in a crash. You also want to think about what happens if you are seriously injured in a crash. You want adequate protection if you’re out of work or suffering for a long time.

Of course, having all this coverage means paying greater premiums now. It also means that should you end up in a wreck, you have adequate coverage to feel protected.

Call your insurance company and ask if they can offer any discounts. If you’ve been a long-time customer, they often have discounts for that. If you have your home insurance with the same insurance company, they might have a discount for that, too. If you have excellent credit, they might offer a discount for that. If they don’t have any discounts, get quotes from other companies. You are just a number to the insurance company. The top four largest insurance companies hold 50% of the insurance market (State Farm, Allstate, Progressive, Geico). You want the best protection for you and your family, so it’s okay to shop around.

Now, go get your policy and review your coverage! Review these numbers:

-       How much liability protection do I have?

-       How much do I have in UM/UIM?

-       How much Med Payments coverage do I have?

-       What is my car worth? How much do I owe? If my car is totaled, what will the plan be to replace the vehicle?

I’d love to hear from you! Let me know what you find when reviewing your policy and protection!

*small caveat to this law: In New Mexico, you can alternatively place $60,000 in a surety bond with the State Treasurer’s office instead of carrying automobile insurance.