Recently we were with a client who was unhappy about the prohibitive cost of auto insurance. 87.4% of US drivers have auto insurance,and most of them share the same sentiments. It is a payment that we make month after month, and it can get frustrating if we have not filed a claim, are a first time auto-owner, or a new driver. Is it worth it? More importantly, many people have no idea what they are buying as coverage.
An insurance is nothing but a transfer of risk. Auto insurance is a contract between you and the insurance company where you pay a fixed amount (called premium), and they cover you for losses as agreed by terms and conditions (called policy). Nerd Wallet reports that the averagedriver overpays by $368 every year. Financial Advisor Magazine reports that Americans overpaid by more than $100B for car insurance in 2016. Are you one of them? If so, you need to know what to include and what not to.
Here are some terms to become familiar with before shopping for car insurance:
Actual Cash Value: The fair market value of your automobile at the time it was damaged, stolen or destroyed.
Bodily Injury Liability Coverage: Coverage that the insurance pays for automobile accidents that result in bodily injuries to other drivers or pedestrians for which you are legally at fault. This also covers legal defense if you are sued after the accident.
Claim: Formal request made by the insured to the insurance company to cover an incurred loss.
Collision Coverage: Amount paid for damage to your car caused by an impact with another vehicle, or object, or a rollover, after the deductible has been met.
Comprehensive Coverage: Amount paid for damage to your car, after deductible is met, that is caused by hazards other than collision, such as fire, theft, explosion, windstorm, hail, water or contact with an animal.
Deductible: Amount that must be paid out of pocket by the insured, for covered losses, before the insurance company pays a claim.
Depreciation: Financial calculation that insurance companies use to identify the Actual Cash Value of the asset, in the event it is determined to be a total loss.
Exclusions: Items that are specifically denied coverage (ex: normal wear and tear) under the terms of an insurance policy.
Medical Payments Coverage: It is the total amount that the insurance company will pay to cover medical expenses and funeral bills, incurred by you and your passengers, in the event of an accident, regardless of who is at fault.
Personal Injury Protection: It is coverage where your own insurance company pays you and your passengers for medical and funeral expenses in the event of an accident, regardless of who’s at fault.
Property Damage Liability Coverage: The amount that covers you, up to the policy limit, for losses that result when you damage or destroy someone else’s personal property. This is mandatory for many states.
Uninsured and Underinsured Motorist Coverage: The coverage for injuries you and others suffer when you’re involved in an accident with an uninsured driver, or a driver without adequate insurance.
Please refer to Auto Insurance Glossary for more details. It is critical that you understand these terms and conditions to be adequately insured, and to not pay for coverage you don’t need.
Please watch out for the next blog on how and where to buy car insurance.