Understanding auto insurance

Insurance is a matter of mitigating risk: Though it’s possible you’ll never need it, chances are that the unexpected will befall you. Of course, the unexpected is never closer at hand than on the road. That’s why you need – and why the government requires – an auto insurance policy.  

Because there are so many options when it comes to auto insurance, you need to think carefully about the risk you face: how much insurance you need, what you want it to pay for, what you can afford to pay in deductibles, and more.

Like all insurance, auto coverage involves a number of peculiar terms and specific factors consider. Here’s a breakdown (so to speak):

Collision coverage pays to repair or replace your car, no matter who or what caused the accident, while comprehensive coverage pays to repair or replace your car if it’s stolen or damaged as a result of a storm or other natural event. For both of these products, you’ll need to pay a portion of the costs, called a deductible, and your insurance will pay the rest. To keep your premiums low, it’s smartest to choose the highest deductible you can afford to pay out of pocket.

Bodily injury liability coverage protects anyone injured or killed by your vehicle, paying for medical bills, lost wages, pain and suffering, and (if necessary) funeral costs. This coverage is mandatory in most states. It’s expressed in terms of the maximum payout per person and per accident. According to the Insurance Research Council, the average bodily injury claim was $15,500 in 2013, but that can quickly add up should more than one person be injured. In general, experts recommend getting as much coverage as you can afford (the more assets you have, the more someone might pursue in a lawsuit).

Property damage coverage pays to repair or replace another person’s vehicle or other property damaged by your car. This is another form of coverage typically required by states, in the range of $10,000 to $25,000.

Uninsured and underinsured motorist coverage is for medical bills, rehabilitation, pain and suffering, and funeral costs for you or your passengers in the case of an accident caused by someone with little or no insurance, or in the case of a hit-and-run. It’s best to get this coverage in the same amount as your bodily injury coverage.  

Personal-injury protection reimburses you for lost wages and any in-home care you might require because of an accident. This situation is likely covered by your health and disability policies, in which case you should only buy the state-required minimum.

Medical-payments coverage is for medical bills accrued by you and your passengers, regardless of who’s at fault. Frequently, this coverage is automatically included, but the costs are minimal to add it if needed. Like personal-injury protection, you may not need this if your health insurance is good enough, however it’s worth it to protect passengers who may not have their own health coverage – at least $5,000 worth.

Roadside assistance coverage pays to have your vehicle towed, which may already be covered by if you belong to an auto club, or if your car’s manufacturer provides it.

Rental reimbursement coverage typically costs very little – about $30 per year – and pays for a month of rental car fees while your vehicle is in the shop for repairs, or is stolen. Keep in mind that there’s usually a limit to the amount you’re reimbursed per day and per occurrence.

Ways to save money

There are a number of ways to lower your premiums, if you do a little extra work. A few worth trying:

• Go for top-tier coverage. If you’ve been driving for a while, you might recall how your premiums would go up for every violation – every ticket, accident, and incident. Today, most insurers use a “tier system” that keeps every single mishap from impacting your premiums; though it still uses the same information to calculate your rates (accidents and moving violations, vehicle type, zip code, credit history), the tier system gives insurers more flexibility when it comes to your particular case. Find out how you can qualify for the top tier (often called “preferred”), and you can save 15 percent or more off the standard rate.
• Buy a car with rates in mind. The particular vehicle you drive is a big factor in your premium levels – even cars that seem similar can vary enormously in repair costs. Once you’ve narrowed down your choices, get quotes for each model to determine which will save you the most money.
• Check for safety discounts. Does your car have safety features like airbags, anti-lock brakes, electronic stability control, daytime running lights, or anti-theft systems? Those features may qualify you for extra discounts. (Note that the newest features, like collision-avoidance systems and lane-departure warnings, do not yet translate into discounts with most insurers.)
• Bundle your insurance policies. If you’re working with the same provider for your auto, home, and personal-liability coverage, you’ll likely receive a multiple-policy discount.
• Go back to (driving) school. Laws on the books in 34 states and in Washington D.C. require insurers to provide a discount when you complete a certified defensive-driving course. (See the full list of states here.)
• Become a member. Low-risk drivers can get further discounts through membership in certain groups or by working for particular employers; these can include professional associations or unions, colleges and university alumni groups, military and federal groups, and others. These “affinity” discounts can be significant, so ask your insurer if any groups you belong to qualify (or ask the groups you belong to about the insurance companies they work with).

In addition, your children can qualify for discounts on their auto insurance as well: Students can receive discounts if they maintain at least a B average (a GPA of 3.0 or above), or if they attend a school more than 100 miles from home and aren’t using a car.

FOR MORE INSIGHT

On auto insurance
How much car insurance do you need? (Wall Street Journal)
Best and worst auto insurance companies (Clark Howard)

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