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Car Insurance. Ugh. Just typing the words makes my eyes want to glaze over. Insurance is one of the areas of personal finance that I really needed to take the time to really understand. There is so much disinformation out there that it was really confusing to figure out what I really needed versus what the insurance brokers were trying to sell to me. Hopefully through this article, I can demystify car insurance for you.
Let’s start with something I actually know fairly well. I worked for an insurance company assessing damage to cars for over two years. For people that do not have any car insurance, please do not choose to pay the DMV a fee in order to waive insurance (in VA, this fee is $500). I have seen too many cars totaled and too many people hurt. You never know when an accident will happen. According to car industry, the average American is in one car accident every 17.9 years or about four accidents over their lifetime. With that said, let’s explore what type of coverage should you have.
First let me explain the various types of insurance coverage options. If you have insurance, you probably have collision insurance. This means if you accidentally hit someone and it’s your fault, your collision insurance will help take care of YOUR car. When I was handling accident claims, I normally came across four types of deductibles – $100, $250, $500 and $1000. Most finance gurus will tell you to get a $1000 deductible if you have that money set aside in your emergency fund. I recommend getting quotes for each of these numbers to figure out what makes most sense to you. While it is unfortunate if a $100 deductible is $2 more than a $1000 deductible, the cost benefit analysis would say it’s probably worth it to buy the $100 deductible given the number of accidents that could theoretically occur.
Property Damage Insurance
This insurance pays for the damage that is inflicted on the other car in the collision. The typical range in Virginia according to USAA is $20,000 to $500,000. Let’s say that you choose to carry $50,000 coverage. This will be the amount total paid per accident. In this case, if you hit two cars, the insurance company would pay up to $50,000 total, not per vehicle. This means that if you hit two cars but caused $70,000 worth of damage to the cars, the insurance company would only cover $50,000. You would be responsible for the remaining $20,000. Yikes.
This is where we get serious. Property damage coverage is not something to scrimp on. If you live in an expensive city with luxury cars, you will want to have as much property damage insurance as you can afford. Think about it for a second; if you are in an accident with a Porsche, the damage to repair that car could easily cost more than $50,000. Do you really want to pay out of pocket for the remainder?
Bodily Injury Insurance
Now, let’s say you were involved in an accident, it’s your fault, and even worse, the person had to see a doctor. Bodily injury insurance pays for medical costs that they incur. This is also where lawyers can sue to get injury settlements for their clients. Quick side note– lawyers don’t really care about their clients car during the negotiation. The lawyer will not be able to get more money for car. The car is worth whatever the used car value book the insurance company is using. The lawyers really only care about the injury settlement since this is where they can actually negotiate a higher amount.
Here in the DC area, there are unfortunately a lot of deer that like to dart in the middle of the road. These type of accidents are surprisingly not handled under Collision, but under Comprehensive. Comprehensive covers acts of God such as hitting an animal, hail damage, or if your vehicle catches fire. This also includes if your vehicle is stolen. Quick side note– I had a friend that use to cover the fire and stolen car division of the company. He told me that a lot of cars that had been reported as missing or stolen were actually recovered within the thirty days. So if you ever find yourself in this situation, don’t start shopping for a new car immediately. Additionally, if your car is stolen, you won’t automatically receive a rental car unless you have rental car insurance.
So, if you are in an accident, and it is your fault, the insurance company won’t give you a rental unless you have this insurance on your policy. On top of that, the amount is capped. So if you drive a Hummer and you want a similar type vehicle, be prepared to pay out of pocket. Most people go with the cheapest car option in order to maximize the amount of time that they can use the rental car.
Uninsured Drivers (UMPD)
Finally, let’s say that dreaded scenario happens, and you are hit by an uninsured driver. Not all is lost; most states require insurance companies to cover something called UMPD, Uninsured Motorist Property Damage. This means that in most cases, you will be required to pay a $200 deductible to your insurance company, and then they will fix the car. You might be thinking, why should I have to pay for the damage the other party did to my car? It’s definitely an awful situation, but in this case, if you go through your insurance company, they will in turn subrogate, which is a fancy word for suing the other party for the damages. If the insurance company is able to recover the damages from the other party, you will be able to receive your deductible back.
Medical Expense Benefits
Additionally, if you are ever injured in an accident, these benefits will allow you to be reimbursed for any coverages that your insurance company does to cover. This is a nice benefit, but honestly, it is not one that I currently carry. This isn’t to say that it isn’t beneficial. I currently have very good insurance that covers almost all of my medical expenses, so I feel comfortable forgoing these benefits for now. In the future if my medical insurance is reduced, I will probably reevaluate.
If you own a car with a loan on it, you may consider getting gap insurance, which is added to your collision deductible. Gap insurance covers the difference between what you owe on the car and what the car is currently worth. As you know, cars lose value the second you drive off the lot. If you finance your car and it is involved in an accident resulting in a total loss, you are still responsible to pay the outstanding loan. Unfortunately, the insurance companies will only pay what the car is worth, not what the loan value amount that is left on the car. Therefore, it is smart to have gap insurance if you have a newer car with a large difference between the car value and the loan value.
Hopefully I have peeled back the curtain of the car insurance industry, and you are now more knowledgeable in order to select the right insurance coverage for you.
Do you maximize the amount of coverage you have on your vehicle? If you scrimp on insurance, have you experienced any nightmarish situations? Share your stories below.