The Basics of Auto Insurance

Insurance. The word makes me cringe. To say the least, I’m not a big fan, but I would never live without it. Auto insurance is one of the most important types since most of us own a vehicle. However, there are risks to owning that vehicle: accidents, theft, vandalism and natural disasters. Another thing to consider is that without auto insurance you are putting your assets and future earnings at risk. Therefore, auto insurance provides protection against those risks. Also, many states require a minimum insurance coverage such as my home state, Colorado. Other options are posting a bond, but check with your local motor vehicle registration office first.

A personal auto policy, or PAP, is a contract between you and the insurance company. It contains the following: declarations page, part A - liability coverage, part B - medical payments coverage, part C - uninsured/underinsured motorist coverage, part D - auto damage coverage, part E - duties after accident/loss and part F - general provisions. Part A covers any wrongdoing (claims here can be limitless). Part B pays medical expenses for the driver and any passengers. Part C is self-explanatory. Part D includes collision (accident damage) and comprehensive (physical damage by other means). You can purchase either or both with or without a deductible (typically $100-$1000). Part E explains the procedure after an accident or loss. Part F deals with insurance fraud, bankruptcy of the insured (you) and policy cancellation.

With your PAP there are several options: policy period and cancellations, premium payments, towing & labor coverage and transportation expense (rental) coverage. PAPs are typically for one year although they may run longer or indefinitely. It is important to know if you pay a penalty for canceling the policy early. There are a variety of payments methods: entire amount, down payment followed by monthly installments, equal monthly amount for one year or quarterly. I personally pay quarterly, even though it includes a nominal service fee. Watch out for the service fees, which usually come with any payment method other than the entire amount. The towing & labor coverage is for emergency roadside service at any time. Labor must be performed wherever the vehicle is disabled. This coverage extends to non-covered autos in the event the covered auto is disabled. Covered autos include recent auto purchases as long as you have notified your insurance company within 30 days of the purchase. The rental coverage is a set amount per day for alternate means of transport when the covered auto is disabled. It is only valid if the covered auto is disabled for more than 24 hours. Sometimes, this coverage is available for stolen vehicles, but not always.

When it comes to calculating the correct coverage amounts, you should consider such personal factors as where you live, your financial circumstances, how often you drive, the way you drive and the size of your assets. Aside from those personal factors, the different coverage types must be examined. The liability coverage falls into two categories: bodily injury and property damage (people and property). Bodily injury liability is crucial due to the fact that it includes payment of medical bills, lost income and pain and suffering. This isn’t the place to underinsure. Typical liability coverage is 300/100/50, meaning $300,000 per accident and $100,000 per person limit for bodily injury and $50,000 for property damage. For medical payments coverage (PIP - personal injury protection), which covers medical expenses for up to three years after an accident, $1,000 per person is the minimum with $10,000 per person as the typical recommendation. An important note: health insurance doesn’t cover passengers that aren’t on your health insurance policy. The uninsured/underinsured coverage should be $250,000 per person and $500,000 per accident. This sounds expensive, but in reality it’s quite inexpensive in relation to the whole policy premium. With collision and comprehensive coverage, the actual cash value of the vehicle is the key. If your vehicle is older, this coverage is not necessarily cost effective. Also as previously mentioned, this usually has a deductive of $100 to $1000. Keep in mind: the higher the deductible, the lower the premium and vice versa. The endorsements include towing & labor, car rental cost, extraordinary medical expenses and certain RV coverage.

And finally, a few words on filing a claim. Most importantly, report it immediately to the police and your insurance company. Verify how to proceed with your insurer. Make sure to keep excellent records in order to provide proof of loss with the police reports, medical expense and vehicle repair bills. After an accident or loss is the perfect time to read over your policy to clarify any questions. Of course, of you’re like me you won’t understand the "legalese", but perhaps you’ll uncover some important information. And check your other insurance policies (health, homeowner’s, etc.) to see if they might cover anything involved with your loss.

So now that your mind is spinning with all these facts, take a break. Find your auto insurance policy and go through it with this article handy. Perhaps you’ll come away with a greater understanding of your policy. Information is power, use it!

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