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What Should You Buy and What You Should Exclude

April 21, 2009

Lori Mandell

Buying an Auto Insurance Policy

Although shopping for auto insurance may not be as much fun as shopping for a new car or new clothes, it is a necessary step in protecting yourself and your loved ones from risk.  Every state has its own requirements for auto insurance.  Some require proof of liability insurance to register your car, while others only ask for proof of insurance if you have an accident or are stopped for a traffic violation.  A handful of states do not require you to carry liability insurance at all, but those are fewer in number each year. The states that do require it also demand that you purchase at least the state’s minimum amount.  Regardless of whether or not your state requires it, however, it is important that you purchase auto insurance, and that your policy includes the right coverages for your financial and other life circumstances. 

Types of coverage
The following types of coverage are those that are typically found on auto insurance policies:

  • Collision
  • Comprehensive
  • Medical Payments (Med Pay)
  • Bodily Injury (BI)
  • Property Damage (PD)
  • Uninsured/Under-insured Motorist (UM/UIM)
  • Most policies also include Rental Car Coverage for an additional premium.

Do you need to buy all of these and how much do you need?
At the very least, you need to buy Liability Insurance (Bodily Injury and Property Damage) in the minimum amount required by your state, but you should consider buying more, and buying other types of coverage, as well, if you can afford the premium. 

Here’s why:
Suppose you accidentally rear-end another vehicle at high speed, and in addition to your passenger sustaining a neck injury, the other vehicle’s driver sustains a broken arm and his passenger sustains injuries to her back.  Further, you damage the rear of the other vehicle and the front of yours. Let’s say your state requires liability insurance limits of 15/30/10, which means if only the driver or one passenger is injured, your policy would pay out up to $15,000 for his medical bills and other injury-related expenses including pain and suffering.  If the driver and his passenger or passengers are injured, your policy would pay out up to $30,000 total for all of their combined medical bills and other injury-related expenses.  It will also pay out up to $10,000 for the damage to the rear of the car and any other property damage you caused. 

Now, if you decided to only purchase the minimum coverage of 15/30/10 and nothing else, (no collision, no comprehensive, no medical payments), you could be saddled with paying for much of the damage you caused out of your own pocket.  With a broken arm for the driver and back injuries for the passenger, you could be faced with responsibility for taking care of their $50,000 or more in medical and related expenses.  And you only have $30,000 in coverage for the accident!  And what about your own passenger?  If you had Medical Payments coverage, that would pay for his or her medical bills up to your limits (usually, $5,000, $10,000, $25,000 or more).  But you didn’t buy it.  Note, too, that if the accident is your fault, and most rear end accidents are the fault of the driver in back, your passenger could also make a claim against your liability coverage for pain and suffering, and any medical bills over and above your medical payments insurance if you had any.  And you’ve already run out of those Bodily Injury dollars from the other vehicle’s occupants.

Now for the property damage.  The other vehicle happens to be a late model BMW and the estimated damages are $11,500.  Your 2006 Toyota Rav4 has $2500.  If you only have the minimum $10K in Property Damage coverage, you are stuck for that extra $1,500 for his car.  If you have no Collision coverage, which covers damage to your vehicle, you’ll be out-of-pocket that $2500, too, or be driving around in a banged up car.

You can see why insurance is not a luxury; it’s essential.  Of course, not everyone can afford to buy more than the minimum amount.  The best advice? Buy the most you can afford. 

A word about Uninsured Motorist Coverage
UM/UIM coverage comes into play when you are involved in an accident with a negligent driver who has no insurance or does not have enough insurance to cover your damages.  Your own insurance company steps in to take the place of the insurance the other driver should have had.  Auto policies typically provide UM/UIM insurance along with Liability insurance.  Be sure your policy includes this coverage so you are taken care of in the event you are injured in an accident where the at-fault driver has little or no liability insurance to cover your damages.

What can you exclude?
If you drive an older vehicle, it is not imperative that you buy Collision or Comprehensive (which is for damage caused by something other than collision, and for theft), because these coverages are expensive and your car may not be worth repairing if you have an accident.  If you do decide to purchase Collision and Comprehensive, you can lower the cost by carrying a high deductible.  You can choose to forgo the Medical Payments coverage if you have health insurance to pay your bills if you’re injured in an accident, but I wouldn’t recommend it since it also covers your passengers, as noted in the example, above.  Rental Car Coverage is an extra offered by many insurance companies for an additional premium. This coverage pays for a replacement vehicle while your car is in the body shop being repaired and covers you for up to whatever limits you purchased.  If there is good public transportation nearby, you may not need this coverage, so don’t pay extra for it if it’s not necessary.

Your priority should be Liability coverage (BI and PD) and my advice is to buy the highest limits you can afford.  Then add Medical Payments, with at least $5,000 limits.  If your car is under 5 or 6 years old, and you can afford it, buy Collision and Comprehensive coverage, with a high deductible if you need to lower the premium.  Lastly, and only if you can afford it and you cannot be without a car even for a few days while yours is in the shop, add Rental Car coverage.  We all hate to pay for insurance, but you will be glad you have it if you have an accident.

Lori Mandell is an attorney, writer and editor. Her specialty areas include insurance, personal injury and estate

Source: AutoInsuranceTips.com
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