To the uninitiated, there's a lot of numbers, strange terminology and alphabet soup in typical auto insurance declarations. Understanding it all can be a daunting task, but it can be done with a little of studying.
In a nutshell, assuming that the auto insurance required by law in your state is a good policy can be very dangerous. A good liability only policy will include adequate liability limits, uninsured and underinsured motorist coverage (UM/UIM), and medical payments or PIP depending on your state. Good full coverage policies will include all of those items as well as collision and comprehensive coverages with suitable deductibles, as well as extras specific to your needs such as loss of use and towing.
To truly understand how good your coverage is, one needs to have a basic understanding of the main coverages offered. If you purchase insurance online without the guidance of an agent, understanding these coverages is particularly important. The following is a discussion of major auto insurance coverages.
LIABILITY
Auto liability insurance, or insurance to pay for expenses that you are found at fault for, is required throughout the United States and Canada. The most common form of auto liability insurance is known as "split limit" insurance. Split limit is often expressed by insurance agents in numbers such as 100/300/50 which represents the three main liability limits in thousands of dollars. In other words, 100/300/50 which would mean a limit of $100,000 for bodily injury (BI) per person, $300,000 in BI per occurrence, and $50,000 in property damage (PD) per occurrence. If a number such as 100/300 is expressed, it generally refers to the BI portion of liability only.
Auto liability insurance also exists in a less common form known combined single limit, or CSL. This means that a single limit of usually $100,000 or more applies to the three main types of liability regardless of how they're accounted for in a claim.
Required liability insurance minimums vary from state to state, ranging from 10/20/10 in Florida and Louisiana to 50/100/25 in Alaska and Maine. Many other states require 25/50 in BI coverage with varying levels of PD coverage. Minimum liability requirements in Canada tend to be significantly higher than in the United States.
But how does this work in the real world? If one considers that many new vehicles cost in excess of $15,000, and that medical bills incurred as the direct result of accidents often exceed $25,000 per person, one can see how a typical state minimum liability policy of 25/50/15 can be easily exhausted in anything more serious than a fender bender. This is true if you live in a state with "traditional tort" insurance, or in a state with "no-fault" insurance where claims for pain and suffering are limited by law. Most states haven't changed their required limits in quite some time, and in some places it really shows. Remember, if you are found at fault in an accident, and the costs associated with the person you hit exceed your liability policy limits, you are personally responsible for the difference. Cutting corners by carrying state minimum liability insurance is never a good idea. If you can afford it, it really is in your best interest to carry higher limits. I recommend going with a 50/100/50 or better.
Most insurance companies offer a range of liability options between state minimums and 500/500/500. If liability coverage over the maximums is desired it can be obtained through a separate personal umbrella policy, which are usually offered in increments of $1 million over and above the underlying policy limits. In order to qualify for an umbrella most companies require high limits on the underlying liability policy, usually a variant of 250/500 or better.
Personal umbrella policies can extend to provide additional liability coverage for your home and for other items, often for no additional charge. An umbrella is a good and often inexpensive means to maximize your auto insurance coverage. If you're a professional such as a physician or attorney, you know that you're more prone to lawsuits simply because of your position in the community. For such people, carrying an umbrella is often a necessity.
It is also very important to remember liability coverage only covers the other person if you're found at fault in an accident, not you or your vehicle. A common misconception among people is that a liability-only policy covers them. It's simply not true. To adequately cover yourself, you need a full coverage policy.
FULL COVERAGE
"Full coverage" usually refers to a policy which offers liability coverage as well as comprehensive and collision coverage. As its name implies, collision coverage covers repair to your vehicle if it collides with something, be it another vehicle or a stationary object such as a tree. Comprehensive coverage, also known as "other-than-collision," covers you for most other mishaps that can happen to your vehicle. In my experience, the most common comprehensive claim - by far - involves auto glass in the form of rock chip repair or windshield replacement.
As coverages are largely defined by BI and PD limits on the liability side, collision and comprehensive coverages are largely defined by deductibles, or the amount you're responsible for in the event of a claim before the insurance kicks in. Deductibles usually range from $0 on the low end to $1,000 on the high end. The higher your deductibles, the lower your premium. Many people split the difference and go with $500.
When choosing your deductibles, go with the numbers you're comfortable with and no higher. If your insurance offers a separate, lower deductible for auto glass claims than for other comprehensive claims, take advantage of it. It's often quite inexpensive and a good way to cover the most likely source of comprehensive claims for a lower deductible while retaining the overall lower price of a higher deductible.
While no state requires full coverage by law, auto lenders do as part of your contract with them. They will also require that you list them on your policy as a "lienholder" or "loss payee," so if the car is totaled before the loan is paid the insurance proceeds will go directly to them to pay off the balance. If you're making payments and fail to obtain or maintain full coverage auto insurance, the lender will likely take it upon itself to "force-place" full coverage insurance on you, and at a price significantly higher than you'd otherwise pay. There's simply no reason at all for anyone to carry force-place insurance instead of regular full coverage insurance, so don't put yourself in that position.
Once your final car payment is made, by all means call your agent and have the lender removed as a lienholder, but consider keeping full coverage in force. If the car is still in good condition, still has a decent resale value, and you plan on hanging onto it for awhile, there's no reason not to.
Another benefit of full coverage is that it applies to claims regardless of fault. If you're in an accident and you're at fault, your full coverage insurance will still fix or replace your car. This attribute can come into play when you're not at fault, such a hit-and-run situation. While it's certainly better to find the individual responsible and make a claim on his insurance, sometimes this isn't possible. In such a situation full coverage may be the only insurance recourse available to you.
UNINSURED AND UNDERINSURED MOTORIST COVERAGE
A third necessary component of auto insurance covers you against uninsured and underinsured drivers, often expressed as UM/UIM coverage. If you're hit, the other guy is found at fault, but doesn't have insurance - or doesn't have enough insurance - to cover your costs, UM/UIM is the solution. UM/UIM is offered in similar limits as standard BI/PD liability discussed earlier. Because many, many people out there aren't adequately covered, UM/UIM is a must. I recommend carrying the same limits for UM/UIM as for liability.
It's important to know that if your company pays a UM/UIM claim on your behalf, it will likely turn around and recover its losses by collecting directly from the person at fault. This process is known as subrogation. It therefore follows carrying higher liability limits greatly reduces the threat of subrogation against you. It's yet another reason to not only carry auto liability insurance, but also to stay away from the state minimums.
MEDICAL PAYMENTS
In traditional tort insurance states, medical payments coverage covers medical expenses in an accident on a no-fault basis up to the desired limit, usually offered between $500 and $25,000. This coverage extends to you and to individuals in your vehicle, and is paid out before any BI/PD claims are taken into consideration. It even covers you if you're a pedestrian hit by a car. It's a relatively inexpensive coverage, and a potentially very valuable one.
A similiar coverage known as personal injury protection, or PIP, exists in no-fault insurance states. In addition to medical expenses, PIP can cover things such as lost wages, child care or if necessary funeral expenses.
Medical payments or PIP should be included in any auto insurance policy, both for liability only and full coverage.
EXTRAS
In addition to the basic coverages of liability, comprehensive and collision, most auto insurance companies offer extra coverages. These tend to include towing, rental reimbursement or loss of use, roadside assistance, and "gap" insurance. Some companies, including Farmers and Progressive, even offer coverage similar to medical payments or PIP for pets. Whether these coverages are necessary is a bit more subjective than when dealing with the others. For example, if you depend on your vehicle to get to work, rental reimbursement is a good coverage to have. If you're retired or can otherwise get by for a few days while your car is in the shop, it's not as necessary. Towing and roadside assistance are worthwhile to have for most people. The rest depends on personal preference. If you're looking to cut costs on your auto insurance, these coverages are the first place to look.
COVERAGE
The vast majority of auto insurance written in the United States is perfectly valid in all 50 states, Canada and Puerto Rico without any adjustment necessary. If you drive to Mexico, however, you will need to secure a separate Mexican policy. Short-term Mexican policies are available for tourists either from your local agent or from agencies located on the border established for that express purpose.
If you're unhappy with your current insurance, please review your coverages right away. Your local insurance agent can help you determine the right coverages that best suit you.