Have you looked at your auto insurance policy recently? Can you understand what the coverages actually cover, or is it like reading a foreign language? Maybe you do not have a policy and do not even know where to start. Whatever the case, we will take a deeper look into why you need auto insurance and what it truly covers in the event of an accident.
According to the National Highway Traffic Safety Administration (NHTSA), there were more than 6.4 million fatal, injury and property damage vehicle crashes in the U.S. alone in 2017. Even with these statistics, many still feel they do not need insurance. So why even have auto insurance?
1. States require it
If you own a car in the United States, forty-nine states require that you have a minimum amount of liability insurance, in case of an accident. The only state that does not require you to have insurance is New Hampshire, but they still require that you be financially responsible if you are in an accident. The minimum requirements for liability insurance vary from state to state, so check with your state to see what is required.
2. To compensate others if you cause an accident
For some reason, you took your eyes off the road for a second and didn’t see the car ahead of you braking. You end up rear-ending the car in front of you. Luckily, you and the other driver walked away, but there is still significant damage to the other person’s car. Your insurance premiums will likely rise, but at least you will have peace of mind that the insurance company will cover the costs of the accident that you caused.
3. To protect your passengers and yourself
Many times, if you are the driver, you are also responsible for the passengers in your vehicle. If you are in an accident, you may walk away fine, but your passengers could need medical care. Having auto insurance could guarantee that those medical costs are paid.
There may also be times that you, as the driver, are the only injured person in an accident. Having your own auto insurance is critical because you may be injured by a driver who does not have insurance.
4. To protect your vehicle
Car repairs are extremely expensive. Even the smallest accidents can cost thousands of dollars in repairs. If you are in an accident, your insurance could cover the repairs versus you having to pay it all out of pocket.
Many individuals own their cars outright, but there could still be a need for insurance. What if your car is damaged in a storm? What if your car is stolen? If you did not have insurance, you would have to pay the cost out of pocket to repair or sometimes replace your vehicle.
5. To protect your finances and assets
This is probably one of the most important reasons to have auto insurance. You have worked very hard to put yourself in a good financial position with savings, retirement accounts and an emergency fund. However, you could be one major accident away from putting all of that in jeopardy if you do not have auto insurance or sufficient insurance.
Many times the minimum amount of auto insurance that states require is just that – the minimum. Many experts believe you should carry a much higher amount of insurance above the minimum.
6. To satisfy lender requirements.
If you take out a loan to buy a car, your financial institution will require that you carry auto insurance on the car. The reason they require this is because they do not want to be held liable in the case of an accident. Not only do lenders require liability insurance, but they also require comprehensive and collision insurance to cover any type of loss.
Understanding Your Coverage
We discussed why auto insurance is important to have, but now we want to dig deeper into understanding what it covers and how it actually works. Here are some of the main coverages most policies offer:
1. Liability
Auto liability insurance covers the damage to other vehicles and to other people from an accident caused by you. Liability covers two types of damages: Bodily injury and property.
- Bodily injury. This covers medical costs, funeral costs, lost income, and pain and suffering from people who are injured by you.
- Property damage. This covers repair and replacement of damaged property caused by you. This can include personal property other than the car.
Each state has its own minimum liability requirements. For instance, Maryland’s minimum liability coverage is 30/60/15. Some states even require additional coverages. In order to better understand these requirements, we must first define what these numbers mean. Our example is a 30/60/15 liability coverage, meaning:
- $30,000 of coverage for bodily injury (per person)
- $60,000 of coverage for bodily injury (per accident)
- $15,000 of coverage for property damage (per accident)
This is how the three numbers work. Most states require much less liability coverage. Many experts believe that the legal minimum liability coverage is not enough for most drivers. In the event of an accident, medical bills can add up quickly. They recommend taking a closer look at your current financial situation to ensure you are properly protected.
2. Comprehensive
Comprehensive coverage covers damage to your vehicle from things not related to vehicle accidents. It is an optional insurance that you can add to your liability coverage, unless you have an outstanding loan on your vehicle, in which case, your lender will require this coverage. Some examples of what comprehensive coverage will typically cover include:
- Natural disasters (tornadoes, storms)
- Vandalism and theft
- Fire
- Broken or shattered window not related to an accident
- Falling objects
- Damage from hitting an animal (ex. deer)
3. Collision
Collision coverage covers damages to your vehicle in a collision with another vehicle, an object like a fence or pole, or even yourself. It is also an optional insurance, but just like comprehensive, is mandatory by your lender if you have an outstanding loan on the vehicle.
Many individuals choose to carry collision coverage because liability coverage covers the other driver and collision covers you as the driver. There may even be a situation where you need collision coverage if the other driver is at fault for causing an accident, but does not have enough liability coverage to cover the repair cost of your vehicle.
4. Personal Injury Protection (PIP) and Medical Payments (MedPay)
Personal Injury Protection (PIP) is required in fifteen states and optional in the rest and helps to pay for an insured’s medical and other injury-related costs, regardless of who is at fault for causing the accident. This coverage extends to passengers. Deductibles and co-pays apply to PIP and can help cover other expenses incurred like lost income or childcare expenses.
Medical Payments (MedPay) is required in two states and optional in the rest and helps to cover costs associated with injuries sustained in an accident. This coverage extends to passengers. No deductible or co-pay applies to MedPay and it helps to pay medical costs quickly, regardless of fault.
5. Uninsured (UM) and Underinsured (UIM) Motorist
Unfortunately, even though states require motorists to carry insurance, many still do not. According to a study done by the Insurance Research Council, around one in eight drivers are uninsured. Uninsured (UM) coverage helps to pay for medical bills for you and your passengers if you are hit by someone who does not have auto insurance. Underinsured (UIM) coverage helps to pay when the driver who is at fault does not have enough insurance to cover yours and your passenger’s medical bills.
Some states require drivers to carry UM coverage and some require both UM and UIM coverage. It just depends on the state you live in.
Summary
Auto insurance can be extremely complicated and expensive, but it is a necessity to have. We discussed some of the main coverage options within your policy, but there are even more options that you can choose from. Overall, it depends on your current situation to decide how much auto insurance and what coverage options you and your family need.
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