Perhaps your parents are taking you off their auto insurance policy now that you’ve graduated from college or you’ve been paying for your auto insurance for years without a second thought of what you are paying for or what you actually are getting. Auto insurance doesn’t have to be confusing.
Learn more about insurance and how you can save money on your car insurance.
Types of Coverage
Your car insurance policy is made up of several different coverage types. Each individual state has their own minimum requirements and some coverages are optional depending on your needs.
Bodily Injury Liability (BI)
When you are found responsible for an accident, bodily injury liability coverage is the part of the insurance policy that pays for the person or people who you’ve injured. This coverage pays for things such as medical expenses, legal fees, pain and suffering, funeral costs, and loss of income. This covers people in the car you hit and it will also cover pedestrians or cyclists but not you, the at-fault driver.
Bodily injury liability is listed as two numbers for its limits, such as $50,000/$100,000 or 50/100. The first number is the coverage limit for each person injured and the second number is the total amount of damages covered in the accident. In this example, the insurance company will pay up to $50,000 for each person you’ve injured up to a total of $100,000. Any damages that exceed $50,000 per person or $100,000 in total, you would be responsible for paying.
Sometimes you will see a third number listed, such as 50/100/50. That last number is the property damage (PD) limit.
Bodily injury liability coverage is required in tort or “at-fault” states. The minimum required coverage varies per state.
How much coverage you need depends on your assets. The higher your net worth, the more insurance you would want to have to protect yourself in case of an accident. With my auto insurance policy, going from $100,000/$300,000 in coverage to $250,000/$500,000 is less than $4 extra a month.
It has been said that the more money that is at stake in a personal injury case, the more time and money an insurance company would be willing to spend to defend a case. The insurance company is more willing to hire experts and investigators when there is $1 million on the line than $10,000 because it is in their best interest to reduce the amount of damages they need to pay out.
Property Damage Liability (PD)
When you are in an accident, property damage coverage pays for any damages you caused to another person’s property. This coverage will pay for repairs to the other party’s vehicle. It will also pay for damages for any objects that you hit with your car, such as buildings, mailboxes, fences, signs, etc.
Property damage coverage is on a per-accident basis and any damages exceeding your limit are your responsibility.
How much property damage coverage you need is a personal decision. With full-size trucks and SUVs now costing up to $80k, $100,000 in coverage would usually be more than enough, especially since cars are a depreciating asset. But you could also be involved in a multi-car accident or turn a fancy restaurant into a drive-thru.
Comprehensive insurance is an optional insurance coverage that protects your car against any damage that occurs when your car isn’t moving. This includes any events that are considered an ‘act of god’ such as hail, tornados, rockslides, floods, fires, or a meteoroid or tree falling on your car. Other things that comprehensive will cover are vandalism, car theft, broken windows, and chipped or cracked windshields.
Comprehensive coverage will also cover you if you hit a deer, but if you swerve to avoid the deer and hit another object such as a tree, it will fall under collision.
Comprehensive is a required coverage if you are financing or leasing your car and it has its own deductible. When people say they have full coverage, it generally means they have both comprehensive and collision coverage.
Collision coverage is exactly what it sounds like. It covers damage to your car when you hit something, whether it is another car or a stationary object such as a telephone pole, guardrail, or tree. If you are involved in an accident where you are at fault or if damage occurs from a rollover or you hit ice and end up in a ditch, collision will pay to repair your vehicle. Potholes are also covered, but for most people paying out of pocket makes more sense because of the deductible.
The benefit of collision coverage is that it is generally faster to file a claim and receive reimbursement regardless of who was at fault in an accident. Rather than wait for the insurance companies to investigate in an accident with another motorist, you can file a claim with your insurance company and pay the deductible to get your car repaired in the meantime. Should it be determined that the accident was the other party’s fault, your insurance company will then seek reimbursement for the repairs and the deductible from their insurance.
Collision is an optional coverage unless you have a car loan. Whether you choose to keep collision after paying off your loan is a personal decision. One way to decide is to find out the fair market value of your car from Kelley Blue Book and determine how much collision insurance costs. If your car is only worth a few thousand dollars, it may be worthwhile to drop collision coverage and self-insure.
Some insurance companies will only allow you to purchase collision coverage if you also purchase comprehensive coverage. Shop around if you only need one but not the other.
Medical Payments/Medical Expense/MedPay
Medical payments coverage helps pay for medical, dental, and funeral expenses of covered drivers and their passengers after an accident no matter who was at fault. One benefit of medical payments coverage is that it follows the policyholder. You are covered if a car hits you when you are walking, riding a bicycle, riding in another person’s car, or even using public transportation.
Any family member is usually also covered by your medical payment coverage if struck by a car. A family member is defined as someone who is related to you by blood, marriage, or adoption that resides in your household.
While you may have health insurance that will pay for medical bills, medical payment coverage will also cover deductibles and copays that you may be responsible for.
Personal Injury Protection (PIP)
Personal injury protection coverage is usually required in “no-fault” states and may be available optionally in others. “No-fault” means that no matter which driver was at fault in an accident, the policyholder’s insurance will cover medical bills, lost wages, loss of services, rehabilitation costs, and funeral costs of the policyholder and others in his or her car.
PIP is similar to Medical Payments coverage in that it will cover injury costs. However, it is more expensive because it is much more comprehensive and will compensate you for lost wages and loss of services, such as being unable to mow your lawn or drive your kid to school because of your injuries.
The benefit of PIP coverage is that you only deal with your insurance company for compensation. You do not need to wait for each party’s insurance companies to determine who was to blame for the accident. As long as it was a covered incident, your insurance company will pay for your expenses.
Uninsured/Underinsured Motorist (UM/UIM)
What happens if you are in an accident with an at-fault driver who does not have enough liability coverage or you are involved in a hit-and-run? Uninsured and underinsured motorist coverage is additional coverage that financially protects you from irresponsible drivers on the road.
Some state’s minimum bodily liability limits are as low as $15,000 and will barely pay for emergency room care in a serious accident. The Insurance Research Council found that the average auto liability claim for bodily injury was $15,443 in 2013. Yet there are many people who buy the minimum to save money. It is very likely these same people will not have many assets to pay for an accident either.
Think of uninsured/underinsured coverage as instead of buying insurance to protect other drivers on the road, you are buying insurance for yourself. In the case of an accident with someone who is underinsured, your UM motorist coverage will fill in the gap up to the policy limits.
Just like bodily injury liability coverage, uninsured motorist bodily injury (UMBI) has two limits, per person and per accident.
Uninsured motorist bodily injury coverage also has two types: Reduced (also called Offset/Difference in limits) and Added-on (also called Excess)
With reduced UMBI, your coverage is “reduced” by the liability coverage the other driver has. As you can guess, reduced coverage gives you less coverage so it is less costly than the added-on option.
Let’s say you are in an accident where you have $125,000 in medical bills and the other party only has $50,000 in bodily injury coverage. Luckily (or unluckily), you have $100,000/$300,000 in reduced underinsured motorist coverage. Their insurance will pay $50,000. Your $100,000 limit is reduced to $50,000 by their coverage. Your insurance will step in and pay $50,000 for a total of $100,000 towards your medical bills. You are on the hook for the remaining $25,000.
Now if you had added-on underinsured motorist coverage instead, your $100,000 in coverage is added to his $50,000, giving you $150,000 in total coverage. Their insurance will pay $50,000. Your insurance will pay $75,000, enough to pay for all your medical expenses.
You might be thinking, “That’s amazing… I will get $1 million in uninsured motorist coverage for myself and no longer worry about that dummy texting behind me.” Not so fast. Car insurance companies are one step ahead of you and limit the amount of UM coverage you can buy to your bodily injury liability (BI) limit. This could give you another reason to up your bodily liability coverage limits.
Underinsured Motorist Property Damage (UMPD)
This coverage will pay for damages to your vehicle if an uninsured/underinsured driver hits you. My insurance company automatically added underinsured motorist property damage with UM/UIM. For the most savings, choose the amount of coverage that doesn’t exceed the value of your vehicle.
If you have collision coverage, that will already pay for damages to your vehicle if another driver hits you. The benefit of having UMPD here is that it is extremely cheap to choose a lower deductible than collision. Mine is 12 cents a month extra for a $250 deductible vs $500 deductible. This will save you a few hundred dollars if you need to file a claim.
If you don’t have collision, UMPD makes sense because it will pay to repair your car if an uninsured driver crashes into you. Otherwise, you would have to sue the other driver to fix your car. This could be difficult if your car gets hit in a parking lot and the other driver doesn’t leave a note and there are no witnesses, which has happened to me before.
Ways To Save On Auto Insurance
Now that you have a better knowledge about auto insurance, here are some ways you can pay less for car insurance.
The easiest way to get a better deal on car insurance is to get quotes from different companies regularly. Getting a quote online can be done instantly from your computer without needing to pick up the phone. Each insurance company has their own formulas to come up with rates. For example, Geico and Progressive quoted me thousands of dollars a year to insure my motorcycle, but State Farm was much less expensive because they calculate rates by engine size.
From personal experience, insurance companies don’t really reward loyalty. Your premiums might go up or down a few dozen dollars at each renewal, but I’ve gotten the biggest savings by switching companies. I’ve even gone back to my agent who I’ve been with for over 6 years and told them I was quoted several hundred dollars less by another company and gave them a chance to match it and they said their rate was already the best they could do.
If you were in an at-fault accident or had any traffic citations when you originally got a quote and 3-5 years have passed, you should definitely get new quotes.
Adjust your deductibles
If you have collision or comprehensive, increasing your deductibles can save you money. Depending on how much risk you are willing to take and if you have an emergency fund, going from a $250 deductible to $500 or even $1,000 can save you a bit of money. For example, with my auto insurance policy I can save $88 a year going from $250 to $500 and $110 a year by increasing my deductible from $250 to $1,000.
Get rid of unnecessary coverage
Look over your insurance policy and see what things you are paying for. Do you have emergency roadside services when you have AAA or are you paying for rental car reimbursement when you have access to another vehicle in your household while yours is in the repair shop?
Bundle with other insurance
If you have homeowners or renters insurance, insurance companies will give you big discounts if you buy them along with your car insurance through the same company.
Look into usage-based insurance
You can save on insurance rates by driving less. According to the Federal Highway Administration, the average American drives 13,476 miles a year. If you can cut down your commute, ask your auto insurance company about low-mileage discounts and programs. Many insurance companies now offer discounts for being a safer driver and driving less by tracking your mileage using a device that plugs into your car’s diagnostic port or through a subscription service such as OnStar.
Take a defensive driving course
Ask your car insurance company whether they offer discounts on your premiums for taking a driving course. For motorcyclists, there is the MSF course. Be sure to check whether the discounts outweigh the price of the class, although taking the course could make you a better driver and avoid an accident.
Pay premiums in full
Depending on your insurance company, you may be charged a handling fee if you use a payment plan. You can save a few dollars by paying the entire balance at once.
Maintain good credit
Insurers have found that drivers with good credit history tend to file less insurance claims and are more responsible drivers. So pay your auto insurance premiums on time!
The first thought for many people to save on insurance is to reduce their limits or cut coverage. Removing collision and comprehensive can be safe if you have an emergency fund to replace or repair your car if something happens. Lowering your liability limits, however, could drastically affect your assets and future earnings if you are found at-fault for a major accident. The saying “penny wise, pound foolish” comes to mind.
On many online discussion boards, there is always a thread asking people how much they pay for car insurance. Take these numbers with a grain of salt. Even with the same vehicle year and model, rates can vary widely depending on location, driving history, and type of coverage. Some people’s rates can be extremely low because they only carry minimum liability coverage. If you are researching rates online before buying a vehicle, take posted rates as a general guideline and be sure to you are comparing apples to apples. Your most accurate quote will be going to the insurance company’s website or calling an agent.
What insurance coverage do you carry? Do you have any tips for saving money on your car insurance?