Car insurance -- it's a necessary evil. Going a day
without it can have disastrous financial consequences. Similarly,
not having enough coverage can spell monetary doom in the event
of an accident or theft. Although there's no such thing as a standard
guideline to proper insurance coverage, understanding how each part
of your policy works can help you prevent a financial wreck the
next time you make a claim.
There are six parts to a basic insurance policy, as
defined by the Insurance Information Institute in New York City:
injury protection (PIP)
Bodily Injury and Personal
Two major components of an automobile insurance
policy involve liability coverage. These areas insure the policyholder
against injuries caused to another person and to property. All 50
states and the District of Columbia require minimum liability coverage
amounts. These requirements are typically listed as a series of
three numbers that define how much, in thousands of dollars, the
policy will cover in the event of an accident.
For example, California requires its drivers to carry
minimum liability coverage of 15/30/5. This means that the insurance
company will pay up to $30,000 for all people injured in an accident,
not exceeding $15,000 on any one person and $5,000 for property
However, the Insurance Information Institute warns
that state minimums nationwide do not provide sufficient
coverage in the event of a serious car accident.
"We always recommend higher limits, especially with
today's expensive cars and hospital prices," advises Jayna Neagle,
"Nowadays, with litigation, the minimums are not enough
to cover in the event of a huge judgment against you," adds Kirk
Hansen, director of claims for the Alliance of American Insurance
in Donners Grove, Ill.
Neagle suggests that drivers have liability coverage
that is no less than 100/300/50. That way, you'll be able to provide
$300,000 worth of injury coverage to all passengers, $100,000 to
one individual and $50,000 for damage to property.
People with assets to lose in the event of a lawsuit,
such as a house or financial portfolio, should consider a supplemental
umbrella insurance policy, says Neagle. Umbrella coverage protects
you in any kind of liability situation, whether the accident is
in your car or in your home. For $150 to $200 a year in premiums,
you can shield yourself with $1 million worth of protection.
"If you have assets, it makes a lot of sense," says
Eric Swan, an insurance attorney and partner for Galfand Berger
Personal Injury Protection
PIP coverage pays for both medical expenses and
lost wages to the policyholder and any passengers injured in the
vehicle in the event of an accident.
Swan says that people with good medical and disability
policies might not need to maximize PIP coverage. Instead, he recommends
that drivers with good health and disability insurance only take
on the lowest limit of PIP coverage required by their state. Some
states, such as New Jersey, allow drivers to reject PIP entirely.