insurance

Financial Literacy Guide: Car insurance basics

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:

1. Bodily Injury and Personal Property Liability

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 damage.

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, Institute spokeswoman.

"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 in Philadelphia.

2. Personal Injury Protection (PIP)

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.

However, David Snyder, assistant general council for the American Insurance Association in Washington, D.C., disagrees with Swan.

"Even if you have health insurance, think twice before you reject or waive PIP coverage," he argues. "PIP usually provides dollar-one coverage [with no deductible]. People with significant deductibles and co-pays should have PIP."

3. Collision and Comprehensive

These are two parts of a policy that can add significant costs to your premium. Collision provides coverage in the event of any kind of accident, whether it's with another car or an object, such as a utility pole or fire hydrant. Comprehensive insurance covers you in the event of theft or natural disaster.

If you have an older car, and the cost of repairing or replacing your car is likely more than its value, then experts such as Swan advise waiving both collision and comprehensive coverage.

Keep in mind that any coverage you decline on your policy, you'll need to have when renting a car, from Avis or Hertz for example, says Neagle. So, if you decline collision and comprehensive, you should either accept a rental car company's insurance or use a credit card that provides rental car protection just in case.

For newer cars, you should have a deductible on both collision and comprehensive that is the maximum amount that you can afford to pay out-of-pocket for repairs, says Snyder. The higher the deductible the lower the premium. Insurance professionals say that the average policy carries a $500 deductible for both collision and comprehensive claims.

4. Uninsured Motorist

As the name indicates, this coverage provides you protection from crashes with motorists not carrying car insurance, as well as covering you in the event of a hit-and-run accident. Also, uninsured motorist insurance coverage comes into play when an at-fault driver doesn't have enough liability coverage to pay for the damages from an accident. Most states require drivers to carry uninsured motorist coverage.

Ask for discounts

Now that you understand the basic parts of a policy, you can save money on premiums by asking your insurance company for a discount.

Discounts available vary by state, but typically include: safety equipment discounts (air bags, anti-lock brakes and security systems), multi-policy discounts (if you have other insurance coverage with the same company or have several family members on the same policy), good student discounts and premium reductions for driver's education classes.

The experts recommend shopping around with several insurance companies to get the best premium rate, especially if you have a clean driving record for the last three years. The longer that you avoid an accident, the better the cost of the insurance.

"Every day you drive, you're helping to determine what your insurance cost is," advises Snyder. "By driving carefully, you're lowering your insurance payment."

Finally, car insurance premiums will be higher for cars that are attractive to theft and that suffer extensive damage during a crash. The CCC Information Services conduct studies and release an annual listing of the most frequently stolen vehicles.

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