Car accidents happen.
We don’t cause them on purpose, which is why they’re called accidents.
Being in a car accident can be a surreal and life-threatening experience. Hopefully, should you ever be involved in one, the only damage will be to the car.
Because accidents are a fact of life, we have auto insurance. This is intended to answer all the fundamental questions about this important coverage.
Here’s what we’ll cover:
- What is it?
- How does it work?
- What does it cover?
- Do I need it?
- How much do I need?
- How much is it?
- What do the numbers on my policy mean?
Let’s get started.
What is it?
Like other types of insurance, it’s an agreement between the insured (you) and the insurance company which protects you financially in the event your vehicle is involved in an accident or stolen.
The policy provides coverage for costs arising from property damage, bodily injury, and medical treatment.
The cost of a car accident can be enormous. In the event there is a fatality, the average cost is over $1,100,000. A non-fatal accident resulting in a disability costs over $60,000, and the average property damage caused by accidents is over $7,500.
Without insurance, those costs could be financially devastating.
How does it work?
You apply for coverage with the insurance company, and based on information about you and the coverage you select, the premium is set. Commonly, the policy term is six months or a year.
As long as you pay your premium, the insurance company provides you the agreed upon protection of the policy.
Should you be in an accident, a claim will be filed with the insurance company. The company will investigate the claim and determine how much money should be paid to settle the claim. You may have a deductible which you will pay out- of-pocket that is deducted from the settlement.
What does it cover?
There is not one type of car insurance. It’s highly customizable with many different options.
There are 7 key areas to be aware of:
- Comprehensive: This pays for non-accident related damage to your vehicle such as natural disasters, collision with an animal, or windshield damage.
- Collision: This pays to fix your own vehicle in the event of an accident.
- Bodily injury: This pays for the damage you do to others as a result of an accident. This will also pay for the other parties medical costs.
- Property damage: This pays to repair or replace someone else’s property you destroy or damage as a result of the accident.
- Personal injury protection (PIP): This pays for medical expenses for you and your passengers injured by the accident.
- Uninsured/underinsured motorist protection: This pays for the costs associated with hit-and-run accidents, as well as the costs when the other party doesn’t have enough coverage to cover all the costs.
- Extras: You can elect to add extras to your policy which can pay for things like rental cars, gap coverage if the replacement value of a totaled vehicle is greater than the amount you’ll receive, and roadside assistance to name a few.
Do I need it?
Yes.
Do not pass Go, do not collect $200, do not get behind the wheel or a car unless you have auto insurance.
It’s simple. If you can’t afford to pay for car insurance, you can’t afford to not have it.
How much do I need?
This is where it makes sense to work with someone who can recommend coverage based on your situation. Here are some rules of thumb for coverages:
- $100,000 for the medical bills of those you injure in the accident
- With a $300,000 cap per accident
- And up to $100,000 to repair the other party’s vehicle and property damaged in the accident
These amounts are toward the lower end of the scale. Please ask questions and obtain quotes for higher limits and then make the decision that’s right for you and your situation.
How much is it?
The primary factors that go into premium amounts are:
- The policy options you choose
- Your credit history
- Your driving history
- Where you live
- Your age
- Your actual vehicle
- How much you drive
The average policy costs around $150 a month. There are also ways to reduce your premium, and safe driving is certainly rewarded.
When shopping for auto insurance, it’s prudent to look at several different insurance companies. This is another reason why it can make sense to work with someone who can guide you through the process.
What do the numbers on my policy mean?
You got your policy and you’re covered.
You look at your new policy, start reading it, and wonder, “What do these numbers mean?”
They are referring to your liability limits. To continue with our example, 100/300/100. The first 100 means your insurance will pay up to $100,000 for injuries caused by you. The 300 means it will pay up to a total of $300,000 for all injuries per accident. The second 100 refers to $100,000 in coverage for any property that you damage, such as the other person’s car.
Conclusion
Insurance is never the most exciting thing to spend money on, but it becomes one of our most important possessions when we have to use it.
Having the proper amounts and coverages on your auto insurance policy ensures you’re protected while driving, and that’s peace of mind.
Check out our The Right Coverage course to ensure you’ve got the right protections in place.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course.
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