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Understanding Car Insurance

When I was 21, I passed my licensing exams in Arizona for Property, Casualty, Life and Health Insurance, which meant going on to work at State Farm and Geico for a few years. I was grateful to learn about different insurances, and really understand what each coverage means–particularly car insurance.

I want to explain auto insurance coverage in (hopefully) easy-to-understand terms for others who may wonder, what the heck does insurance cover?

For those with multiple assets (homes, cars, 401k's, rentals, stocks) and a lot of dough to protect, go ahead and skip this article–and call your insurance agent to discuss the right plan for you because I'm talkin' today to those on a budget, who may wonder if they are getting enough protection for their premium, and if I were back in the insurance office what I would say to explain their coverage and make sure they were adequately protected.

The main coverage types that I will discuss are: 
  • Bodily Injury Liability
  • Property Damage Liability
  • Medical Payments
  • Comprehensive
  • Collision
  • Un-insured
  • Under-insured

1. Bodily Injury:

Insurance Definition: "Bodily Injury and Property Damage liability limits are the maximum indemnity amounts your automobile insurance policy will pay for accidentally injuring someone or damaging their property" (, 2013). 

In other words...
This is a coverage that only pays other people's medical bills involved in an accident with your insured vehicle or driver. You and your passengers are not covered under this limit–just the other people. 

In my state, the minimum amount legally required to drive an insured vehicle are: "$15,000/$30,000." $15,000 pays the damages (medical bills, pain and suffering, lost wages, etc.) for each PERSON, and $30,000 is the total the insurance policy will pay for the entire accident occurence. 

This one always confused people, so I'll break it down in a pretend accident:

Let's say your husband doesn't stop soon enough at a stop sign and rams the back of a Porsche, is found at-fault for accident, which involves a 50-year-old woman and her Porsche. Johnny is covered under your insurance policy. This lady ends up having $41,303 in medical damages and "pain and suffering" as well as $23,240 in damages to her Porsche. That's a grand total of $64,543. Well guess what? Your measly little state minimum policy ran out at about $25,000. That leaves YOU a balance of $39,543 if you are sued in court and deemed liable. They take garnished wages quite seriously.

Don't be a victim of the "state minimum" requirements. Do better for yourself and increase your peace of mind as well as protection down the road–should anything (hopefully not) happen. I saw too many people with low limits on their policies getting completely screwed over after an accident. They just didn't know until it was too late, no one told them what these limits meant and how $15,000 doesn't go very far in medical bills and $10,000 doesn't even really cover the cost of a new car. What if there's also damage to a building tacked on?

And really think about it, the above example isn't that "out there" or "extreme" of a case–it could happen. And look where that family would be–basically inadequately protected.

I recommend to anyone as a true "minimum" – $50,000/100,000(bodily injury) and $50,000 or $100,000 (property damage).

On our Geico policy, for two late 20's drivers and two regular vehicles, the premium for these limits is

Call and ask your insurance company for a free quote just to see how much it would cost to raise your insurance "limits" to the next level or so. When I worked for State Farm and Geico, I was always telling other moms about their coverages and quoting them to raise their limits–sometimes only $20 every six months for tens of thousands more in coverage.

If the increase is still more than you can afford right now, it's something to at least keep in mind down the road after a raise or an increase in income.

I highly recommend:
$50,000/$100,000 bodily injury limit for anyone with an insurance policy
$100,000/$300,000 for those who own a home.

Bodily Injury (BI) Liability coverage pays damages for other people's injuries or death resulting from an at-fault accident involving an insured vehicle or driver. This may include medical treatment, lost wages and compensation for pain and suffering. In the event of a serious accident, these costs can become substantial. If you do not carry a sufficient limit of insurance, your personal assets and earnings could be at risk. You should choose a coverage limit that will adequately protect your assets. BI coverage also includes payment for certain legal fees, bail bonds, and court costs that you might incur.

BI provides two limits of coverage. The first figure is the maximum amount we will pay for injury or death to any one person. The second figure is the maximum we will pay (regardless of the number of people involved) for injury or death stemming from a single occurrence. Please see your contract for state specific coverage details.

Comprehensive & Collision cover your vehicle only.

Comprehensive: Covers your car under anything other than an accident (fire, theft, vandalism, tornado...etc)
Collision: Covers your car in the event it collides with another vehicle

My Recommendations:
These are the minimums I truly recommend for most people.

Bodily Injury: 50,000/100,000 minimum  (Arizona state minimum
PD: 50k minimum
Medical: 1,000 minimum

Collision: $500 deductible, and don't have it if car is worth less than $2,500.

*Tip: Auto insurance generally follows the vehicle, not the driver.

*Tip: With auto insurance, always carry the highest limits you can comfortably afford. Auto insurance really is one of the most important things you can have, and the better off you  will be should you ever need it (hopefully you never do). Sometimes, thousands more in coverage costs only a few dollars.

Comprehensive: $100, $250 or $500

I recommend carrying a $250 deductible if it's not that much of a difference in price, $100 if you can afford it, of course all based on your insurance company and pricing. A $500 deductible is fine and very typical. That just means that in the event insurance company pays the value of your vehicle after it is submitted under a claim, they will "subtract" the deductible first. Let's say you have a Mustang and it's bluebook is $5200. If you carry a $500 deductible, your insurance would give  you a check for $4700 (subtracting $500 deductible from $5200 value). They do this help reduce the number of claims filed, and to help prevent insurance fraud.

Tip: Emergency Road Service & Rental Car: I recommend these both. They're so cheap and cover a battery jump, towing, flat tire repair, or a rental should your vehicle need repairs following a collision. 

*Tip: Some companies give you an additional discount for having a child, as  they
presume the family members will be safer drivers. Check with yours next time! 

When I was younger, I thought insurance and payments were an annoyance. I didn't think of the benefits of insurance and how it really is a protection, not an annoyance. However, we only seem to appreciate it when it's our things needing to be replaced or fixed after a catastrophe. 

But when I started to understand the importance of insurance (particularly after my own car was broken into), and to think about third world countries where streets are unpaved and cars are a rarity, it makes a person more willing to make that payment each month, for that peace of mind. It's a privilege really, to be able to "protect" a possession's worth. So when you couple understanding with appreciation, it can make your life that much more peaceful and happier. =)

"Umbrella insurance is designed to give one added liability protection above and beyond the limits on homeowners, auto, and watercraft personal insurance policies. With an umbrella policy, depending on the insurance company, one can add an additional 1-5 million in liability protection" 

*Tip: A "Personal Umbrella Policy" is a must-have for anyone with assets worth protecting - including a home, vehicle, boat, business, savings, 401k, etc.  

One thing I want to recommend to anyone with a home or assets is getting a "personal umbrella policy" (often called a PIP or PUP). This policy is literally like an umbrella of coverage, kicking in after your auto and homeowners insurance limits are exhausted, in the event you are sued. 

An umbrella policy is generally carried through your car insurance company as coverage up to a million dollars in case you or anyone in your household is sued. 

I had a friend who's husband was at-fault in an accident for t-boning a lady in a sedan one night. The lady wasn't injured, but sued them anyways and started coming after their house and 401k's! They ended up eventually having to pay her off out of court. 

Now, they have an umbrella policy worth up to 1 million in protection. 

The fact is, in today's "sue happy" culture, you never know when some crazy is going to come along and sue you. Did you know you can get sued if your dog bites someone on your property or if a guest trips and falls and they have medical bills? You just never know. That's why an umbrella policy makes sense especially for homeowners. 

"Almost every state has financial responsibility laws that will hold drivers accountable for bodily injury and property damage resulting from car accidents and the at fault driver could be sued for the damage. Personal assets from the at fault driver could be seized resulting from a lawsuit. Similar laws are also in force for home and watercraft owners" (