What Auto Insurance Should You Buy?
Know your options, and your state's requirements
Say you've just bought (or leased) a new or used car or truck. Maybe it's your first vehicle and you're new to auto insurance, or maybe not. Maybe you just want to look into changing your insurance for better coverage, or better service, or to save money. The first thing you need to know is the coverage your state requires. Forty-seven U.S. states require at least some kind of auto insurance, usually liability. Here are the types of coverage to consider;
As its name implies, liability insurance pays for accidental damage to other peoples' vehicles and property as well as injuries to others. The latter typically includes medical expenses, pain and suffering and lost wages. It can also cover legal defense and court costs, if necessary. State laws define the minimum required, but depending on how much you have to lose if sued for a mishap that's judged to be your fault, it's smart to purchase more than the minimum.
This coverage pays for damage to, or replacement of, your own vehicle. Just keep in mind that the insurance company will pay its Kelley Blue Book used vehicle replacement value, not what you paid for it or what you may believe it's worth. For an old, near-worthless beater, you can probably do without.
Usually supplemental, comprehensive insurance also covers your vehicle, but not for accident damage. It pays to repair damage due to fire, theft, vandalism, flood, wind, hail, etc. Like collision, it reimburses for a total loss up to the vehicle's Kelley Blue Book value.
This additional coverage covers for loss or damage caused by an at-fault driver who is uninsured or insufficiently insured. According to Insurance Information Institute, 12.6-percent of motorists in 2012 were uninsured. That’s down three points from 20 years earlier. Oklahoma had the highest percentage of uninsured motorists at 25.9 percent. Massachusetts, on the other hand, had only 3.9 percent of its drivers with no insurance in 2012.
Another supplement to basic policies, medical coverage pays medical expenses for accident victims regardless of fault. If you already have comprehensive medical insurance, you may not need this add-on.
Personal Injury Protection (PIP)
Under this coverage, the policy pays the insured driver's medical expenses regardless of fault. PIP is required in some 15 states.
If your car ends up in the shop for repairs after an accident, it might pay to have Rental Reimbursement to cover the cost of a rental car. The coverage typically is a daily allowance while your vehicle is being fixed or while you find a new one if yours is totaled.
You should consider this coverage if you are buying or leasing a higher end new vehicle. Gap insurance pays the difference, if any, between a totaled vehicle's Kelley Blue Book value and what you may still owe on it. Most of the depreciation of a new vehicle occurs in the first three years of ownership. Some insurance companies do include replacement cost, which in its own way is a form of Gap insurance.
Making the right decision
Beyond state requirements, which coverages you buy is up to you. How much you should buy (and how much it will cost) depends, among other factors, on the value and condition of your vehicle and how much you can afford to risk.
Like most insurance, each type of coverage comes with specified deductibles and limits. A deductible is the amount you agree to pay up front for vehicle repair or replacement, or medical or legal costs, before the insurance company kicks in its first dollar. A coverage limit is the maximum the policy will pay per person or per accident.
Not surprisingly, higher coverage limits cost more. But higher deductibles (say $500 for vehicle damage or $1,000 for liability) lower your premium. You can save substantial dollars per month if you're willing to risk higher out-of-pocket costs.
In any event, it's wise for most folks to invest in more liability insurance than their state's legal minimum as protection from a potentially ruinous financial setback, especially should you be sued for losses beyond your coverage. You owe it to yourself and your family to understand your risks and shop for the best coverages from the most reputable companies.