Female motorist involved in car accident calling insurance company. Adobe Stock Photo
Life comes at you fast! On the week of this writing, I was involved in a car accident. It appeared to be a perfectly normal day. I put in a productive work day. After work I went to the gym. On my way home from the gym, I got within one block away from my house and it happened—CRASH!
I was driving toward my house when the car in front of me abruptly stopped and made a left hand turn without using his turning signal. This forced me to come to an abrupt stop as I navigated my car to avoid hitting this car. I succeeded. Unfortunately, the truck’s reaction time behind me was not as swift as mine. He crashed into the back of my truck causing $6,200 in damages. The person who caused the accident by not using their turn signal and coming to an abrupt stop didn’t know there was an accident. I imagine him at home drinking coffee with his wife telling her how great his day was. The good news is that there were no injuries.
What’s instructive here is that over six million car accidents occur yearly. It can happen to any of us. I’m reminded of something my mother would always tell me when I first started driving. “I’m not worried about you. It’s the people driving alongside you that I worry about.” Oftentimes car accidents are the result of another person’s negligence. With people driving under the influence of alcohol, people driving while texting and using their cell phone, you have to be extremely cautious of the other drivers when you’re behind the wheel of your car.
If you or I are ever the cause of an accident that results in a huge financial obligation, the thing that can prevent us from financial ruin is car insurance and umbrella insurance. I’ll share more about umbrella insurance in a later article.
Insurance is one of those things that you don’t appreciate until you need it. As comedian Chris Rock says, “You need insurance in case (expletive) happens.” In this article, I’d like to give a basic overview of PAP (Personal Auto Policy) commonly referred to as car insurance.
Liability Coverage—Liability coverage kicks in when you’re legally responsible for an accident. There are two types of liability coverage— bodily injury and property damage. With liability coverage, the insurer has agreed to defend you in court, pay claims to the other driver for vehicle damage and bodily injuries. The liability section of the insurance policy does not compensate you for damage to your own car or injuries you sustained in the accident. Most states make it mandatory that you have liability coverage. But the state requirements are modest. I generally recommend that for bodily injury liability you get at a minimum $100,000 per person and $300,000 per accident. As for property liability damage, I generally recommend that you get at a minimum $100,000.
Medical Coverage and/or Personal Injury Protection—The good thing about medical coverage under car insurance is that benefits are paid for medical expenses regardless of who’s at fault. Medical payments coverage is typically $1,000 to $10,000 for each person protected by your policy. The bad thing is this type of coverage is generally unnecessary. Your health insurance will typically cover the expenses that the medical coverage portion of a car insurance covers.
Uninsured and Underinsured Motorist Coverage—Although most states require all drivers to have a valid driver’s license and minimum liability insurance, there are people out there driving with no license. When I first started driving, my mother would always say, “I’m not worried about you. I’m worried about the idiot driving in the general area as you.” Uninsured coverage kicks in if you’re involved in an accident with an uninsured driver, if you’re the victim of a hit-and-run accident, or if the persons who’s at fault’s insurance company denies to pay or becomes insolvent. The underinsured coverage kicks in when the guilty party has insurance where the liability limits are lower than the applicable state law. In order for uninsured/underinsured coverage to kick in, the other driver has to be at fault. This coverage generally covers bodily injury. The coverage applies to claims for medical expenses, lost wages, and pain and suffering.
Coverage for Damage to your Car—There are actually two coverages available for damage to your car: Collision and other-than-collision. Other-than-collision is commonly referred to as comprehensive coverage. You have the option to purchase both collision and comprehensive or you can purchase collision as a standalone coverage. Comprehensive coverage generally cannot be purchased alone. Collision covers the cost of repairing or replacing your car regardless of who’s at fault. Comprehensive (other-than-collision) coverage kicks in if the following damages your car: missiles, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, vandalism, riot, civil commotion, contact with a deer, bird or other animal, breakage of glass. I recommend that your collision and comprehensive coverage amounts mirror your liability coverage amounts at $100,000 per person and $300,000 per accident.
Gap Insurance: Gap Insurance covers the difference between the actual cash value of your vehicle and the remaining balance on your loan or lease if your car is totaled or stolen. If you financed or leased a car with a small down payment and a payment term period greater than three years, you should get gap insurance because depreciation on your car value tends to drop faster than your loan balance creating what is known as negative equity or upside down balance.
New Car Replacement Insurance: New Car Replacement Insurance covers the cost of replacing your totaled or stolen car with a new vehicle of the same make, model, and equipment, without factoring in depreciation. It’s particularly beneficial for owners of newer cars, ensuring they can return to a vehicle of similar value, even after a total loss. Coverage specifics can vary by insurer, including eligibility based on the car’s age and mileage.
Choosing your deductible amount: The most common deductible amounts are $500 or $1,000. When you take on a higher deductible, you lower your premium because you take on more risk. Conversely, when you opt for a lower deductible, your premiums are higher. Insurance is the only financial product you buy but hope you never use. We tend to be reluctant to file claims on small scratch and dent accidents for fear of our premiums rising. I recommend you select the $1,000 deductible.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website at www.damonmoneycoach.com)
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