Your Insurance Cheat Sheet: Auto Insurance

The first of a two-part series on a necessary reality of adulthood: insurance.

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You don’t want to talk about it. Or think about it. Or figure out how it works. Or deal with the paperwork. Most of all, you don’t want to pay for it.

But… for better or worse, if you want to drive, you need to have auto insurance (in most states).

In another life, I sold insurance. My favorite part of my job was educating millennials about how it works. Like finances, insurance, in any capacity, can seem daunting. There is a great deal of numbers, industry terminology and fine print involved in any one insurance policy. But I’m here to break it down for you as I did with my customers.

Liability Coverage
Every auto insurance policy comes with liability coverage, or the portion of the policy that will pay damages to another party. On your auto insurance policy, liability coverage will be listed on a line looking similar to this one:

25/50/10

Keep in mind: all numbers are in thousands. So, ‘25’ is actually $25,000 and ‘50’ represents $50,000.

The ‘25’ is in the first position represents bodily injury damage per person. If the drivers suffers injuries that would cost $10,000 worth of treatment, your policy would front that $10,000. But — if that driver suffers injuries that would cost $35,000 worth of treatment… you’d be short about ten grand. Why? Because your policy limit only covers up to $25,000 worth of bodily injury payments per any one person.

The ’50’ in the second position represents bodily injury damages — wait, didn’t we just cover that? You’re right, we did, but now we’re moving into bodily injury per accident. Say you were once again in an accident, but this time, there were two people in the car — and each person suffered injuries that required treatment costing $15,000 each. Not to worry…you’d be covered. Why? Because $15,000 doesn’t exceed the per person limit of $25,000, and $30,000 ($15,000 x 2) doesn’t exceed the per accident limit of $50,000. However, if both people were injured to the tune of $30,000 each, you’d have to hold on to your wallet.

But wait — what about the big gash in the rear bumper of the car you just hit? What coverage is going to pay for that? The ‘10’ in the third position represents property damage — that is, any damage your at-fault accident caused to the car, or a pole on the side of the road, or a guard rail, to name a few possibilities. And if you’re thinking that in this case it will cover up to $10,000 worth of property damages, you’re correct.

Personal Injury Protection (PIP) aka “No-Fault” Coverage
Personal Injury Protection requirements vary by state — but if it’s included in your policy, you are entitled to payment to treat your own injuries in the event of an accident, regardless of fault (hence the nickname no-fault coverage).

Uninsured/Underinsured Motorist Coverage
Oh, no — you are involved in an accident with someone who does not have insurance, or carries significantly low liability limits. To put it simply, your uninsured/underinsured motorist coverage will help you out — it’s in place for those exact situations and is required by a number of states.

Collision Coverage
While it’s an optional coverage, you’re probably going to want collision coverage for a newer car — and if you’re engaged in a lease or loan contract, it’s going to be required as part of said contract. Sometimes accidents happen in which it’s difficult to decipher which party is truly at fault. In those cases, both parties will suffer property damage to their respective vehicles. Your car may have a gash in the front, or a smashed headlight. Since it could take a bit for one side to be ruled at fault, collision coverage is the best way to get the repair taken care of. It will usually come with a deductible — better known as the portion of the price of the repair that you are responsible for yourself — but the cost of any damages over and above the deductible are covered.

Comprehensive (aka Other Than Collision) Coverage
Sometimes damages to your vehicle are not the results of an accident between two vehicles. It’s possible… a tree fell on your windshield. Or maybe you hit a pole causing damage to the front grill. Whatever the cause, don’t worry — there’s an optional coverage for that (again required by most lease or loan contracts). Comprehensive coverage will cover any loss caused by something other than a collision less your deductible, and most companies don’t even include a deductible if it’s just for an auto glass repair.

Helpful Tips

  • There are many auto insurance companies out there in cyberspace—especially the big names that you’ve probably seen in commercials including State Farm, Geico, Progressive, Farmers and esurance (which is an Allstate affiliate). They will all promise the best prices. Get quotes from more than one company and be sure to speak with an agent about the particulars.
  • Read your policy when it comes in the mail. I know, it’s a drag and it’s long. But do your best to familiarize yourself with the terms and conditions.
  • If you have a lease or loan contract, know their auto insurance requirements. Not only will your financial institution most likely require the purchase of comprehensive and collision coverages but they will also ask for higher limits of liability.
  • Be sure to check your state’s required liability limits. In the above example, I used New York’s required limits of 25/50/10—but your state may require higher or lower minimum limits.
  • Educate yourself further. I’ve covered a lot here, but there is more to auto insurance than just coverages, limits and deductibles.

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