That 4000-pound Piece of Metal is a Weapon: Make Sure You’re Insured

Do you think you’re a good driver?  Maybe you’ve never been in an accident.  Maybe you’re ACTUALLY an Indy 500 driver.

That’s great, but it turns out it doesn’t really matter how good of a driver you are.  There are things out of your control, including forces of nature and OTHER people.

Accidents can and WILL happen, even if you’re not at fault.  Therefore, you NEED auto insurance.  The purpose of this post is to break down the different components of auto insurance and help you decide what you need and what you don’t.

There are five main components of auto insurance we will discuss:

1. Liability Coverage
2. Uninsured/Underinsured Motorist Coverage
3. Medical Payments / Personal Injury Protection
4. Vehicle Damage Coverage (Comprehensive and Collision)
5. Other (Roadside Assistance, Rental Car Reimbursement, Rental Car Coverage)

Liability Insurance

This is the most essential component of auto insurance.  Liability insurance covers you for any damages  that YOU cause to another motorist or their property.

There are two parts to this:

1. Bodily Injury Liability: This pays if you are responsible for someone’s injuries or death.  It also pays for your legal defense.
2. Property Damage Liability:  This pays if you damage another person’s property, such as their car, or if you crash into a storefront on the way to a Black Friday sale.

Auto Liability Insurance isn’t just a good idea, it’s REQUIRED in all states except New Hampshire. For example, in Alaska, the minimum liability coverage required is:

1. Bodily Injury Liability: $15,000 per person and $30,000 per accident
2. Property Damage Liability: $10,000 per accident

However, you don’t want to just get the minimum required.  You should NOT skimp on this coverage.  Again, the purpose of this insurance is to protect against catastrophe.  A severe injury such as a traumatic brain injury or spinal cord injury could easily cost several hundred thousand dollars to treat.  Therefore, I recommend the following levels of liability insurance:

1. Bodily Injury Liability: $300,000 per person and $500,000 per accident
2. Property Damage Liability: $100,000 per accident (some of those cars out there are expensive…)

It is still possible to surpass these limits, and we live in a litigious society, so if you have a higher net worth, I also recommend you carry Umbrella Insurance, which I will discuss in an upcoming post.

Uninsured Motorist Insurance

Uninsured Motorist Insurance is also essential.  This pays for YOUR medical bills or property damage if the OTHER driver is at fault and does not have adequate liability insurance.  Even though liability insurance is required by law, it doesn’t mean that the other driver will actually have it, and it CERTAINLY doesn’t mean that they will have more than the minimum required.  Therefore, you need uninsured/underinsured motorist insurance.

The same injuries that you could cause to another person could happen to you.  Therefore, I recommend the same coverage limits for the bodily injury liability, and this is often required by insurers.  For the property damage liability, you only need to choose the amount that corresponds to the cost to replace your car, unless you want to self-insure the cost of your car, in which case you wouldn’t absolutely need uninsured property coverage.

Recommendations for Uninsured/Underinsured Motorist Coverage:

1. Uninsured motorist Bodily Injury coverage: $300,000 per person and $500,000 per accident
2. Uninsured motorist Property Damage coverage: Equal to the cost to replace your vehicle.

Medical Payments / Personal Injury Protection

Medical payments coverage will pay for your medical bills, regardless of who is at fault.  Personal Injury Protection will pay not only for your medical bills, but may also cover lost wages.

Approximately 20% of states require Personal Injury Protection.  If it is required, then you must purchase the minimum, but I wouldn’t necessarily go above this.  If it is not required, then I would generally not recommend it, for the following reasons:

1. You should have health insurance to pay for any associated personal medical bills if the accident is your fault.
2. If the accident is NOT your fault, your medical bills will be paid either by the other party’s liability insurance, or your uninsured motorist insurance.
3. Your emergency fund should serve as your short-term disability fund, and your employer may also offer short-term disability benefits.  If you are severely and permanently injured, this will be covered by your long-term disability insurance.

If you do not have a robust emergency fund, or you have a very high deductible on your health insurance, then you may opt for medical payments or Personal Injury Protection until you can build up your emergency fund.

Vehicle Damage Coverage

Coverage for damage to your own vehicle is not absolutely necessary.  If you drive a $3,000 car and have a $20,000 emergency fund, you probably don’t need vehicle coverage.  On the other hand, if you don’t have a full emergency fund or you drive a $50,000 car (you shouldn’t unless you’re a millionaire), you may want to consider vehicle coverage.

There are two main types of vehicle coverage available:

1. Comprehensive: Covers damages to your vehicle NOT caused by a collision, such as fire, vandalism, theft, tornados, etc.
2. Collision: Covers damage to your vehicle caused by a collision.

If you decide to have comprehensive and collision vehicle coverage, either because you are building up your emergency fund or because you drive an expensive automobile, I recommend you at least consider increasing the deductibles to $500 or $1000.  Remember, insurance is used to protect against catastrophe, not a small scratch from someone dinging your car with their door in the parking lot.

Other Types of Coverage

There are a variety of other types of coverage that are available, including roadside assistance and payments for a rental car if your car is in the shop.  All of these are probably unnecessary if you have a robust emergency fund.

Also, if you have ever rented a car on vacation or a business trip, you will likely be asked about rental car coverage.  Your usual auto insurance will cover you as if you were driving your own car, so unless you are driving a very fancy/expensive car compared to your usual car and are unable to afford any damages that might occur, you should opt out of additional rental car coverage.

Auto Insurance Coverage Summary

How to Find the Best Rates

There is no secret formula here. Each insurer has a different algorithm for determining your rates.

I would recommend making a spreadsheet with each insurer that offers auto insurance in your state.  You should get a quote from each company, either online or by phone, making sure to request the exact same coverage amounts.  You should also factor in the effect of discounts, such as the good driver discount and discounts based on your profession and credit score.

Finally, you will need to weigh the relative quality of customer service with each company.  Consumer reports has rated the various auto insurers, with Amica coming in near the top, GEICO and Progressive in the middle, and MetLife and Allstate near the bottom.

When we moved from Utah to Alaska, I spent around 12 hours requesting and comparing quotes.  There was a significant difference in premium prices depending upon the company, ranging from $550 per 6 months to $1500 per 6 months.  We ended up going with GEICO, but this may not be the best insurer for your particular situation.

Summary

No matter how good of a driver you are, you need auto insurance with high liability and uninsured motorist coverage.  The rest is not absolutely essential if you have a reasonably-priced car and a robust emergency fund.  Even if you like your current insurer, spend a few hours to shop around to see if you can get a cheaper policy.  It may be time well spent and help you achieve your freedom that much sooner.

Remember, It’s Not About the Money; It’s About the Freedom