Automobile Insurance 101

carcrashcartoonInsurance planning is part and parcel with retirement planning. The ability to share common risks at a reasonable cost protects us from a truly catastrophic loss and can help to ensure the continuity of our financial and estate plan. Automobile insurance, mandatory in most states, plays a foundational role in asset protection planning, and is at the same time both widely utilized and overlooked. In this week’s blog post, we will review the most important provisions of a personal automobile insurance plan and provide simple tips to help you design a thorough and cost effective plan of coverage. Before we begin, it is important to note that insurance is regulated at the state level and provisions or policy definitions that apply in one state may be different in another. Thus, the coverage areas outlined are general in nature and based on those found in a typical New York policy.

Liability Protection:
Most states require drivers to maintain insurance coverage for bodily injury, though the mandatory minimums are often too stingy to provide adequate protection. Bodily injury coverage pays the medical, rehabilitation and funeral costs for occupants of your vehicle, other vehicles and injured pedestrians.  The liability limit is often reflected in “split limits” that detail coverage per person and per accident.  Coverage in the amount of $250,000 per person and $500,000 per accident is generally recommended.

Uninsured Motorist:
Though trending downward in recent years, an estimated twelve percent of drivers in America are uninsured and many others carry only the mandated minimum liability coverage. Coverage for uninsured or underinsured motorists pays the costs for medical care and rehabilitation, funeral costs and costs associated with the pain and suffering of occupants in your car. It also provides coverage for members of your household as pedestrians, including hit-and-run accidents. This coverage should always be included and should mirror the limits of bodily injury liability coverage.

Personal Injury Protection (PIP):
Also referred to as “no-fault”, this pays the medical, rehabilitation and funeral costs for household members. It also provides some protection for lost wages and medical or rehabilitative care provided at home, and certain contracts may include survivor benefits. No fault coverage exists in states that have enacted automobile accident compensation laws that allow accident victims to collect benefits directly from their own insurance carrier, regardless of who was at fault for the accident. Consider what your health insurance, disability or long-term care insurance policies cover before selecting coverage.

Put An Umbrella On It:
Excess liability coverage provides an extremely cost-effective way to purchase additional liability protection. It pays claim amounts in excess of the primary underlying liability limits contained in the automobile policy. Automobile accidents may result in large tort claims that greatly exceed the liability limits of most automobile insurance policies. Consider maintaining coverage that is approximately equal to the value of any assets or future income that could be attached in a lawsuit.

Property Damage:
As the name suggests, property damage coverage pays to repair or replace automobiles or other property damaged in an accident.  While vehicle weights have declined over time, many late model passenger cars weigh in at well over 3,000 pounds and can do a lot of damage, even at modest speeds. Thus, be sure to maintain enough property damage liability coverage. Generally $100,000 of coverage, or the minimum liability limit required under the terms of the umbrella liability policy.

Medical Payments:
Coverage that will pay the deductibles and co-payments under your health insurance plan, or the insurance company of your passengers. Having robust coverage is useful for those with high-deductible medical plans; generally a few thousand dollars in coverage will be sufficient.

Comprehensive:
Comprehensive coverage pays if your car or its contents are stolen, or if your car is damaged by fire, falling objects or other perils. If you have financed the purchase of your car, the lender may require it. You will need to select a deductible, which is the amount of the claim that you pay. A higher deductible will help reduce your premium.

Collision:
This type of coverage pays to repair or replace your car after an accident. It also requires the selection of a deductible and is often required if you finance the purchase of the vehicle. You may consider dropping collision coverage on older vehicles, as the additional premium may not be worth the benefit.

Rental Insurance:
Coverage for rental vehicles may be a nice extra if you find yourself traveling and renting cars often. It is generally inexpensive, but may overlap other coverage that you already have. Check with your credit card company to determine what coverage is extended if you rent a vehicle using your credit card, and always be cognizant of what the policy does and does not cover.

Saving You More:
This slogan from a popular insurance carrier says it all, in the eyes of many consumers,  automobile insurance has become a commodity product. Insurance companies continue to cherry pick those drivers with the best risk characteristics, using technology to better assess a client’s risk behind the wheel. For those with good driving records this may be a positive development, as rates generally trend downward, but it calls into question whether this changes the fundamental characteristics of pooled risk, on which insurance is based.

A well-designed automobile insurance policy will provide protection from catastrophic loss, but is not intended to make you whole for every loss. Here are some simple tips to help structure your coverage.

  1. Bundle your coverage: placing your automobile, homeowners and umbrella liability with the same carrier may make you eligible for discounts. Check with your insurance professional.
  2. Increase your deductibles: insurance is designed to protect against catastrophic events, not to provide protection from every loss.
  3. Eliminate unnecessary coverage: cover for comprehensive and/or collision may no longer be warranted for an older car. Review the cost to benefit of maintaining it.
  4. Look for cost saving opportunities: research good student and good driver discounts, as well as premium savings geared to older applicants or those that drive less frequently. Maintain a good credit profile, as your good FICO score may help save you some money.
  5. Review your policies at renewal to make sure they continue to meet your needs.

Having good coverage in place helps to ensure that assets earmarked for retirement are secured from creditors. Personal insurance is a first line of defense and represents an important component of the retirement income plan. Ignore it at your peril.

John Male, CFP®
The Gassman Financial Group
G&G Planning Concepts, Inc.
The Retirement Maven ™
9 East 40th Street, Suite 1500
New York, NY 10016
Tel: 212-221-7067 Ext. 17
Fax: 585-625-0830
www.gassmanfg.com

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