Auto Insurance: Know Your Limits

Written by Andrew Freiburghouse and Gary Bangstad on July 16, 2000 & Posted in Auto Insurance

Whether driving on the freeway or buying auto insurance, it's important to know your limits. But unlike the roads, with auto insurance limits, it's up to you to pick a number. So how do you know which number to pick?

Minimum Requirements for Car Insurance
Can I drive legally without insurance? NO! Most states require you to have auto insurance if you own a car, but all states require financial responsibility. You must either have sufficient assets to pay a claim if you cause an accident, or, you must buy a minimum amount of liability coverage. However, taking the minimum amount of coverage might not be your best choice. According to many experts, it is wise to have more than the minimum amount of coverage. The basic types of coverage that you should have in your policy are as follows: liability, property damage, collision, comprehensive, uninsured motorist, and umbrella insurance.

Bodily Injury Liability Insurance
This covers any expenses from an accident that you, or any one driving with your permission, may cause to someone else. Another important feature is that you and your listed family members are also covered when driving someone else's car with their permission.

Although some states may require less, many consumer groups recommend that you carry at least $100,000 liability insurance per person and $300,000 per accident. If you have considerable assets, consider increasing those limits to $250,000 per person and $500,000 per accident. Your premiums, however, will likely increase up to ten percent as well. These larger numbers do make sense, considering that $15,000 barely covers a few days in the hospital.

Property Damage Insurance
What happens if you or your son smashes into someone else's car, or even into their house? Property damage coverage pays the bill. Usually, this means damage to someone else's car, but it also includes damage to any other structure such as a lamppost or a house. Many states require only $10,000 to $25,000 in coverage, but, according to Smart Money, you should buy coverage of at least $100,000.

Collision Coverage
Ok, what about your car? Liability insurance gets the most attention, because it is required, but collision insurance is also important. This pays for damage done to your car by another car, or by flipping over your own car. It even pays for damages done by potholes. Deductibles usually range from $200 to $1,000, which means that you are responsible for any cost up to the deductible amount. Obviously, the higher the deductible, the lower your insurance cost. In fact, by going to a $1,000 deductible, you can save 40 percent or more on your collision and comprehensive costs.

About that deductible, keep in mind, the purpose of insurance is to protect you against big losses, not to make you owe to the last dollar. Therefore, Smart Money recommends a $1,000 deductible. Put the money that you save in premiums into a savings account where you can use it on a "rainy day."

Comprehensive Coverage
Comprehensive insurance covers your car for anything other than a collision with another car. No matter what happened, whether it is bad weather, fire, theft, vandalism, or hitting a deer, your car will be o.k. In fact, if you still owe money on your car, comprehensive insurance is probably required by your lender. Comprehensive insurance quotes are based on the value of the property you are insuring. So if you drive a 2008 Lexus, you'll pay a lot more than if you drive a 1976 Pinto.

Uninsured Motorist
What happens if an uninsured driver broadsides your car? What happens if a hit and run driver rear-ends you? Uninsured motorist insurance will cover your injury bills and the bills of the passengers in your car. This feature keeps you in control when other people are out of control.

Umbrella Policy
Additionally, because you don't have to be a millionaire to get sued--it may be wise to purchase a personal umbrella liability policy. If you shop around, you can usually get up to one million dollars in additional liability coverage for about $300 a year. That's money well spent protecting a lifetime of work and savings from a personal injury lawsuit. In addition, an umbrella policy includes protection not offered by auto insurance--defense against claims like accidents that happen to other people at your home, for example.

Generally speaking, the more assets you have, the higher your liability coverage should be, above and beyond the standard minimums of your state. But even if you haven't yet made your fortune, an umbrella policy could make sense. Otherwise, you could end up with wage garnishments for decades if you lose a big lawsuit.

Balancing Act
What can you afford? How can you save money? Balancing the cost of your premiums with your coverage needs is indeed a difficult task. Ask your auto insurance agent what other coverage's are available in order to help you decide what you need and what you can afford. He or she can also give you many tips on how to save money on your insurance.

Insurance Information Center
MSN Money Central
Smart Money, "How Much Insurance Do You Need,"

About the Author

Andrew Freiburghouse is a writer and businessman. As a partner at Los Angeles tax preparation firm Pronto Income Tax of California, Inc., Andrew has served thousands of clients both face to face and over the telephone. Currently, Andrew lives in Brooklyn, NY, and is in the process of starting up his own tax practice.

Gary P. Bangstad, Ed. D. is a freelance writer in the area of business and insurance. Previously, he worked for Midwest Financial Planning LTD, selling insurance and investment products. He has also taught music at the university level.


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