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Auto Insurance Information
What is (and ISN'T) covered in your auto policy?
An auto policy is really several individual stand-alone (or a-la-cart) coverages combined into one single policy and most people have no idea what they are really paying for. Each one of these coverage has its own individual premium (or price) and they are explained below.
- Liability (required): This is the coverage type required by law to pay for the medical bills or property damage to other parties caused by you or another driver of your vehicle in the event of an accident. THIS DOES NOT PAY ANYTHING FOR YOU OR YOUR VEHICLE. All states have very low "minimum limits of liability" which are nothing more than a very small coverage amount for other people's bodily injury and property damage that you are required by law to purchase to legally operate your vehicle. However, these limits are so low that they are normally NOT enough to cover the repair costs of today's expensive cars or any reasonable medical bills. If you don't have enough liability coverage on your policy, you will be held personally liable and responsible (i.e. sued) for the remaining balance. WE DO NOT EVER RECOMMEND SIMPLY PURCHASING MINIMUM-LIMITS OF AUTO INSURANCE COVERAGE.
- Uninsured and Underinsured Motorist Coverage (optional): Although most states require some form of financial responsibility, there are those who either do not follow the law or acquire the absolute minimum necessary to comply with the law. This can provide bodily injury coverage or property damage to your vehicle or both. For instance, in the great State of Texas the current minimum limits for bodily injury are $30,000 per person or $60,000 total for the accident and no more than $25,000 for all property damage. This is what is required. Recent statistics show those with no insurance are in the upper teens and those with minimal insurance limits the norm. The only way to protect against this reality is to proactively prepare to take care of yourself and your passengers. This is often inexpensive to purchase yet can be a very valuable to have.
- Comprehensive also known as "Other than Collision" (optional): If your vehicle has no lien, then this coverage is optional. However, if there is a lien holder on your vehicle, then the lender will require that you carry this coverage until the loan is paid in full. "Comprehensive" coverage is what pays for damage to your vehicle resulting from such non-collision related issues such as vandalism, theft, hit-and-run, falling objects, making contact with an animal and other such instances. You are responsible for paying the deductible (whichever amount you chose when purchasing your policy often ranging from $100 to $500 or higher) and the insurance company will pay the remaining balance. In some cases, the lien holder (in order to secure their collateral) will not let you have a deductible higher than $500).
- Collision (optional); Just as with comprehensive coverage above, this is optional if your vehicle has no lien but required by the lien holder if it's not (in order to protect the loan collateral). Collision coverage is what is used to pay for the damage caused to your vehicle in the event of an accident for which you, or another authorized driver of your vehicle, is "at-fault." The liability coverage first mentioned above pays for the other party's damages and this collision coverage is what pays for damage to your auto. If you don't have collision coverage and you are involved in an accident for which you are at-fault; you are fully responsible for paying you own repair costs. As with comprehensive coverage, you choose the deductible that you are comfortable with (subject to lien agreement limitations) and the insurance company pays the remaining balance above this amount.
- Personal Injury Protection or "PIP" (optional): This is benefit limit is provided on a per passenger basis. Sometimes referred to as "no-fault medical" coverage, this is a completely optional however is very important if you do not have sick leave, short term disability or emergency funds to cover extra costs. Personal Injury coverage has no deductible and it is paid out to you in the event of a claim in order to reimburse you for costs related to an accident or claim such as medical deductibles, lost wages (if injured and unable to work), and domestic assistance (if you are injured and need someone to assist in household tasks while recovering), as well as other injury related expenses. This is often inexpensive to purchase yet can be a very valuable to have. In some states, you can only have Personal Injury Protection or Medical Payments but not both.
- Medical Payments (optional): This is benefit limit is provided on a per passenger basis. This benefit covers medical related expenses WITHOUT the inclusion of lost wages or domestic assistance. Therefore, it is often 60-80% less in cost than Personal Injury Protection (above). Medical Payments coverage has no deductible and it is paid out to you in the event of a claim in order to reimburse you for medical costs related to an accident or claim such as medical deductibles. One can often purchase a higher Medical Payments coverage limit than Personal Injury Protection coverage limit. In some states, you can only have Medical Payments or Personal Injury Protection but not both.
- Roadside Assistance (optional): Provides for assistance with such travel aspects as towing, putting the spare tire on when you have a flat, sometimes jump starts for dead batteries, vehicle lock outs and such. For those that have experienced changing a tire on the side of a roadway, this can be a safety feature as well as a convenience coverage.
- Rental Reimbursement (optional): Again, this is fully optional as well; however, this is what pays for you to have a rental car in the event that you are in an accident and your vehicle is in the shop being repaired. This is a very inexpensive coverage and most policies pay anywhere from $35 to $50 per day for up to one month for a rental vehicle.
- Accidental Death and Disability (optional): Available without medical qualification, these coverages can be added to most policies with little additional cost. Enough can be provided, in some cases, to cover basic burial costs or assist in providing a very small amount of replaced income post accident to help with recovery.
How Your Premium is Determined?
There are many factors that go into "rating" (or determining the premium amount) of your policy and these are used across the board by auto insurance companies. While the exact methods used for determining premiums are actuarial and complex, the major determining factors are below:
- Driving Record - Obviously, the more moving violations and/or accidents on your driving record the bigger risk the insurance company is taking with regards to paying out future claims while the policy is in effect. Therefore, the worse your driving record is the higher your premium is going to be; that's just the hard reality with every company. Parking tickets, expired registrations, and other "non-moving" violations don't count and these likely won't have an impact on your cost, but speeding tickets, failure to obey traffic devices, and similar violations will. Also, depending upon who the insurance company is they will look at your driving record for either the last 36 to 60 months (it all depends on the companies underwriting guidelines).
- Driver Age - Youthful drivers and very elderly are far more likely to be involved in accidents and/or get moving violations, therefore, the premiums for these drivers are more than for others.
- Vehicle Type and Value - the type, age, and value of the vehicle being insured is another factor simply due to things such as the vehicle's repair cost, theft history (some vehicle types are specifically targeted by car thieves), and security features (alarms, VIN etching, lo-jack, etc.). A $100,000 sports car is going to cost more to insure than a $40,000 midsize sedan.
- Geographic Locations - This is a factor due to the history (and probability) of loss in one area from another. For example, the Dallas, Texas area can be more expensive because of the extreme risk of wind and hail damage as well as to the number of accidents reported while Junction, Texas may be much lower because of the smaller population density (and resulting lower number of claims, thefts, and losses) as well as the reduced exposure to hail, snow, and other weather-related issues.
- Insurance Credit Score - First, getting a new quote for insurance does NOT have a negative impact on your credit (FICO) score nor does it count as an "inquiry" on your credit report. It is a "soft hit" which is no different than a prospective employer checking your credit history prior to offering employment. That said, the reason that your credit score is a factor is simple; it is a statistical (actuarial) fact that there is a direct correlation between an individual's credit score and the number (and dollar amount) of claims that he or she will file. The lower the credit score the more likelihood there is that a claim will be made. Therefore, this is one of the rating factors used by most insurance companies when determining the cost of your insurance.
- Past Claims History - Obviously, the number of claims that someone has in the past five years (along with the type and dollar amount of these claims) is directly related to how an insurance company is going to determine a the cost of insurance.
- Vehicle Usage - Is your vehicle being used daily to commute back and forth to work? How many miles? Or, is it only used on weekends as an "occasional use" toy (i.e. convertible) to drive on warm sunny days? Or, are you a Realtor using your vehicle for "business use" driving clients around town and putting a high number of miles on the vehicle? The actual way the vehicle is being driven will also have a direct impact on how the policy is rated.
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