What are the ins and outs of car insurance?



Could you afford to pay $60,000 if your attention slipped for an instant and you totaled someone’s brand new BMW? Or hundreds of thousands if you sent them to the hospital with serious injuries? Most people could not. Thus, to protect potential victims, state law requires automobiles to have liability coverage. Many people also choose to buy collision coverage, which covers their own repair, replacement, and medical costs when there is a collision and no other party can be held liable (e.g., when they cause the accident or run into a tree or guard rail). Comprehensive coverage is another option that covers other sources of damage to your car (e.g., hail, theft, falling trees, broken windshields, and vandalism). Collision and comprehensive coverage will likely be mandatory if you have a car loan, since the car serves as collateral.

Basic liability insurance for a driver with a clean record costs about $35 per month in North Carolina.  Additional types of coverage can drive that price up substantially, especially if you are covering potential replacement costs for an expensive car.  All types of coverage have policy limits, beyond which the expenses are on you rather than the insurer.  Minimum coverage prices vary by state, since different states have different minimum policy-limit requirements.

The following outline provides an overview of standard car insurance terms you should be aware of.

1. Deductible: the amount that you will have to pay if you file a claim.

For example, if repairs cost $2,000 and your policy has a $500 deductible, you will pay $500 and your insurance will pay the remaining $1,500. If your claim is less than your deductible, then you will have to pay it in full.  Normally, there is no point in reporting such claims, as the deductible usually applies anew to every claim made; it is not an aggregate deductible for all claims made in a year.

2. Liability Coverage: covers your liabilities incurred while operating the insured vehicle, up to the policy limits. The policy limits are denoted by a series of three numbers, e.g., 25/50/100.

  1. First number  - maximum coverage for each victim in an accident for bodily injury  (in thousands of dollars)
  2. Second number - maximum coverage for all victims in an accident for bodily injury (in thousands of dollars)
  3. Third number - maximum coverage for property damage (in thousands of dollars)

Note that you will remain personally liable for victims’ costs in excess of your policy limits.

3. Collision Coverage: covers only damage sustained in a collision with another object. Animals (such as deer) are typically excluded.

4. Comprehensive Coverage: covers most other sources of damage to your vehicle, such as weather events, animal collisions, and deliberate damage or theft.

5. Uninsured/Underinsured Motorist Coverage: covers damage and injuries caused by someone who is driving without insurance or who maxes out his liability policy limits.

How Much Coverage do you Need?

Generally, the greater your assets, the more liability coverage you need, because you stand to lose more in the event you are sued.  If you have minimal assets, there is little reason to pay for more liability insurance than is required by state law. If you consider yourself a relatively safe driver or have a not-so-fancy car you don’t mind getting repaired cheaply, then you probably want to forego collision coverage. If weather and tree limbs and theft are not serious threats in your area, it may not be worth paying for comprehensive coverage.

Many factors affect the price of your policy:

  • Driving record: : if you have caused accidents, received DUI citations, gotten speeding tickets, or have other blemishes on your record, your rate will go up for a few years. Taking a safe driving course can save you money.
  • Age and gender: Drivers under 21 have higher rates. Males may also face higher rates, due to their statistically higher likelihood of engaging in risky behavior.
  • Car type and features: More expensive cars have higher collision and comprehensive rates due to greater repair and replacement costs.
  • Claim history: Making claims on your insurance policy increases your rate in order to recoup costs and because you are statistically more likely to make future claims.
  • Credit rating: A low credit score is considered evidence of irresponsibility. Take care of your credit!
  • Deductible: A lower deductible means higher premiums, since the insurer’s risk exposure is greater.
  • Policy limits: Higher policy limits mean higher risk exposure for the insurer, thus higher premiums.