DIY Guide To Auto Insurance // Terms & Suggested Coverage Limits

Everyone is forced to carry some liability coverage by state laws, so we will start with those terms, then get into the other “optional” coverage terms.

Common Auto Insurance Coverage Terms

Bodily Injury Liability Per Person:  this is how much they will pay for each person you are liable for hurting in an accident.

Bodily Injury Per Accident:  This is the most they will pay in total for the accident.

Property Damage:  this is the most they will pay for damaging someone’s property.

Usually you will see the liability limits listed something like this:  100/300/50  they are being listed as:  bodily injury per person/bodily injury per accident/property damage (always in that order.

Combined Single Limit (CSL):  This is a total limit for a claim, it combines bodily injury and property damage, so you have a single pot of money to draw from, instead of several smaller ones.  This would take the place of having bodily injury per person, bodily injury per accident, and property damage coverage all broken up into different coverage amounts.  

Uninsured Motorist Bodily Injury:  this is for you and your passengers, if you are hurt in an accident by an uninsured motorist.  You will see limits listed like this: 100/300 with the order of the coverage limits are:  bodily injury per person/bodily injury per accident.

Underinsured Motorist Bodily Injury:  same as Uninsured motorist, except more commonly needed because most people walk around with really low limits of insurance (which is not smart)

Personal Injury Protection:  also known as “PIP” coverage.  It is required in some states and is similar to uninsured motorist, but does not require the other motorist to be uninsured to apply.  

Medical Payments:  this is a “goodwill” type coverage.  It allows a claims adjuster a small amount of money to pay in order to get a quick settlement done with an injured party for a small claim.  It is also money available to you if you are hit by another party and that other party is at fault in the accident.

Collision:  coverage for your vehicle if you run into something (a tree, a wall, or another car).  This is usually with a deductible.  But you can take “full coverage”; which means no deductible.  

Comprehensive:  covers your vehicle for everything other than collisions.  (Theft, vandalism, fire, hail damage, etc.)  This also usually includes a deductible, but you can choose “full coverage”, which means no deductible.

The Waiver of Collision Deductible:   If an uninsured motorist hits your car, the insurance company will waive your collision deductible and your vehicle gets repaired from the first dollar of expenses.

Gap Coverage:  Brand new cars depreciate rapidly.  So if you total your new ride a week after you bought it, your loan may be bigger than the value of the vehicle.  This leaves you upside down on the loan with the settlement being offered by your insurance company, unless you have Gap Coverage.  It covers that value to debt gap.

OEM Parts:  these are manufacturer’s parts.  Most auto insurance companies will pay for your repairs using aftermarket parts.  This effects the resale value of your car.  

Named Driver:  some policies only cover the drivers who are specifically listed on the policy. This is bad.  Avoid these if possible.

Rental Car:  pays a certain amount per day for up to 30 days after the date of the accident.  

Towing and Labor:  pays for your car to be towed for the amount of coverage available (typically $100 or less).

This is far from a complete list of terms, but it hits the major ones.  Now, on to the good stuff!

How To Choose Liability Auto Insurance

When buying liability insurance, I have one simple rule...

More is better.

Why?  

Well, for one thing, the state mandated minimum limits were not adequate to properly protect someone from financial ruin when they were established sometime in the 1950’s.  

Secondly, its good to remember that the cost of medicine has skyrocketed in the past 20 years.

Lastly, society has changed and most jury trials end up with larger settlements being given to plaintiffs than in the past.  

I recommend at least $100,000 bodily injury per person and $300,000 per accident with $100,000 property damage coverage. 

If you own a home, have teen drivers, or have significant assets, you need $250,000 per person, $500,000 per accident, and $250,000 property damage with at least a $1,000,000 personal umbrella policy.

Collision Coverage: Buy collision coverage with a higher deductible.  Never less than $1,000.  Why?  Because Collision coverage can be expensive and you going to be a smart dodo shopper, so you aren’t going to file a small claim for this type of accident. Most collision claims will probably blow by the $1,000 cost of repairs anyways, so why not save on the front end.  Some companies offer $2,500 or even a $5,000 deductible and if you are financial able to support this type of deductible, the up front premium savings might make it a good decision.  

Comprehensive: Buy Comprehensive with a lower deductible.  $250 or $500 is typically going to only be a fraction of the cost of Collision coverage.  You would probably save $10 a year by going with a $500 vs. a $1,000 deductible.  

A Word about older vehicles: Sometimes, people have been carrying Comprehensive and Collision for a long time without even knowing it.  They hold on to their car and before you know it, the thing is 10 years old with 120,000 miles on it.  

Having coverage on a vehicle this old is not smart.  In a settlement, the insurance company is going to offer you the depreciated value of the car. Also known as “actual cash value”

For example;  a 2009 Honda Accord runs great and probably has a few more years of trouble free driving, but its depreciated value is $2,500.  If you pay $500 a year in premium for collision and carry a $1,000 deductible, you would barely break even on a claim after 3 years. On the other hand, you could save $500 a year and come up big if the car was totaled.  You could put that $1,500 towards the down payment on something new.  

Medical Payments:  This is not much in terms of premium.   $5,000 is a standard amount most folks carry and its nice if you are hit by someone else because you can file a claim against your own insurance and have them pay for your medical bills, then seek reimbursement from the other driver’s insurance company for the expense.  

Rental Car:  This is nice to have and not too expensive usually.  Having a claim is a big headache.  You may get money for your loss, but it is truly difficult to be compensated for your time.  If you can afford it, make your life easy after a claim and have rental car coverage included.

Towing and Labor:  If you subscribe to a road side assistance program through AAA, you can avoid this offer.  If not, its usually fairly inexpensive to include on the policy.