Tuesday, July 21, 2009

Auto Insurance Policy Limits - My Two Cents (Part 1)

Insurance -- unquestionably a necessary evil.

In Washington -- and I dare say in most if not all states -- auto insurance is required. This is going to be a 3-part blog entry. This first part will discuss the basic types of typical auto insurance coverages. Of course, I can't discuss all the details; so feel free to call or contact us if you have specific questions. But I will try to cover the basics. In Part 2, I'll talk about some suggestions for insurance if you're a low wage earner; and in Part 3, I'll make suggestions for those whose income and assets are moving in the right direction (i.e., up!).

The coverage that the State cares about is referred to as "Liability" coverage. This is the insurance that will hire you an attorney and pay a settlement or judgment to someone you have hurt or damaged. Bottom line: you're in an accident that's your fault; the other driver is injured; they sue you. Your insurer hires an attorney for you, and eventually pays the other driver to settle the case - or if the case goes to trial, pays the judgment. Washington requires that drivers carry a minimum of $25,000 in liability coverage (often referred to as BI coverage). That means that if you have the minimum, your insurer will pay up to $25k to resolve your case. If your accident has caused someone to incur more damage than $25k, you can be 'stuck' for anything above the $25k. Your insurer won't pay more than the limits you've purchased. You can, of course, purchase more than the $25k limits. You can purchase limits into the hundreds of thousands -- and as I'll discuss in Part 3 of topic, into the millions!!

Some policies also provide a separate level of coverage limits for damage to the other driver's car. Typically, if you have a $25k BI limits, you may also have a $25k limit for damage to the other driver's car (often referred to as PD coverage).

The two coverages above (BI and PD) are referred to as "third-party" coverage. This means that they are designed to provide monies to 'third-parties' (i.e., other people). The other type of coverage is "first-party" coverage. First-party coverage is designed to provide monies to you - the actual insured.

Personal Injury Protection coverage is referred to as PIP coverage. PIP pays your medical expenses for accident-related medical treatment. Generally, PIP provides up to $10k in benefits for up to a year following an accident. This, too, can be increased. Some PIP policies will pay up to $30k for 3 years following an accident. When referring to PIP coverage, most insurers also include coverage for lost wages, assistance, and (in the case of a death) funeral expenses. Wage benefits are typically limited to 1-year at $200/week. Policies usually provide that wage benefits don't begin until after 2-weeks of missed work. Other portions of PIP may provide for assistance at home. For example, let's say you're laid up at home alone, and you need someone to clean and cook. Your PIP policy may provide benefits to pay for someone to do that for you until you can do it, again, on your own. Now here's a sneaky thing about PIP. If you don't want PIP, your insurer must have you waive the coverage in writing. If they don't, you get it with your policy --- even if you didn't pay for it!

Collision Coverage is much like PD coverage; except it pays you for the damage to your car. It will almost always carry with it a deductible. The lower the deductible on your collision coverage, the higher your premium will be. But if your car is damaged or totalled, regardless of who is at fault for the accident, your Collision coverage will pay for the repairs or pay you the fair market value of your totaled car.

Comprehensive Coverage also carries a deductible with it. This is coverage that applies to protect your vehicle investment when it is damaged by something other than a collision. For example, if someone smashes your window, breaks into your car and steals your stereo; or a tree falls over on top of your car during a storm; Comprehesive coverage takes care of it.

The last major type of coverage is Underinsured Motorist Coverage - generally abbreviated as UM or UIM coverage. This is coverage that pays you if you are hurt in a collision caused by someone else; and that other person either doesn't have insurance, or doesn't have enough.
So those are the primary types of auto insurance coverages. In Parts 2 and 3, I'll discuss suggestions and strategies for the types and amount of coverages you should consider.