How to Know How Much Auto Insurance You Need
Auto Insurance Should Protect You – Not Just Your Vehicle
Four Key Coverage Areas That Protect You
Like most people, I’ve spent most of my life believing that finding the cheapest auto insurance is the way to go. I remember the sticker shock of buying a new vehicle after owning a succession of used cars. And I was nearly apoplectic when I moved from rural Missouri into the city of St. Louis. The price of your vehicle and your zip code do drive auto insurance prices, but once you figure out that insurance is covering you and not just the metal box on wheels, you’ll gain a whole new perspective on the cost of your insurance premium.
Basically, there’s insurance coverage for your actual vehicle, and then there’s coverage for you, the people in your vehicle, and the people in another vehicle when you injure them in a crash. I’m not going to address the part of your policy that covers the vehicle itself. Instead, I’ll give you a few tips for using your policy to cover your own health and well-being.
There are different types of coverage on your plan, and every insurance company seems to have its own unique coding system. Insurance is regulated by individual states, which means there’s no one-size-fits-all federal plan specifying some uniform coding. Even the same insurance company may have different codes for one state than it does in another. Take a look at your proof-of-insurance card and you’ll see letters and numbers which may or may not mean anything to you. If they don’t, go pull a copy of your actual policy. It should contain a key to unlock the insurance card secret code.
In general, other than what’s generally referred to as “Comprehensive and Collision,” which covers damage you do to your own vehicle or things like cracked windshields and hail damage, there are four basic health-related coverage areas that cover you.
- #1 Liability: Liability coverage applies when you cause injury to someone else and/or damage someone else’s vehicle. Your liability coverage will include bodily injury as well as property damage.
- #2 Uninsured Motorist: Uninsured Motorist, or "UM," coverage pays you when someone else injures you and that person has no automobile insurance.
- #3 Underinsured Motorist: Typically abbreviated as “UIM,” this coverage pays you when the person who injures you has bodily injury liability coverage, but the limits of that coverage are insufficient to fully compensate you for your damages.
- #4 Medical Expense: This coverage is referred to as “med pay” or “PIP,” which stands for “personal injury protection.” You can collect your medical payment coverage to help pay your own medical expense following a crash. PIP coverage, which isn’t available in all states, usually also reimburses you for lost wages, in addition to medical expense.
The code on my insurance card looks like this: BIPD UM UIM ME
Translation: I have coverage for Bodily Injury/Property Damage, Uninsured Motorists, Underinsured Motorists, and Medical Expense. Before I became a much wiser auto insurance purchaser, my card read only "BIPD."
Some insurance cards might also have numbers following the initials, for example, "BIPD 25," which would indicate bodily injury/property damage coverage limits of $25,000.
It's tough to talk about auto insurance without defining what "damages" means. Damage to your actual vehicle is fairly self-explanatory. But what are “damages” to a person involved in a vehicular crash? Without getting way into the weeds, “damages” refers to the harms and losses that person suffers as a result of the crash. Damages include expense for medical treatment immediately following the crash, and in the case of severe injuries in the future. Damages also include lost wages and income when the injured person is unable to work due to his crash-related injuries. Finally, damages include the more nebulous but just as important pain and suffering, as well as loss of enjoyment of life and inability to engage in life’s normal activities, whether temporary or permanent.
Three Tips for Better Coverage
Now that you might better understand the terminology of auto insurance, figure out what coverage you currently have. Then, follow these tips for assessing what you really need.
Tip #1: Cover your assets.
If you own substantial assets, make sure you have enough auto insurance to cover big injuries you cause to someone else. Your insurance company has a duty to protect you as its insured. That means tendering your bodily injury policy limits to someone you’ve injured when that person has suffered a high value of damages. If an injured person agrees to accept the limits of your bodily injury coverage, he signs an agreement basically stating that he agrees to accept your insurance money in full and final settlement of all claims against you. He can’t file a lawsuit and obtain a judgment against you that would expose your personal assets or allow him to garnish your wages. Let’s say you own real estate or you have a steady job with a good wage. Let’s say you also have only $25,000 in bodily injury liability limits on your auto policy and you cause a crash that severely injures someone else. With such low policy limits, the injured person’s attorney will probably recommend filing suit to have a judgment entered against you for a much higher amount. That would force you to liquidate assets and perhaps have your wages garnished in order to pay the judgment. Healthy bodily injury limits on your automobile insurance policy (and perhaps an umbrella policy, which is a whole other topic) would be a wise investment.
Tip #2: Control your own destiny.
"Helpless" is how many people feel when they're involved in a crash. But having solid insurance coverage can put you in control in the aftermath.
Despite state laws requiring drivers to have liability insurance, not everyone complies, and people who do often have only the minimum coverage required. States require vehicle owners to maintain some minimum level of liability insurance so that if you cause a crash that injures someone else, the injured person can recover at least something from your insurer. In Missouri, the minimum liability coverage is a mere $25,000, and that’s often not enough to cover even an emergency room visit, a few x-rays, and the injured person’s handful of missed workdays.
Having a healthy amount of UM and UIM coverage on your own auto policy allows you to control your own destiny if someone else injures you. You'll hope that person has high bodily injury liability limits on their auto policy, but if they have no insurance, you’ll be glad you covered yourself. If there is coverage but not much, you’ll be glad you can settle for the negligent driver’s policy limits, then make a claim on your own UIM coverage if the other driver’s limits aren’t sufficient for your damages. A note of caution: Some auto insurance policies specify “offsets” under their UIM coverage. That means the amount you collect from the negligent driver’s policy offsets the amount you can collect under your own UIM coverage. Let's say you suffer $125,000 in damages due to another driver’s negligence. That driver has $25,000 in bodily injury coverage, which you collect, and you have $100,000 in UIM coverage. On the surface, it appears that you will collect $125,000 for your damages, but your UIM coverage has an offset clause. That means when you try to collect your $100,000 in UIM limits, your own insurer will give “credit” to the $25,000 third-party settlement and you’ll collect only $75,000 of your own UIM coverage which leaves you $25,000 short of your damages. It’s obviously to your advantage to have a policy without UIM offsets, so shop around.
Tip #3: Let your health insurance deductible drive your medical expense coverage.
I’ve seen a lot of clients who have no medical expense coverage on their auto policies, and a lot who have coverage of $1,000 which, let’s face it, doesn’t pay squat in medical expense these days. It’s tough to know how much coverage you should have, but one yardstick you can use is your own health insurance deductible. If your deductible is $5,000, you should have at least that amount in medical expense benefits so it can cover your deductible. Maybe you should double or triple the amount of your deductible. And if you have no health insurance, you really need to invest in medical expense coverage. Know too that you can collect your med pay coverage when you’re injured, even if you caused the crash, and even if you’re not in your own car.
Assess Your Coverage Now
Don’t wait to assess your coverage—do it right away. You never know when you’re going to need it. (That’s why it’s called an “accident.”) I’ve seen a lot of people increase their coverage after a crash, and every single one of them wishes they’d done it before they needed it.
Now, you might be thinking: “How much is all this increased coverage going to cost me?” That’s a conversation you need to have with your insurance agent but typically, the answer will be “Not very much.” You might be surprised to find out that the difference between $1,000 in med pay and $10,000, or $50,000 in bodily injury liability coverage and $250,000, might be only a few dollars more than what you're paying every six months for your current coverage.
Just remember: Insurance is all about the “what ifs” and as such, making your “what if” catastrophic is the best way to make sure you—not just your vehicle—are really covered.