Understanding Auto Insurance

The National Highway Traffic Safety Administration (NHTSA) report “Traffic Safety Facts 2013” showed that there were over 5.6M motor vehicle accidents and more than 37,000 motor vehicle related fatalities. It is evident from these statistics that operating a motor vehicle comes with inherent risk. This is why all motorists are required to carry liability coverage and why I think they should always carry the maximum liability coverage that they can afford.

As a general rule, I recommend that any homeowner carry a minimum liability coverage of $100,000 bodily injury per person, $300,000 bodily injury per accident, and $100,000 in property damage coverage. In the industry, we it “100-300-100” coverage and it works for most people.

Our online application explains each coverage item for you
Our online application explains each coverage item for you

Some states have what we call “state minimum liability coverage”. This is the lowest amount of liability coverage required to be on the road. I almost never recommend state minimum coverage but it can work for people who are in or near poverty.

Higher net worth individuals, and families with young drivers on their policy, should carry higher liability limits and even consider purchasing an umbrella liability policy. These policies typically offer coverage starting at $1M, which is then “added onto” or “extends” your underlying auto liability coverage. These policies often cost as little as $200-$300 per year and the added protection is well worth the additional expense.

Many insured mistakenly refer to state minimum liability coverage as “full coverage.” It is not. “Full coverage” means that you carry comprehensive and collision coverage in addition to the required liability limits.

It's important for everyone to understand basic insurance terms
It’s important for everyone to understand basic insurance terms.

Comprehensive and Collision Coverage are voluntary. They are for covering the costs of repairing or replacing your car as the result of an accident when you are at fault or there is no fault assigned to someone else. We recommend that individuals operating late model cars (manufactured within the last 8-10 years) carry these coverages and typically we recommend deductibles of $250-$500 for both. If a vehicle is more than 10 years old the individual may want to forego these coverages. It is purely an individual preference and should be based upon the value and condition of the vehicle being insured, and the budget of the insured.

If cost is an issue, insureds can choose to waive voluntary or elective coverage such as Roadside Assistance, Rental Reimbursement, and others, but a driver should avoid state minimum liability coverage whenever possible.

So, to summarize:

  • Liability is the only required coverage
  • Start at “100-300-100” liability
  • Avoid state minimum liability
  • Increase liability and consider an umbrella if your net worth at or over $1m
  • Get Comprehensive and Collision coverage if you car is less than 10 years old
  • Try to keep your Comprehensive and Collision coverage deductibles under $500 each

Scott Hunter