An insured was driving from Berkley back to his home in Orange County, it was late and after a long day and the driver dozed off. He woke up to his car hitting the center divider and hitting several other cars causing significant damage and injury to those he hit. His policies paid out the full limit of coverage, but he had enough coverage that he did not have to pay anything personally.
When I first spoke to this client he was adamant that he wanted to save money on his auto insurance at all costs, including reducing or removing coverages. I was able to find him savings, however explained what he could lose in a worse case scenario and he opted to take my recommendations. This saved him from losing everything that he worked for his home, savings, retirement, and income post his major accident.
When you reduce your coverage are you actually saving money? No… but technically… yes.
With Auto insurance or any insurance you spend a ton of money on a piece of paper that essentially says if you hit things, things hit you, things burn, or a number of other things that could happen that you carrier will defend you, protect you, and fix your car, house, etc.. (if you have coverage). It is not shiny, it isn’t tangible, not something you can show off to your friends but… all the while required and necessary. All of this boils down to that when insurance companies are trying to earn your business they keep mentioning how much you can save if you switch to them; however, many of these reported savings come from reducing, removing, or changing coverages in order to boost your felt savings.
The coverages you carry are the most important part of your policy. We hear most of the time that, ‘I have full coverage, I’m protected” well.. not to be the bearer of bad news, but this is as far from the truth as the sky being green. Coverages are broken down into two parts, the first your liability, property damage and uninsured/underinsured motorist which I like to call you primary coverages… these are key… Next, you have your ‘nice-to-have’ coverages… comprehensive and collision (these are what makes your policy have ‘Full coverage”), rental, towing, audio equipment, etc; these coverages make life nice but at the end of the day are not what protects your assets and income but provides coverage to your your property.
Other than being an annoying bill, what does your auto insurance do for you? At its basis, your insurance policy is a transfer of risk for you, the insured. Transfer of risk is where you reduce your risk and literally transfer the responsibility to another party (up to the limits you have bought), to your insurance companies. The risk at hand is the financial liability In the case that you hit things, and that translates to your limits of liability is how much you are protected up to. A basic example of how this functions is that say, you are the driver of a car and you don’t see the traffic stop in front of you. You then rear-end the car in front of you. Without insurance you would have to pay for the damage to your car, and the car you hit, and if the driver is injured you would need to pay for their injuries. Between all of the above the cost you would need to pay $10,000 to $20,000 if not more. However, With insurance you would need to pay your deductible (if you have full coverage) to fix your car, and then insurance would (up to your policy limits) pay for the damage you caused the other party including damage to their car, medical bills, loss of use of their car, loss of their income if the accident caused them to miss work just to name a few.
All of this is important because as a driver and vehicle owner you face financial risk if you have an accident and another party is injured. In California your wages can be garnished up to 25% until the debt from the accident is paid in full, can you afford to lose 25% of your income? Probably not. The losses can be even more intense if you are a homeowner, or have investments, these can all be lost because you didn’t buy the right coverages.
What to look for
For you, this means that keeping track and understanding your limits of liability should be on your radar. That being said this is also where a majority of the policy premium exists so when you go to shop your insurance a lot of times savings are masked by removing or reducing coverage limits. However, the blame is not entirely the fault of the uneducated insured; when you talk to a normal agent, as licensed professionals, they are supposed to be advising you properly as to what coverages fit your needs best. However, pressures from insureds to save money, pressures to write more business, wrong information from the customer, and sometimes lack of training all contribute to the coverages being mismatched and/or inadequate.
Understanding your limits and what they do
So, understanding your coverages is the best way to defend against buying the wrong coverage when you go shopping for your auto insurance. The first place to start is with your limits of liability. On a side note, if your car is financed, you will need to have comp and collision, or if you don’t want to be responsible for repairs for your vehicle.
The insurance industry is made up of confusing language, acronyms that can even confuse even veteran agents, and complex legal language that confuses lawyers. When it comes to your liability limits the good news is the most of the language is relatively standardized (yay!!). Liability limits are split into two groups, split limits, and combined single limit. Split limits are far more common than combined single limits in personal auto policies. When you see split limit coverages, they are generally identified by the limits being divided into two sections. Take for example the California state minimum limits, they are split limits and are typically seen on policies as 15/30, 15k/30k or 15,000/30,000. The first number in a split limit policy refers to the maximum that a policy will pay for a single individual’s injuries in an accident. The second number is what is known as the aggregate limit or better known as the total the policy will pay if multiple people are injured in a single accident event. A practical way of looking at these coverages is that in the case of an accident if you have two people who are injured and their injuries total 15,000 you have not exceed the per person limit for each injured person, and at a total of 30,000 you have also not exceeded the aggregate limit. In the same regard if you have an accident where 15 people suffer injuries that are 1,000.00 each means that the 15k per person limit has not been reached, and the total of 15k is half of the 30k total limit. In many cases the scenario is that there an accident that exceeds the purchased policy limits. I had a client who was going through a hard period in their life barely keeping things together and opted to buy lower limits because at the moment the extra premium was not in the budget. One day her son came to borrow her spare car to drive to a job interview. He was rushing, going quite a bit too fast. In changing lanes clipped the back of his car which set into motion a deadly chain reaction. His car flipped and caught fire, the car he clipped was pushed into oncoming traffic, and in total 2 people needed to be airlifted, 1 escaped with minor injuries, and one person died. In a case like this the the owner of the car is on the hook for all of the damage caused by their son, the injuries from this accident far exceeded their limits of liability. Though a catastrophic accident like this is not frequent, but still possible; it is also the reason as you work your way up to higher limits of liability the cost per thousand of coverage gets cheaper.
The less common, combined single limit, takes the same principle of the split limit and instead of having a per person and aggregate limit combines them into one limit of liability that pays until it has been exhausted.
What limits should I buy?
If you are a gainfully employed professional, you need a minimum of 100k/300k limits of liability. Preferably your limits of liability would be at 250k/500k or greater. These same guidelines apply if you are a homeowner or plan to buy in the next five years. Personally, I apply the same rules of thumb for students who are planning on going into higher income professions (engineers, lawyers, doctors, and other professionals) because planning before an accident is far more critical than planning after. Because debts from auto accidents are unable to discharged via bankruptcy, if you are planning on going into a profession with highly competitive pay, you don’t want a debt to derail your life plans.
If you want to make an agent happy and go one step further, ask about an umbrella policy. This will make our day because it shows you are being proactive in protecting yourself (not that we are selling another product).
If you are leasing your car the leasing company generally requires that you carry 100k/300k limits of liability. However, you should make sure that your uninsured/underinsured motorist coverage matches the same 100k/300k and your property damage limit is placed at at least 100k.
One place that some carriers/ agents tend to skimp and place your uninsured motorist at far lower coverage in order to save you a few bucks. What we usually see is that an insured is issued a policy where they are told they have ‘good coverage’… say limits of 100k/300k or 250k/500k. So, as I noted above these are very good coverages. Pat yourself on the back, this is good! However, what you will see next is that your uninsured/underinsured motorist (UMBI) is at a lower, far-lower, or even isn’t included in the policy. Uninsured/underinsured motorist coverage is IMPORTANT, the question I always ask is if you are going to insure others if you damage their property or cause them injury why not protect yourself if someone causes you injury and is less responsible in terms of their limits? In addition to this, how the premium is broken down, the UMBI coverage costs pennies per thousand compared to the premiums for the other coverages. Without a doubt your liability limit coverages should match, uninsured motorist should ALWAYS be the same as your primary liability coverage.
Every insured generally comes with their own unique situation, but the piece of advice that always rings true is to buy as much insurance as you can comfortably afford above what you are required to have. We assist in this by doing a full professional review and then provide you with the real purchasable quotes from the major carriers at your current limits and recommended limits liability. We shop so you don’t have to.
Where do I go next?
Now you have a solid baseline education on your insurance limits, you are free to out into the world and make good life choices in regards to your insurance. What do you do next? Start by pulling out or downloading your policies and start looking at the coverages. Are they too low, middle of the road or, or too high? Next, do an audit of your finances what is your income potential, do you own your home or are thinking that you will want to in the near-ish future, if something major was to happen what could you loose? Now, do your limits of liability and financial audit allign or are they mismatched? Could you afford another few dollars a month to get up to the next level of coverage?
These are all questions you should start asking yourself, then start shopping your insurance and see what options are out there. We are here to help and make this process as user friendly and easy as possible.