What Kind of Car Insurance Do You Need?

Posted By Matthew Clawson || 31-Jul-2014

Considering buying your car insurance online? In former days, you bought car insurance from an insurance agent—an agent who was either employed by, or associated with, an insurance company, or an agent who was "independent," selling insurance from several different companies. You would go into the agent's office and the agent, face to face, would explain car insurance to you and make recommendations for the kinds of coverage that you should buy. Online insurance has changed all that. Even with an 800 number to call, it is very hard for most of us to track the complexities of car insurance from a distance. We may just give up and buy "the minimum" coverage or "the required" coverage. Here are some guidelines to what you are buying—and why—offered by a law firm that sees how car insurance works when it is really needed: after you have been in a car accident.

Liability Insurance

This is the main reason to buy car insurance. If you cause an accident, you are responsible for the damages that you cause. This means you are responsible for the damage to the car you hit and all who may have been in the car and were injured by you. Just think about that. You are on the hook ("liable") for thousands, maybe even tens or hundreds of thousands of dollars! You can lose your house, your bank account—everything. Even your wages can be garnished to pay for those damages. In Colorado, the "minimum" required car accident liability coverage is $25,000 per person, $50,000 per accident. This minimum hasn't changed in 20 years—but the cost of medical care sure has changed in that time. The Colorado legislature has decided not to raise the "minimum" required auto insurance coverage hoping that low limits (which cost less) will encourage more people to follow the law and buy car insurance. That may be true for some folks who are truly in financial need, but most folks ignore the purpose of liability coverage and just buy the "minimum" limits when they purchase car insurance—especially when they purchase insurance online.

The "minimum" coverage required by Colorado law will not protect you if your assets are worth more than $25,000. How to protect your assets when you cause an accident? Buy sufficient auto liability insurance in an amount which reflects what is really at risk if you cause a car accident. If you have a job or any assets that are at risk, you need to have at least $100,000 in liability insurance for each person hurt in an accident, up to at least $300,000 per accident. More assets need higher insurance coverage—as well as "umbrella" coverage, discussed below.

Recommendation: liability coverage of at least $100,000.

Collision and Comprehensive Coverage

When folks think of car insurance, this is the coverage most people think about. This is the coverage that the bank or finance company for your car loan wants to make sure is on your car to protect the value of the vehicle if the car is damaged in an accident, especially one that was your fault. Look at the details of this coverage really carefully. Most insurance companies will only insure the current market value of your car—regardless of the balance of your car loan. This means that your new car could be a total loss in an accident and you are surprised to find out that you will not get enough money back from your insurance company even to pay off your car loan. Work the numbers very carefully when you are deciding the amount of collision coverage for your car. Shop different insurance companies that may offer you different options to cover your car's car loan balance—or even cover the cost of a replacement vehicle.

Recommendation: collision coverage sufficient to allow you to buy another car if your car is totaled

Medical Payments Coverage

If you are injured in a car accident, even if it was the fault of the other driver, you are responsible to pay your own medical bills as they are incurred. The other driver's car insurance may make a one-time lump sum settlement with you sometime in the future that will pay you back for those medical expenses, but that payment comes only after you are recovered from your injuries—maybe a year or more after the accident. Meanwhile, the bills pile up and you have to pay them on time, or risk lowering your credit score as those bills go into collections.

Medical payments coverage ("med pay") is basic to any car insurance policy and, unless you have lots of money lying around, is absolutely necessary for everyone to purchase. Purchasing med pay coverage is important even if you have health insurance or you are on Medicare. All health insurance plans now have deductibles of $3,000 to $5,000. Even if you are past your deductible, or are on Medicare, your medical bills from a car accident aren't paid 100% and you will still have a significant co-pay for much treatment you receive. The medical treatment for most auto injuries will cost between $3,000 and $5,000 (unless you are taken by ambulance to the Emergency Room, which can eat that amount up in one ride and one visit). Med pay has no deductibles and no co-pays. It pays 100% of all reasonable and necessary medical treatment (including chiropractic) needed for your auto injuries.

Colorado law requires the car insurance company to offer a minimum of $5,000 in med pay coverage, but many decline the coverage. The cost is minimal compared to the benefits it provides. No one who has been injured in a car accident, and then finds out that they declined the med pay coverage, is happy that they did.

Recommendation: Medical payments coverage ("med pay") of at least $5,000

Uninsured Motorist Coverage

It is estimated that one in four drivers (about 25%) do not have car insurance in Colorado. Even more drivers carry only the "minimum" liability coverage of $25,000 just to stay legal, as discussed above. By their very numbers, these drivers cause a high percentage of car accidents. In other words, it is very likely that if you are injured in a car accident by another driver, that driver is either uninsured or underinsured.

The car insurance company must sell you liability insurance. It is not required to include uninsured (which includes underinsured) motorist coverage in the insurance it sells you if you decline that coverage in writing. Why would anyone decline coverage that protects themselves and their passengers for an auto injury but buy liability coverage to make sure that someone they hurt is paid? Often, this coverage is declined because the customer doesn't understand what it is for and why it is so necessary in Colorado.

If you are hurt in a car accident that was the other driver's fault, and that striking driver was uninsured, without uninsured motorist coverage you will receive nothing for your injuries—no matter how catastrophic those injuries may be. Nothing. Uninsured motorist coverage insures you and your passengers from uninsured drivers.

If you are hurt in a car accident that was the other driver's fault, and that driver had only the "minimum" $25,000 in liability coverage, without uninsured motorist coverage the most compensation you can get for your injuries is $25,000-- no matter how catastrophic those injuries may be. Uninsured motorist coverage also insures you and your passengers from drivers who carry insufficient insurance to pay for the damages that they cause.

Don't decline the insurance. Don't agree to uninsured motorist coverage that is less than your liability limits.

Recommendation: Accept uninsured motorist coverage on your car insurance policy in the same amount as your liability coverage. (If your liability coverage is $100,000, the uninsured motorist coverage should be $100,000 also.)

Umbrella Coverage

This kind of car insurance is the best-kept secret in the insurance business. If you have assets (or high wages) that need protection from a person that you injured in a car accident, you can buy "umbrella coverage" that operates as excess liability coverage to pay claims that are more than your underlying car insurance coverage. Because these high dollar claims are so rare, the risk is very low that the insurance company would ever have to pay under this coverage—and that means that this coverage is very, very inexpensive. Perhaps you just paid off your home (or are very close to doing so). This is an asset that is probably worth more than a quarter of a million dollars. It should be protected with inexpensive umbrella coverage—and you will sleep better at night. Umbrella coverage is typically $1 million, but can be less or more.

Each insurance company has a different formula for how much underlying liability coverage you need to have in order to purchase its umbrella policy. Purchasing the minimum underlying liability coverage to qualify to purchase an umbrella policy with the same company can be a cost-effective way to maximize your liability coverage at a minimum cost. (But be aware that you cannot purchase uninsured motorist coverage in an amount that exceeds your liability coverage, so you will need to weigh that as a factor to determine the amount of your underlying coverage that will qualify you for umbrella coverage.)

Recommendation: Purchase car insurance with at least $100,000 of basic liability coverage to qualify you to buy the minimum umbrella coverage offered by the insurance company (as well as purchasing uninsured motorist coverage in the same amount as the liability coverage).

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