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Evaluating and Comparing Automobile Insurance Policies
What is it?
The primary function of auto insurance (like any insurance)
is to protect your assets. The liability coverage provided
through your personal auto policy (PAP) is required coverage
in most states. Auto insurance protects you in many other
ways as well. You can insure the value of your car, protect
yourself against uninsured motorists, and purchase rental
reimbursement insurance. Your auto insurance choices are
covered at length in Premiums and Coverage.
Before purchasing auto insurance, you should evaluate and
compare the various products offered. In addition, because
your personal and financial obligations change, you will
occasionally need to review your PAP to ensure that it
adequately meets your needs. If it doesn't, you may have to
modify or replace your policy.
Evaluating your auto insurance
How much insurance do you need?
Covering your legal liability is the single greatest auto
insurance concern. Lawsuits and claims are being filed more
frequently than in the past, and the cost of defending
yourself may be high. If you don't have adequate liability
insurance as part of your PAP, you may be left in a position
where the amount you owe exceeds your insurance coverage. If
this happens, you are personally responsible for any amount
that is above and beyond the limit of your coverage. If you
don't have the money to pay those damages, your assets and
future earnings can be legally seized, subject to some legal
restrictions.
Many experts recommend purchasing bodily injury coverage of
$100,000 per person and $300,000 per accident. Property
damage coverage should be no less than $25,000. Depending on
the value of your assets, you may need more or less
coverage. In addition to liability protection, the PAP
contains many different coverage options. See Premiums and
Coverage for more information. Because there's no optimum
amount for every individual, how much auto insurance you
need depends partly on your tolerance for risk. Can you
afford to pay the cost of a claim out-of-pocket, or would
even a small claim threaten your finances? If you already
have an auto policy, take a look at your current policy.
Determine whether your liability limits are high enough,
whether your vehicle is adequately protected, or if there
are any coverage gaps you'd like to fill. Your insurance
company can recommend the liability and physical damage
limits you should carry to adequately protect yourself and
your property.
Minimum requirements
The amount of auto insurance you carry may not be completely
up to you. First, the state in which you live may require
that you purchase coverage with certain minimal liability
limits. Second, the financial institution that holds the
lien on your car may also require that you purchase a
certain amount of collision and comprehensive coverage.
Evaluate the coverage you already have
Before buying new or additional coverage, review the
coverage you already have. It's a good idea to sit down with
your insurance agent or financial advisor to look over your
auto policy. Talk about your current and future insurance
needs. You may be able to increase your liability coverage
or make limited changes to an existing policy if you find
that the coverage you have is inadequate. There may also be
occasions when you need to purchase an entirely new policy.
Events that trigger a review of your auto insurance
The following is a list of some common events that should
trigger a review of your personal auto policy:
·
Your annual policy is up for renewal--If you're like most
people, your PAP is issued on a yearly basis. Before you
renew your policy, you should take the time to review it and
make any necessary changes. For example, collision coverage
may become less necessary as the value of your vehicle
decreases. The day the quote from your current insurer comes
(usually a month or so before your policy expires) is an
ideal time to shop around and compare the rates of other
insurers.
·
Your family status changes--Because the PAP covers not only
you but frequently family members who live with you, it's
time to review your PAP when you get married, get divorced,
are widowed, have children reaching driving age, or become
an empty nester. You may become more concerned about
protecting assets after you get married, or you may wish to
purchase more liability coverage (or collision) after your
son or daughter gets a driver's license.
·
Your property increases in value--Your home is your most
valuable asset. Without adequate auto liability protection,
your home could be seized to pay a judgment against you. As
the value or the equity in your home increases, so too does
the amount of protection you need. Purchasing additional
liability coverage can provide that protection.
·
Your net worth increases--As your net worth increases, you
will have more assets to protect, and you may become more
and more concerned about protecting those assets. It's an
unfortunate fact, too, that wealthy people are sometimes
targeted for lawsuits. Increased liability coverage can,
again, help you protect these assets.
·
You buy a new (or additional) car--When you buy a car,
you'll need to change your automobile policy to insure it.
Take a few minutes to review your liability coverage under
that policy, and make sure that your liability limits are
still adequate. It's also a good time to make a few calls to
other insurers and compare your current insurance company's
price.
Comparing auto insurance policies--policy terms and
conditions
The main objective when buying any type of insurance is to
buy coverage that will insure you adequately. However, for
most people, price is also a factor. It may even be a big
factor. Insurers evaluate risk factors differently. In
states that do not have standardized rates, it's not
uncommon for one company to charge significantly more than
another company for the same coverage. Shopping around for
the best rates can really pay off.
Although automobile insurance policies are standardized to a
certain extent, it's still important to compare policies in
terms of price, coverage, exclusions, and the reputation of
the insurance company. When comparing auto policies and
coverages, here are some points to consider:
·
Shop around--Check with some of the larger carriers in the
market. They will give you a basis to compare coverage and
cost. Don't forget about quote services that will give you
several quotes over the phone or on-line, making it easy to
compare policies.
·
Make sure you are comparing similar policies--You can't
fairly weigh one policy against another unless you are
comparing similar policies. Before you compare auto policies
or coverages, decide which coverages you need, what
deductible you would like to have (usually the higher the
deductible, the lower the cost), and what limit of liability
you would like to carry. In addition, determine whether the
policies you are comparing contain similar coverage
provisions and exclusions.
·
Weigh the policy cost against coverage and service
provided--When buying auto insurance, your goal should be to
buy the best-quality coverage offered that will adequately
protect you at a price you can afford. First, review each
policy carefully to determine what coverages it offers and
what things are excluded from coverage, and then determine
if they meet your needs. If the policies are standard forms,
you may not find much difference from one policy to the
next, but you may find that one policy may include a type of
coverage as standard that another policy offers only as an
option. This may affect the premium you pay. In addition,
each insurance company is allowed to set its own rates,
within limits, and you may find that coverage at company A
might simply cost more than the same or similar coverage at
company B. As mentioned, prices for the same coverage can
vary widely. However, price should not be your only concern.
For instance, the premium that company A charges may be
higher than the premium company B charges, but company A may
be the company you want as your insurer because you've had a
good experience with them, or because they have a good
reputation in the industry. Finally, you may be satisfied
with the service you receive at your current insurance
company and may want to continue doing business there. You
may even find that the premium you pay will be less if you
own multiple policies with the same company.
·
Evaluate the strength and reputation of the insurance
company--It's important to buy auto insurance from a
financially sound, reputable insurance company. You (or your
insurance agent) may rely on the ratings published by one of
several companies, such as A. M. Best, Moody's, Standard &
Poor's, and Fitch (formerly Duff & Phelps). These ratings
can tell you how financially sound an insurance company is.
In addition, try to find out something about the
claims-paying practices of the insurance company by talking
to your agent or any friends or family members who may have
dealt with the company in the past. Does the company settle
claims quickly? Does it refuse to pay certain claims? Does
the company have a good reputation in the industry? These
intangibles can be very important to your overall
satisfaction with the insurance company.
Why conserve, rather than replace, your existing auto
policy?
Because it wouldn't be cost effective to replace your
existing coverage
Sometimes, after evaluating your existing PAP and comparing
it to other policies out there, you may conclude that
replacing existing coverage would not be cost effective.
First, the new coverage offered might be more expensive (or
not substantially less expensive) than the coverage you
already own. Second, if you are replacing coverage to lower
the cost, you may end up with a policy that offers less
protection than you really need.
Because your policy adequately meets your needs
After analyzing your auto insurance needs, you may conclude
that your coverage is adequate. After comparing your policy
to those offered by different companies, you may decide that
your policy is fine.
Because you only need to make limited changes
Unless you have a good reason to replace your existing auto
coverage, don't. The benefit you receive by being a steady
customer may outweigh, for instance, the slightly cheaper
rates that the new company has offered you, not to mention
the time and effort it takes to change your policy.
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provides legal, taxation, or investment advice. All content
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