Auto insurance is a necessity of life that most people spend very little time thinking about until they have an accident. Kim and I have reviewed a lot of policies over the years and have seen quite a bit of confusion. This is our guide to what you should and should not pay for on your auto insurance policy.
Liability policy limits are the most important type of coverage and will pay for the injuries and property of others outside your vehicle if you cause an accident. You might see them displayed like this:
The first number in the series is how much the insurance policy will pay for bodily injury per person per accident. The second number is the total the policy will pay for all bodily injury per accident. The last number is how much property damage your policy will pay to other vehicles or property that you damage. The first two sets of numbers above are the highest levels of coverage that most companies offer. The third set is the state minimum you are legally required to have in Texas.
Insurance is a wonderful invention that allows you to offload substantial risk in your life for an affordable annual premium. It helps restore the injured party in an accident and helps the insured protect their assets. Can you imagine the lawsuits we would have if there were no auto insurance? Unfortunately many people do not realize they don’t have enough liability coverage until it is too late.
Far too many people try to save money by getting the state minimum amounts of coverage and then get sued for their personal assets once the insurance money is exhausted. $30,000 for pain and suffering, lost wages, and hospital bills per person is grossly inadequate with the cost of health care today. $100,000 is too!
Some people would say the minimums are fine if you don’t have assets that lawyers could go after. I strongly reject this notion. How would you feel if your child caused permanent injury to someone and your insurance only compensated them $50,000? You can’t fix someone’s injury or pain and suffering, but by missing a few dinners per year out, you can at least buy a much bigger pot of money to be available to help ease someone else’s burden in a future accident.
We always recommend getting the maximum liability limits on auto insurance by going with $250k/$500k/$100k or a $500,000 combined single limit (CSL) policy. The CSL policy will cost a little more, but it provides better coverage in case you go over any of your single limits. For example, you may cause $300,000 of bodily injury to one person or you may total a $250,000 Ferrari. The CSL policy would cover the above examples, where where the split limit policy would be insufficient. Many people are not aware that there is no deductible for damage caused to others or their property and these limits pay ON TOP of the legal expenses incurred by your auto insurance company.
Most people should also have at least a $1 million umbrella policy that will pay on top of the liability of their car insurance or home owners insurance.
These limits are displayed like the policy limits above and Texas does not mandate that you have them. This section of your policy covers you when someone else hurts you, your passengers, or damages your vehicle and property in your vehicle and they do not have insurance or do not have sufficient insurance or assets to make you whole.
This coverage is inexpensive and worth having on your vehicle. Many people who are driving $20,000 vehicles have $100,000 of property damage included. We recommend matching the property coverage with what your vehicle is worth. Texas law requires you to have a $250 deductible for this coverage.
Most people will see a deductible on their declaration pages for comprehensive and collision. Comprehensive coverage covers non-collision claims to your vehicle like vandalism, a fire, a tree limb or hail falling on your car, theft, and hitting an animal while driving.
Collision damage is coverage for your vehicle if you roll it, hit a tree, or hit another vehicle. Both of these types of coverage pay actual cash value which is essentially what it costs to repair your vehicle up to the value of your used vehicle.
There are two issues we see when it comes to comprehensive/collision insurance. The first glaring one is that we often see people with a deductible of $250 or $500 for this coverage. Having a cash reserve is the first step in financial planning. If you don’t have $10,000 or more in a liquid bank account, that should be your number one financial goal. You need to be able to afford a $1,000 deductible and whatever your health insurance deductible is and have money you can get to in case of a home repair or a loss of your job. Raising your deductible will lower your premiums and you NEVER WANT TO make a claim on your insurance for less than $1,000.
An at-fault accident in Texas will stay on your record for five years and you will often lose discounts like being accident-free and the good driver discount in addition to seeing substantial increases in your premium. Paying higher rates for five years is usually more expensive than the $1,000 you might have been paid by the insurance company. It also will limit your ability to switch for a good price to another insurance carrier.
The last reason to think twice about making a small claim is that you might get into a second accident in five years that would skyrocket your premiums and you could potentially be dropped by your carrier and forced to go into the State Insurance Pool where you will pay an arm and a leg for poor coverage.
What is Your Car Worth?
The second issue to think about when it comes to comprehensive/collision insurance is the value of your vehicle. Since we recommend a $1,000 deductible, you may decide to drop this coverage all together if your vehicle is worth $2,000 or less. I sold my last car for only $1,200 when it had 240,000 miles on it. It made zero sense for me to pay for collision/comprehensive since the insurance company might have given me only $1,200 after I paid my $1,000 deductible.
Personal Injury Protection (PIP)
Personal Injury Protection is a no-fault claim that usually pays for medical expenses and lost wages for the driver and their passengers. Agents recommend it so you have money to pay your medical bills before you have hit the deductible on your medical insurance.
Texas requires it to be offered, but I recommend rejecting it. My reason’s are two-fold. The first reason is the basic idea that you should build a cash reserve and self-insure all the small things in life. If you bought insurance and an extended warranty on your vehicles, appliances and electronics, you would be paying hundreds if not thousands per year. You should self-insure on the small things and buy insurance to cover the really big things.
The second reason to reject PIP is that it is extremely expensive compared to liability insurance. I am reviewing a policy now that has $2,525 of PIP coverage for $22 per year. The same policy provides $250k/$500k/$100k of liability coverage for $231 per year. The PIP costs $8.71 per thousand of insurance while the the liability works out to be only $.924/thousand ($231/$250).
There are all sorts of other tricks that a good insurance agent can use to help you find the best auto insurance policy for your needs. It usually saves you about 5% to pay your entire annual premium up front. Since you aren’t making 5% from your savings account, this is a no-brainer. If you are into credit card points, you will be happy to know that several companies don’t charge higher premiums if you pay via credit card.
There are also discounts for low mileage, multiple policies, B average students, and certain jobs. Always take the time to tell your agent everything you can and ask if they are aware of any other discounts that you might qualify for.
Lastly, some auto insurance companies will give you a discount if you allow them to install a tracking device on your vehicle for 1-6 months. Insurers are looking for how many miles you drive, what time you are driving, and how hard you break and accelerate. Be careful here: some companies can raise your rates once they realize how lousy of a driver you are. Good drivers can see substantially lower rates.
The last thing to know about car insurance is that actuaries are some of the smartest people in the world. They will offer you a low rate to get your business and then increase the rate just enough each year where most people will not take the time to switch. If you are accident free and have had the same policy for 4 or more years, you are probably no longer paying a competitive rate.
It is important to work with an independent insurance agent that can shop your policy every few years for you. We switched insurance carriers for our home and auto this year and saved $1,800 per year. Over a life-time, that will add up to a lot of money.
In an effort to better serve our clients and help them outsource more of thier financial lives, we are now independent property and casualty agents. We have teamed up with The Woodlands Financial Group where we have contracts with many of the best insurance companies.
If you would like us to review your home and auto insurance, we need your declaration pages and the birthdays and driver’s license numbers of all drivers. You can reach Kim at 214-587-7885 or firstname.lastname@example.org if you would like to learn more.