What is Insurance?
Let’s start with what insurance is and why it came to exist. Insurance helps you cover the cost to recoup lost items that are so expensive they’d be hard for you to replace on your own such as a house or a car. An insurance company requires that you pay a monthly, quarterly or yearly premium monthly to cover your belongings. They spread the risk over multiple clients who also pay premiums to the company so that if your $300,000 house were to burn down, they would cover the replacement costs. Hopefully, not everybody’s house burns down at the same time, or else the insurance company wouldn’t be able to cover the loss from clients’ premiums.
Why Talk about Auto Insurance?
Many people are underinsured when it comes to auto insurance. When we think about the cost of auto insurance, we tend to believe that we don’t want to pay more than we have to. However, the minimums aren’t that high, so we leave ourselves pretty vulnerable to paying cash if we are underinsured. Often, we can be more underinsured than we think.
There are three main parts to auto insurance:
Bodily injury liability
This includes any damage you have to yourself or the driver or occupants of any other vehicle. If the accident is your fault, medical expenses would be one thing you would be responsible for, covered by your auto insurance policy.
Property damage liability
This includes, most obviously, the other driver’s car. But also, let’s say that you sideswiped someone’s car and then hit a telephone pole. You would be responsible for replacing the telephone pole. Because it’s property, it could be covered by your insurance depending on how much you pay for coverage with your auto insurance company.
Underinsured or uninsured motorist coverage
This helps protect you if another driver hits you and is uninsured or underinsured. This type of insurance is imperative because the uninsured or underinsured motorist most likely wouldn’t be able to pay for the costs out of pocket and don’t have insurance to do so on their behalf. The Insurance Research Council (IRC) states that one in eight drivers, or 12.6 percent, are uninsured.
Here’s Why You Need (More) Auto Insurance
Let’s imagine that you’re driving and you hit another motorist, and it totals their car, and that motorist happens to be a doctor, a lawyer or someone who makes a healthy income. This motorist makes $300,000 a year, the Porsche you hit costs $100,000, and the medical expenses they had as a result of the crash also cost $100,000. Let’s assume that the $100,000 in medical bills for the motorist means that the injury was bad enough that they couldn’t work for a year. That motorist could sue your auto insurance for lost wages in addition to the bodily injury and the $100,000 to replace their Porsche. So if that doctor makes $300,000 a year, that means you’re on the hook for $500,000.
This example may seem extreme, but it’s to show the disparities between what you’re covered for and what the possibilities are. Be sure to check the minimums that most insurance policies provide. The minimum insurance for most states is not more than $100,000, $50,000 or only $25,0000 in some states. If you only had $100,000 in total coverage on your plan, and that previous scenario happened, you could be on the hook for the remaining $400,000. Your employer could garnish your wages. It is not a situation you want to be in. So, it’s essential to talk to an insurance agent you trust to help you figure out the right amount of coverage. Determine together how much more it costs to get that extra level of coverage and peace of mind that comes with it.
This post was adapted from an episode of the Fireside Financials series. If you’d like to check out the video, you can watch it here!