When to Reduce Your Car Insurance Coverage
Every state has minimum insurance requirements for car owners, specifically bodily injury and property damage liability. Whatever the minimums are, your insurance has to cover them no matter what, but as your car ages, you may consider scaling back on your coverage to save money.
But when is the right time? Preferably when the math works out in your favor, so that you trade off the money you save on your premium for more risk but at a lower cost than when your car was new. The following is a rough guide on car insurance coverage that you can use to determine what is appropriate for you and your vehicle. Fresh off the lot If you are financing your car, the lender will require that you carry collision and comprehensive coverage. But even if you paid cash for that new car, it behoves you to carry the same coverage. Comprehensive coverage covers anything that might happen to your car, like hail damage, if someone hits your vehicle in a parking lot and runs, or if it is vandalized. In this case, the insurance covers the value of the damage (minus your deductible). Collision is almost the same as comprehensive, except that it covers any damage to your vehicle that’s your fault, like backing into a tree. If you really want to be covered all the way for that new car, you can also buy gap insurance. A gap policy will make up the difference between what your insurance policy may deem the value of your car to be if it is totaled, and what you still owe the lender. Close to paying off your loan (car 2-5 years old) If you are close to paying off your loan, you may want to consider dropping gap coverage as most certainly the car is worth more than what you owe. Once you pay off the loan, if it’s still between two and five years old you should keep comprehensive and collision coverage, as you would still be out of pocket considerably if it is totaled due to your own negligence or stolen and not recovered. Six to 11 years old At this point, you may want to consider getting rid of your comprehensive coverage. But before you do that, you should determine what your car is worth in the resale market, using the Kelley Blue Book or Edmunds.com. Whatever is in the Kelley Blue Book is what your insurer would pay you if the car is totaled. Would you be okay losing that much if your car is totaled or stolen, or if it suffers significant damage that was your fault? Compare how much you save every month with that figure and determine for yourself if dropping comprehensive and collision coverage is worth it. Twelve years and older If you’re still paying full coverage at this point, the value of your vehicle may no longer be worth the burden of the higher premium. One option is to ditch collision coverage, which tends to be more expensive, but keep comprehensive, which will still cover your vehicle in case of that parking lot hit-and-run and theft.
Umbrella Coverage and How to File a Claim
WHEN YOU are deemed at fault for an accident your liability coverage can protect you.
But what if your liability coverage is not enough to cover the cost of damages or litigation? This is where umbrella insurance comes to the fore. If costs associated with an accident or injury exceed your normal liability coverage, the injured party may opt to file an umbrella insurance claim to collect additional funds. What’s umbrella coverage? Your auto insurance, homeowner’s insurance or renter’s insurance all have standard liability caps built into them. You may even have a liability policy for your motorcycle, boat or RV. An umbrella policy serves as a backstop. And like an open umbrella it spreads out a second layer of protection for all of your liability policies. Umbrella insurance coverage increases the liability limits on your home, auto, boat or RV insurance, but also provides a much broader form of coverage. Umbrella insurance claims If you are responsible for severe injury or property damage to another person and you are sued, the umbrella insurance claim will be filed against you, the policyholder. Only after your other liability limits have been exhausted will your umbrella policy begin to pay for the damage or injury you caused. Covered Claims Umbrella insurance can cover large claims if you cause bodily injury or property damage to someone else. There are multiple ways you can be held liable and be in a position to pay damages, such as: • You cause a serious car crash. Multiple people have injuries and the property damage is extensive. You are sued for medical bills and car repair. • You have a party at your house and someone is injured. That person is hospitalized and out of work for a month or more. • A moment of inattention while you adjust a radio station results in an accident with a cargo van carrying $500,000 worth of electrical equipment, all of which is destroyed in the crash. • Your teenager is driving a friend’s car and crashes, injuring the other passengers. • You’re accused of verbally assaulting someone and they sue for emotional duress. ASSETS AT RISK Without an umbrella policy, if you are faced with a claim that exceeds your policy limits, you can be sued, putting all of the following at risk: • Your personal property • Your real estate • Your investments • Your retirement accounts • Your liquid assets • Your future income HOW IT WORKS Let’s say that your auto insurance and homeowner’s policies both have liability coverage in the amount of $300,000, and both policies have a deductible of $1,000. You also have an umbrella policy for $1 million with a deductible of $300,000. You cause a serious car accident and get sued for $1 million. You pay your auto policy deductible of $1,000 and your auto liability pays the remaining $299,000. After that, since you have met your $300,000 deductible for your umbrella policy, it pays the remaining balance of $700,000. The key here is to make sure there isn’t a significant gap between your liability coverage amounts and your umbrella policy deductible, as that money will come out of your pocket.