Understanding Insurance: Coverage for Drivers

Car Wreck

If you’ve ever had a fender-bender, then you probably know: Even a small amount of auto damage can amount to huge sums of money in repair costs.

Modern automobiles are among the most amazing machines ever built, and the value that they add to our lives is absolutely incredible. In about 100 years’ time, cars have changed the face of modern society. But with these incredible machines come incredible cost and incredible destructive power. If you’re going to drive a car, you need to protect yourself against that risks that come with that power and cost. You need auto insurance.

Insurance can be one of the most misunderstood financial products in the marketplace today, but it is also one of the most necessary to have a peaceful, prosperous financial life. In this series, Understanding Insurance, we’ve talked about philosophical ideas such as the the fundamentals of risk, as well as practical matters like how to approach health insurance. Today we’re taking a look at a topic that is critical for any driver: Auto insurance.

Auto insurance is necessary because the potential costs of driving a car are enormous. Most of those potential costs come in accidents. Even a slow-speed accident that does minor damage to the body of a car can be very costly to fix. Body shops charge incredibly high rates for their work, making a simple body panel repair cost thousands of dollars. And the risks of driving go up from there: A higher-speed wreck can destroy a car completely, and sometimes accidents unfortunately cause bodily harm to people. And even if you don’t hurt other people, it’s possible for you to damage someone else’s property with your car.

The costs of replacing property or providing medical care for accident victims can easily climb into hundreds of thousands of dollars — money that you certainly don’t have to spare. That’s where auto insurance comes into play: Auto insurance protects you, your passengers and other motorists from the financial risks that come from driving a car. If you have an auto accident, you probably can’t afford to pay for all of the damages out of pocket. So you pay an insurance company monthly to assume that risk on your behalf.

Fortunately, auto insurance isn’t just a voluntary thing: Every state in America requires drivers to be insured in order to operate a vehicle on public roads (as does the rest of the developed world). State laws set minimums for the amount of coverage that a driver must have, and a number of insurance companies have built their business on offering legal-minimum insurance at rock-bottom prices.

It’s great that laws require a minimum amount of insurance, but you shouldn’t let the state’s minimum be your starting place for auto coverage. You see, the minimums mandated by the law exist only to pay for damage that you do to other people’s cars, health or properties. If you hit another car, the minimum insurance will pay to repair the other driver’s property. But it won’t pay for yours — if you wreck your own car, you’re entirely out of luck.

What that means is that you need to carry more than the state-minimum insurance. One split-second accident can destroy a car that’s worth thousands of dollars, leaving you thousands of dollars poorer if you don’t have proper coverage. You need to carry enough insurance to replace your car in case of an accident that is your fault. This will be more expensive than the legal-minimum coverage, but it’s money very well spent. With this kind of insurance (often known as “comprehensive” coverage), you’re never at risk of losing thousands of dollars in the blink of an eye. Even if a wreck is your fault, your insurance coverage will give you enough money to go buy another car.

Of course, your insurance is probably not going to replace the full value of the car that you wreck. Just like most other kinds of insurance, auto policies come with a deductible. If your policy has a $1,000 deductible, you’re responsible for the first $1,000 in repair or replacement costs, and then your insurance kicks in to cover anything over that amount. Deductibles can vary widely. The higher your deductible, the lower your monthly cost of insurance will be, and vice-versa. If you have a good emergency fund, you can save money on insurance by carrying high-deductible coverage, because you have enough money in savings to cover that deductible in case of a wreck.

It’s also wise to pay a little bit more for what’s called “uninsured or under-insured driver coverage.” You see, although laws require that all drivers carry insurance, the reality is that many people drive without insurance. Some people may have cut-rate insurance with policies that don’t pay enough to fix the damage that they do to your vehicle. If you get hit by someone with insufficient coverage, your only way to get them to pay is to sue them. But if they couldn’t afford to buy good insurance, they probably don’t have any money for the court to take and give to you.

Your regular insurance policy isn’t going to pay for someone else’s damage… unless you pay extra for the uninsured driver coverage. It only costs a few dollars more per month to add this to your insurance policy, and it’s money very well spent. If you have this addition to your coverage, your insurance company will pay to make you whole after a wreck caused by a driver with insufficient insurance.

There are many other factors that affect your auto insurance policy, and you should work with an agent that you trust to work out the best policy for you. Remember, it’s always better to cover yourself than to leave a part of your financial life exposed to risk. In our modern world, auto insurance is one of the most important protections you can have.

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Photo by Marit & Toomas Hinnosaar. Used under Creative Commons License.