understanding gift tax

Your Guide to Auto Insurance

The saying should be: death, taxes, and auto insurance the only three certainties in life.

If you have a car, you are going to need some type of auto insurance it’s the law. What type of auto insurance should you get and at what coverages can be the real question.

Most states will have their own rules about the minimum type of coverage and amounts you should get but there are some consistencies that we can talk about here. States will also only require the bare minimum coverage, which may be fine in certain situations but will leave some risks open for you to deal with.

Understanding Risk

Life is risky. Plain and simple.

The risk of falling and getting hurt while walking down the street, to the risk of your house catching up fire in the middle of the night. Life is constantly throwing these little “surprises” at you. These risks can cause little to no financial strain or they can place you in bankruptcy.

Managing risks involves a bit of planning to identify the areas where you are vulnerable and then finding a solution to eliminate the vulnerabilities. Solutions range from reducing, avoidance, buying insurance, or self-insuring/retaining.

One of the easiest ways to guard against these risks is through the purchase of insurance. You can get insurance to protect against most things these days, from house fires and earthquakes to terrorist attacks.

Buying insurance for every little possibility to happen in life is a good way to run out of cash quickly. Insurance should be used to protect against high severity risks. High severity risks, whether they are common or not, have the potential to be catastrophic to your finances. Items like fires, natural disasters, and lawsuits all fall under high severity risks.

When driving a 3,000+ pound vehicle down the road, the opportunity for serious damage is always present. The ability to not only hurt yourself, but others and property is a real concern. Financial loss can include property damage, medical bills, and legal fees.

Liability Coverage

All states are going to require you to have liability coverage on your vehicle. Liability is meant to cover the people in the car with you, and everyone else that may be involved in the accident. Liability coverage does not cover you or your vehicle. If you are found at-fault for the accident, this part of the insurance will kick in to help. If someone else is at-fault for the accident, their liability insurance will kick in to pay for you, your passengers, and the damage to your car.

Bodily injury liability pays when the people in your car and the people apart of the accident get hurt. This insurance protects against their claims for damage, medical expenses, lost wages, and pain and suffering.

Property damage liability insurance pays for the property you damage when you are at-fault in the accident. The car or cars you hit, buildings, fences, mailboxes, etc. are all made whole again by the property damage liability coverage.

Uninsured motorist coverage is also a coverage that is frequently required from states. Even though liability insurance is required in all states, a lot of drivers are still driving without it. This can leave a lot of people vulnerable if there is an accident, especially if someone in your party gets hurt. Uninsured motorist coverage will also step in if there is a hit and run situation. Uninsured motorist coverage is you buying the required liability coverage the other driver is supposed to have.

There is also underinsured motorist coverage. This coverage steps in when the person at-fault doesn’t have enough liability coverage to handle the situation. There are limits to liability and if the accident is severe enough, it could max out those limits rather quickly. Now there are ways to get more money from the underinsured, such as suing them. However, sometimes you need the money quickly and don’t have time to take them to court first.

You will typically see the amount of liability insurance you have purchased written as 150/300/50.

That means you have $150,000 of bodily liability insurance, $300,000 of total bodily liability insurance per accident, and $50,000 of property damage liability per accident.

Texas requires you to have 30/60/25 coverage, or $30,000 of bodily liability insurance, $60,000 of total bodily liability insurance per accident, and $25,000 of property damage liability per accident. This is the minimum amount, but you should not stop at the minimum amount.

How much does it cost for a brand-new car? Do you think it costs more than $25,000? If you are at-fault and total the other person’s car, you will need your property damage liability to kick in. If you total their brand-new car worth more than $25,000 you will be on the hook for the difference. What happens if you total more than one car, or there are multiple cars in the accident?

Collision and Comprehensive Auto Coverage

Collision and comprehensive coverage are all about making you whole again.

Collision coverage will repair or replace your car if you damage it hitting another car or object and are found at-fault. If you are not at-fault, the other person’s liability coverage will pay to fix your car.

The amount of coverage offered will be based on the car you have insured. That is the nice part about collision and comprehensive coverage, the insurance company knows what vehicle is being insured and can properly cover it.

Comprehensive coverage is going to cover your car if something happens to it that wasn’t the result of an accident. If your car is stolen, damaged by fire, flood, or vandalism it will be covered under comprehensive coverage.

How Much Insurance Coverage Do You Need

Deciding on how much auto insurance to buy is the ultimate question. On the one hand you don’t want to overpay and carry too much coverage. This will cause you to pay more annually and will eat away at your cash flow. On the other hand, you don’t want to carry to little and open yourself up for a lawsuit. Paying medical, property damage, and legal fees out of your own pocket is a great way to drain your bank account.

You never want to think that you can’t be at-fault for an accident. No matter how good your driving record is, accident happen all the time. Carrying lower amounts of coverage because you think you will never have to pay is not a good way to minimize your risk.

The first item you want to look at is your current vehicle. Is it worth it to carry collision and comprehensive coverage on that vehicle? Some vehicles may be such low value that it wouldn’t be worth the extra money to repair or replace your car if you are at-fault.

You may have enough money in the bank to put down a down payment on another car if something were to happen to your current vehicle.

When deciding on liability coverage, more is always better. It is always better to have too much versus too little. The other person seeking the money is not going to get by on just the limits of your insurance, if they require more, they will sue you for the rest.

The nice part about liability insurance is that it doesn’t cost a ton extra to increase your limits. Insurance companies know that the probability of getting into an accident is high, but the probability of maxing out your liability coverage is low.

You should really carry a minimum of 100/300/100 for liability insurance. Ideally, we like to see 250/500/250 coverage for liability. Again, you want to err on the side of caution, it is better to have too much liability insurance. You may want to increase those limits depending on the situation in your household. Do you have people that tend to get distracted and into accidents more easily? Do you have new drivers getting on the road for the first time? Do you typically carry minivans and SUVs with a lot of people?

If the increase in cost due to the increase in liability insurance is too much, consider raising your deductible for the collision and comprehensive coverage.

There is no deductible for liability, since that covers the other person and their car. When you are trying to cover your own vehicle there is a deductible. The deductible is typically $500 and is paid per incident. Unlike a medical deductible that resets every year, this one resets every accident. If you increase your deductible to $1,000, it will lower the price of your coverage, allowing you to spend that money on additional liability.

Gap Insurance

Collision and comprehensive coverage only cover the market value of the vehicle, not how much you owe on it. If your vehicle is currently worth $10,000 but you owe $15,000 you are underwater on your loan. If you were to wreck the vehicle, you would receive $10,000 but would be on the line to cover the remaining $5,000 on the loan.

Gap insurance is used to cover the gap between those two amounts. If you had gap insurance in the above scenario, your loan would be paid off. You wouldn’t receive any money, but you wouldn’t have to spend money out of your pocket to pay off the loan.

We recommend getting gap insurance if you owe more than the vehicle is worth. You don’t want to compound a bad situation by owing additional money on a car you can no longer drive.

Extras to Sweeten the Pot

With insurance you can always add on additional riders to make the policy have more benefits, but they do come at a cost. Three of the most common additions to an insurance policy is rental reimbursement, roadside assistance, and glass coverage.

Rental reimbursement covers the cost of a rental car if your vehicle is in an accident and can’t be used. This great for making sure there isn’t a lot of disruption in your day-to-day when your car is totaled or in the shop. It can take awhile to get a car back from the shop, so the rental helps. Rental coverage is usually for a cheaper rental, but you can always pay the additional to get a different rental car.

Roadside assistance helps you when you break down on the road. It doesn’t matter if you ran out of gas or had a flat tire, rental assistance will come out and help you get your car home. They will also cover things like have your car towed to a near by shop or getting your battery jumped. A lot of times you can get additional roadside assistance from a company like AAA, so be careful doubling up on assistance and costs.

There isn’t a person that drives that hasn’t suffered the pain and anguish of watching their beautiful windshield crack and splinter as road debris comes flying at you. You can always get your window replaced under the comprehensive coverage you have, but you will be subject to the deductible. At $500 or $1000 for the deductible, you can find the new windshield isn’t worth it. A lot of insurance companies will offer additional windshield coverage that will allow you to get your window fixed without a deductible.

How Companies Decide What to Charge You

Most companies will consider multiple factors when deciding on what to charge you. Everything from who in the household can drive, to your age, driving record and claims history, when you keep your car, type of car, how you use your car, and even your credit score.

The younger you are, the more at risk you are for an accident, so the higher the premium you will pay. Insurance companies can use the Comprehensive Loss Underwriting Exchange (CLUE) to learn about your claims history. Don’t think skipping from one company to the next will keep your claims history hidden.

The newer and the more expensive car you get the more coverage that will be needed for your collision and comprehensive coverage. A minivan will have lower rates versus a Corvette.

Is your car a weekend car only? If so, you will probably pay less because your car is not out on the road most of the time. Having multiple cars in the family can allow you to specify your weekend cars or garage queens and pay less insurance on those vehicles. You will also get lower rates if you tell the insurance company your car is stored in a garage instead of out on the street. There is a lower probability of theft when the car is kept secured.

Conclusion

Auto insurance is one of those necessities in life if you own a car or drive. Taking the minimum coverage and running may be the cheap option now but it is usually not the best option. When a risk is frequent enough that it can occur multiple times in your lifetime, and severe enough that it could bankrupt you, protect yourself with insurance.

Sit down with multiple insurance agents to find the coverage that fits your life the best. We recommend a higher than normal liability coverage because it is better to have too much in this instance. Don’t let a multi-car accident or a van with a family in it ruin your financial wellbeing. Pay more now so you don’t have to later. If you need, raise your deductible or cut some of the additional options to lower your overall premium.

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