It’s often joked that there are two certainties in life: death and taxes. There really should be a third certainty: auto insurance (it is mandated by state law after all!).
Often, this is dealt with by simply ignoring it, keeping the same coverage that was selected years ago (unless your agent successfully upsold you). Not surprisingly, we want to bring some purpose to your coverage and align the coverage with your overall financial picture.
Below we want to go over what the different types of auto insurance really mean and how to know if you are over or under insured.
Types of Coverage and How to Decide What is Needed
Liability is for other people if an accident is your fault. There are two subcategories: bodily injury (with limits per person and per incident) and property damage (limit per incident).
The state you live in will set the minimum limits. Currently, Illinois’ minimums for bodily injury are $25,000 per person and $50,000 per incident and the property damage minimum is $20,000.
You will likely desire more coverage than the state minimum. The amount to raise each number to will depend upon your budget and your net worth. The reason for higher limits are that you may have to pay the amount over your limit out of pocket. To protect your assets, you may want to raise the limits and possibly include an umbrella policy as well.
Similar to liability, there are also coverages for bodily injury to you and/or your passengers. These coverages are often called Medical Payments (MED PAY), Uninsured Motorists Bodily Injury and Underinsured Motorists Bodily Injury. The discussion on limits around liability coverage also would apply to these limits.
Collision coverage is optional unless you have a loan or lease on your vehicle. The coverage helps pay for damage to your car in the event of an accident (with another car or object) up to the policy limit.
Closely related to collision coverage is Comprehensive coverage. This is also optional unless you have a loan or lease on your vehicle. This covers non-collision related damage to your vehicle, such as fire, theft, vandalism, hail, flood, etc. up to the policy limit.
Since these are optional coverages, the natural question is whether such coverage is needed. Like liability coverage decisions, your budget for insurance and your net worth will be factors in this decision. Another factor will be the value of your vehicle and the expected benefit should your coverage be needed.
Another question that arises is what deductible should be chosen. This question is often decided purely upon the cost for the deductible. The higher the deductible the lower the premium/cost to you. We generally prefer higher deductibles, with the caveat that there is sufficient cash (such as in your emergency fund) to cover the higher deductible should there be a claim.
There are some rules of thumb that we’re aware of that can be helpful. One example would be that you should not have collision coverage if the annual premium is 10% or greater of your vehicles value. For example, a $300 annual cost for collision coverage is not worth the cost for a vehicle worth $3,000.
In general, there are far too many factors (budget, net worth, value of vehicle, risk tolerance, deductibles) involved for rules of thumb to be helpful and we also could never write a recommendation for each situation (nor would anyone read such a long post!). We recommend taking the factors we mention into consideration when determining appropriate coverages.
We are always happy to help our clients review their policies, make any adjustments necessary as well as shop for new coverage. While this may seem like a small issue, it can have significant ramifications should an accident occur, especially if policy limits are insufficient to cover the damage.
This is for informational purposes only. Guillaume & Freckman and LPL Financial do not offer auto insurance.