Buying Insurance

Lesson 2: Auto Insurance

This lesson discusses the parts of an auto insurance policy. It reviews Collision and Comprehensive, the two parts of the physical damage elements of auto insurance. It examines the Liability part of auto insurance and discusses the importance of securing sufficient dollar limits. Lastly, it discusses Uninsured and Underinsured motorist insurance and its importance in an auto insurance policy.

Collision and Comprehensive

An automobile insurance policy is typically divided into four parts: physical damage, liability, medical payments and uninsured/underinsured motorists. Collision, one part of the physical damage coverage, is the part you probably think of first. It is the insurance that pays for damage to your atuomobile as the result of an accident. If you have financed the purchase of your vehicle, the bank will require you to carry this insurance and they will be listed as the party to be paid (insurance jargon:loss payee)if damage results in a total loss. The dollar amount of the insurance is not determined by you, it is determined at the time of loss by calculatling the actual cash value of your vehicle (insurance jargon:ACV) using industry wide reference sources such as the NADA guides or Kelly Blue Book. (Buyer beware: if you own an older vehicle which is paid for you may want to check Kelly Blue Book or other sources to determine the vehicle value. It may not be cost effective to pay several hundred dollars a year for physical damage coverage on an older low value vehicle). If you are involved in an auto accident and your insurance company pays for the damage to your vehicle, you will be required to pay a part of the cost which is known as the "deductibe". Typical deductibles are $250 or $500. The higher deductible you select, the lowr your cost for the isnurance. (Buyer beware: this is not a dollar for dollar trade-off. Think carefully about selecting a $1000 deductible with saves you $60 a year in premium). Also, if you finance your vehicle, the bank may set a maximum on the deductible you can choose. For further informatiion on Collision and deductibles see Hungelmann, pp. 36-41.

There is a second part to automobile physical damage insurance. This is called Comprehensive. It pays for damage to your vehicle that is not the result of an accident. For example, your vehicle may be damaged by hail, by vandals, by a stone which hits your windshield, or by contact with a deer. These and other occurences are covered under the Comprehensive portion of your insurance. Again, a deductible will apply but the deductible can be smaller than that which applies to collision. In some instances it is possible to purchase Comprehensive insurance without purchasing Collision, for example if your vehicle is to be in storage for a period of time. If you have need for coverage during storage consult with your agent. Hungelmann provides some illuminating examples of the cost to benefit trade offs on deductibles, see pp. 38-40.

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