Insurance Primer

What is Not Covered and Add-ons

There are a few risks that homeowners insurance won’t normally cover.   Here’s a list of what is not covered.  Depending on what you own and where you live, you might need to supplement your policy with special coverage for these:

• Problems caused by lack of prevention or maintenance.
• Earth movements, landslides, earthquakes, mudslides, and sinkholes.
• Flood damage. You may be covered for broken pipes and sewer or drain backups, but flood insurance requires a separate policy.
• Windstorms.
• War or terrorism.
• Home businesses within your home may need a separate policy.
• Trampolines
• Jewelry, collections, art, and high priced electronics might require extra protection.
• Food spoilage.  Some policies will have a small allowance for food but won’t cover a large freezer full.
• Pools.  Actually, most will cover the pool itself if it meets standards, but most require additional coverage for the risk of injuries.
• Big boats usually need separate coverage, small boats are sometimes covered.
• Dogs.  Some companies won’t sell insurance to you if you have certain breeds of dogs.
• Identity theft is a fairly new issue.  It normally wasn’t even mentioned in policies as either included or excluded, but many policies now are specifying that it is excluded.

Common add-ons include:

• Flood Insurance (see NFIP). Most homeowners policies do not cover flood damage. Ask your insurance agent about the National Flood Insurance Program (NFIP), a government program, that offers flood coverage in many areas.
• Earthquake Insurance is available in a separate policy.
• Extra Coverage (called an Endorsement). You might want more than standard coverage on certain items such as jewelry, fine arts, camera equipment, coin or stamp collections, computer equipment, and home theater installations.
• Identity theft insurance.

Personal umbrella liability insurance, or Umbrella policy can provide more liability coverage than a homeowners policy provides.

Insuring Rental Cars

Rental cars require insurance and it’s usually not included in the price of the rental. Before you rent, check with your insurance company to see what coverage you already have. In many cases, your personal auto coverage will apply towards your rental. Be sure that you have collision and comprehensive coverage in case your rental is stolen or in an accident. Some credit cards will also provide additional coverage when they are used for the rental.

Car rental companies aren’t shy about selling you insurance along with the rental and they make a substantial profit on it. Here’s some of what they offer:

Collision Damage Waiver (CDW), or Loss Damage Waiver (LDW) covers you if your rental car is damaged or stolen. If you already have comprehensive and collision on your own car, you may not need to purchase this coverage.  If you have an older model car without collision coverage, or if you just decided against carrying it, look into this coverage.  Look for alternate insurers if you rent cars often as it’s expensive from the rental companies.
Liability Insurance is usually provided at the state minimum level, and is included with the basic rental price. Note that the state minimum in most states is only $10,000, and that doesn’t go very far if you hit a BMW, so more coverage is usually a good idea. Additional LI coverage may be offered as an extra, but in most cases, if you have liability insurance through a personal auto or homeowners policy, it may carry over.
Personal Accident Insurance (PAI) covers you and your passengers for medical and ambulance costs. This coverage may carry over from your personal auto insurance, and may be duplicated by health insurance.
Personal Effects Coverage (PEC) or Personal Effects Protection (PEP) covers items that you might have in your car if they are stolen.

Most rental representatives are trained to push extra insurance as it is highly profitable for the rental companies.  Know your coverage before going up to the rental counter.  The insurance is good if you need it, but a waste of money if it duplicates coverage that you already have.

Insuring A Leased Vehicle

Insuring a leased vehicle still requires you to purchase your own auto insurance policy.  Typical coverage will include at least the state minimum, along with collision and comprehensive, although most leasing companies have set their own minimums higher than the state minimums.

Leasing a car is like borrowing it.  You don’t own a leased vehicle, the leasing company does.  At the end of the lease, they hope to sell the car at a profit.  The lease agreement spells out a bunch of conditions that protect their investment.  Of course, they want the car returned in tip top shape too.

Insurance will be required before you pick up the car.  In many  cases, it will be more than the state required minimums as the leasing companies don’t want to be on the hook.  Higher limits and lower deductibles are the norm.  Collision will be required as they don’t want a crunched car back, and in most cases they will specify that only OEM parts be used for the repairs.  They don’t want their cars back with junkyard or cheapo parts.

The leasing company may also require Gap insurance and will probably add this in to your monthly payments. Gap insurance is the difference, or Gap, between what your car’s book value might be and what you owe. You have probably heard the expression that “a new car loses 20% of it’s value the minute it’s driven off the showroom floor”. Well, if you crack it up, you still owe the full amount, but your insurance won’t pay you the 20% that the car has depreciated. Gap insurance covers the difference.

As with most types of insurance, it pays to shop around.  Your current insurance company might not be the best deal for insuring a leased vehicle. The internet is great for that. Be sure to ask for available discounts, some of them are substantial.  A few minutes spent shopping can yield big savings.

Young Drivers

Insurance companies don’t like young drivers because they tend to have a much higher accident record, so they charge a much higher rate if they’ll insure them at all. It’s not just teens, the higher rates apply to drivers under 25, and are higher again for boys than girls.

Here’s a few suggestions to keep the costs down :

• It is usually cheaper to add young drivers to your insurance policy than for them to purchase their own. If they will have their own car, insure it with your company so that you can get a multi-policy discount.
• Pick a safe and inexpensive car. Cars with better safety records cost less to insure, as do cars that are less expensive to repair.
• Look for discounts. Many companies offer discounts for good grades, completing a drivers education course, and students that are away at school.
• Avoid accidents and tickets. Many companies will offer discounts over time based on driving records.
• Shop around for prices. Some companies are more teen-friendly than others.

Many companies offer young drivers discounts that can dull the pain a bit.  Drivers education classes are required in some states and probably a good idea everywhere.  Most insurance companies have discounts for completing drivers ed.  Make sure that it’s a state approved course in your state.

Some insurance companies also offer good student discounts.  These generally require B or above averages, but check with your insurance company.  Good student discounts often extend even after school graduation.

Driving records are important too.  Tickets, accidents, and points on a license can raise anyone’s rates … mores with young drivers.

The Top Discount

This applies to everyone.  Buy a safe car!  It may sound boring, but some cars are safer than others and are rewarded with lower rates (sometimes much lower).  It might not be quite as cool cruising in a 4 door sedan as showing off in a 2 seat roadster, but you’ll have a lot more gas and fun money in the sedan.

Discounts are only part of the story.  It is important to avoid up-charges.  Tickets add up.  The fine for a speeding ticket is several hundred dollars in most states.  But the ticket cost is nothing compared to what it adds to insurance costs.   A single speeding ticket can add $1000 or more yearly to your insurance bill.  A second ticket can add another $1000 to $2000.  That’s a lot of money.

Tickets aren’t the only way to build your bill.  My under 25 year old son had good inexpensive insurance. But made the mistake of letting his insurance lapse by late payments.  When he tried to buy insurance again, he was kicked into the risk pool and the rate was triple what it was before.  It was a year before he could find a company to give him a lower price, and he’s still well above what he paid before.  I guess he learned a lesson: Don’t mess with insurance companies.  They always win.

Shopping for Car Insurance

The internet is a great place for shopping for car insurance and learning the basics…and since you’re here, you have already begun.  There are several sites that will give full quotes online, and lot’s of others that will take your information and get back to you. Once you have a general idea of what your costs will be, check with a local agent. Sometimes it’s convenient having someone local to talk with rather than spending time on an 800 number, but keep in mind that many of today’s insurance agents are just order takers and can’t offer service.

Shop around because prices vary for many reasons. Companies base their rates on a variety of factors and may have different priorities. Your rate may be based on:

• Your driving record, a better record will lower your premium.
• The number of miles you drive each year, the more miles you drive, the more chance for accidents.
• Where you live, companies track neighborhoods by the number of accidents, car thefts and lawsuits, along with the cost of medical care and car repair.
• What kind of car you drive, some cars cost more to insure than others because they are stolen more often, cost more to replace, more to repair, and the overall safety record of the car.
• Your age, generally, mature drivers have fewer accidents than newer drivers, particularly teenagers. So insurers generally charge more if teenagers or young people below age 25 drive your car (and boys are charged more than girls).
• Your credit record.
• The amount of coverage, the more coverage you have, the more it costs.

One hazard of shopping online is the number of sites that have you fill out long forms only to tell you that someone will call.  There are two dangers here.  The first is outright identity theft.  Don’t give your personal information to any company that you don’t recognize.  Make sure that the URL, that’s the http address at the top of your browser, matches the company name.

The second danger isn’t as serious but it still might cost you.  Many companies have trainees or special telephone reps return your calls.  Ask a few questions.  If they’re not knowledgeable, or don’t want to deviate from their set sales script, it’s probably not a good deal for you.  You’ll be giving them a lot of money over the years.  They owe you a representative with full knowledge of discounts and situations.

Saving Money on Auto Insurance

Auto insurance can be expensive but there are many ways to save. Here are some money saving ideas:

• Get several quotes to compare prices and services.
• Before buying a new car, check Consumer Reports magazine to see if the vehicle has a high accident rate or is popular with thieves, or write to the Insurance Institute for Highway Safety, 1005 N. Glebe Rd., Suite 800, Arlington, VA 22201 and ask for the Highway Loss Data Chart.
• Increase your deductible if you can handle the out-of-pocket expense in the event of an accident. For example, increasing your deductible to $500, rather than the standard $250, will cut the cost of your insurance.
• Consider dropping collision coverage as your car ages. In an accident, your insurer may only pay up to the car’s book value. You can find out the current value of your car from the N.A.D.A. Official Used Car Guide, available at most local libraries, bookstores or banks.
• A good driving record lowers your insurance rates, a poor record raises rates.
• Ask if you qualify for any of the following discounts for saving money (which are not permitted in all states and are not offered by all insurance companies):
  • Good driver. The definition of a good driver varies but usually includes those with no accidents or convictions on their records for the previous three years.
  • Driver training, improvement and defensive driving courses. You may qualify if you have taken an approved driver education course. Call the National Safety Council at 1-800-621-6244 or check your yellow pages for the number of an AAA or Top Driver near you to inquire about courses.
  • Mature driver discount. For drivers between 50 and 65.
  • Multi-car discount. For those insuring more than one car with the same company.
  • Restricted mileage discount. For those who drive less than 7,500 miles annually.
  • Anti-lock brakes discount. For cars equipped with computerized anti-lock braking systems.
  • Passive seat belts and air bags discount. On cars equipped with factory-installed air bags and automatic seat belts.
  • Anti-theft systems discount. For vehicles with devices that make them more difficult to steal — for example, ignition- and fuel-cutoff systems, alarms, and hood- and wheel-locking devices.
  • Good student discount. Sometimes offered for drivers under age 25 who have maintained a B average for the preceding semester in high school or college.
• Ask if a discount is available for buying your homeowners, auto and other insurance from the same company.

Automobile Insurance – Legal Minimums

Bodily Injury Liability and Property Damage Liability have legal minimums in most states, and more is often recommended. If you are financing the car, your lender will probably require collision and comprehensive.

Liability insurance covers you if you are sued and is usually expressed as a series of 3 numbers such as 20/40/10. The first number refers to liability limits for bodily injury for any one person, the second to limits for all persons injured, and the third refers to property damage liability limits. So for example, 20/40/10 means up to $20,000 is covered for one person injured in an accident, 40,000 is covered for all persons , and up to $10,000 coverage for property damage.

20/40/10 is the minimum in my State of Connecticut and may seem like a lot of money, but keep in mind that $20,000 might just barely cover a broken leg and $10,000 property damage won’t go very far if you broadside a BMW. If you cause a serious accident, minimum insurance may not cover you adequately, and if you own your home or have other assets, you should consider more liability insurance because in most states, drivers are allowed to sue other drivers who injure them in car accidents.

Your actual amount will depend on your financial situation.  No one likes to pay the added premiums of higher limits, but most of us should purchase additional coverage.  Elsewhere in this site I recommend a minimum of 100/300/50.  That’s $100,000 per person, $300,000 for all persons per accident, and $50,000 for property damage.  It sounds like a lot but really isn’t.  Heavens forbid that you seriously injure someone.  A hundred thousand dollars doesn’t go very far.  And $50,000 isn’t much more than a fancy SUV, and that’s assuming that you hit only one!

How Much Car Insurance Do I Need? The answer varies for each individual set of circumstances, but for most people, the state required minimum isn’t enough.

A common amount of bodily injury liability coverage is $100/300. That’s up to $100,000 of bodily injury protection per person and $300,000 per accident. Greater amounts might be better covered with an umbrella policy. I have joked about the state minimums for property damage on several other pages.  Don’t skimp on liability insurance.  It doesn’t add a lot to the cost and it’s rare that anyone is even going to bother to sue for the $10,000 that most states set as a minimum anymore. If someone with a good reason sues you for $50,000, and you only have $10,000 of coverage, your insurance company isn’t going to put a lot of effort into your defense.  They’ll pay their $10,000, you’ll be on the hook for the rest.

In today’s world, $10,000 worth of property damage insurance won’t cover much and you should consider at least $50,000.  Even a bumper thumper can push the lower limit and damage can really run up in a multiyear crash.  Drive careful even with the $50,000 amount,  that’s still less than the replacement cost of luxury SUV.

Remember that collision and comprehensive covers repairs or replacement to your car if it’s stolen or damaged. Both are generally required if your car is leased or financed, and it might still be a good idea if it’s paid off. Balance the cost of the insurance against whether you would be able to afford to pay the entire cost of repairing or replacing the vehicle. For an older vehicle where the book value is low, this insurance might not be worthwhile.

Uninsured and Underinsured Motorist Coverage is usually set at the same limits as your other insurance.  This is important coverage as there are a lot of uninsured drivers out there.  This feature covers you even if it’s their fault.

We’ll talk more about deductibles later, but generally, a higher deductible policy costs less, and might be a good way to protect you against a big loss and still keep the cost down.

Insurance companies look for customers who are safe drivers and have a low risk of filing claims, avoiding applicants from groups that are riskier. These groups might include young or inexperienced drivers, those with high performance cars, or areas with a high risk of theft or vandalism.If you can’t find insurance, states have set up Assigned Risk Pools where all insurance companies accept policies assigned to it based on the proportion of business that it does in the state. The cost is much higher in the pool than if you purchase the policy directly, but all applicants are accepted regardless of risk.

There are also companies that specialize in higher risk and non-standard policies. Pricing is higher than standard policies, but generally lower than the pool.  Some advertise on TV.  Google “high risk non-standard auto insurance” with your state name for leads to other companies in your area. Prices vary greatly so shop around.

Each state is different but most states have a process for joining the assigned risk pool.  Often qualification is based on points or by being turned down by 3 insurance companies.  In most cases it’s best to look for a non-standard policy before applying to the assigned risk pool as the rates will be lower (although they may still be high).

Once you’re in the pool, look to get out as soon as possible.  Check at renewal time.  If your driving record has improved, or maybe your credit score is better, there’s a good chance of finding lower cost plans.

Risk ratings and assignment to the pool are based on different factors in each state.  Some, like age, sex, and neighborhood ratings can’t be changed.  Others like your driving record, credit score, distance of your commute, and accidents can change over time.  Driving record is the top factor.  Having a lot of accidents, tickets or a DUI are tough to overcome.

It happens to almost everyone at some time. You’re driving along, when all of a sudden, BOOM, you have an accident. When You Have an Auto Accident you should:

• Stay calm and check for injuries. Safety and personal health always comes first.
• Move your car to a safe place, turn on you hazard lights.
• Call the police, even for a small accident.
• Take notes and, if possible, take photos of the damage and conditions.
• Exchange names, addresses, driver’s license and insurance information with the driver of the other car. You should always have your own insurance information with you in the car.
• Be polite and provide the required information. *Stick to the facts, this isn’t the time or place to get emotional or make accusations.
• Call your insurance company as soon as possible, even for a small accident.
• Stay on the scene until the police have finished and left.

Does it need to be reported?

In most cases, yes it needs to be reported.  Private settlements between drivers often don’t work out.  You may think that you have an agreement for a couple hundred dollars, but once you pay the other driver is free to come back again and say that more is needed.  Plus, most states have laws that require reporting motor vehicle accidents over a certain threshold.

The only time that you can get away with not reporting is a single car minor accident. Something like backing into the garbage cans or mailbox.  Note that this might be against some insurance company policies, bit as long as there’s no one else involved, no property damage to others, and there are no injuries you’re probably ok.  Of course you might want to evaluate if filing a claim is worthwhile if the damages are well over your deductible amount.

An accident might increase your rates but some companies have forgiveness programs for first or minor accidents.  Check your policy for details.