Automobile Insurance – FINA 250 Module 9 supplemental

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Mercedes-Benz C63 AMG Car

Having a car may make you want to hit the highway, but there are some things you have to get sorted out first…

Automobiles have had a profound impact on society. They have altered lifestyles, influenced where people live, and affected the development of many convenience industries, particularly the fast food industry. In fact, the automotive and related industries form a large part of the American economy. However, increased use of the automobile has created huge risks and hazards.

There are 35 million automobile accidents annually (Insurance Information Institute). Motor vehicle crashes are the leading cause of death in the U.S. and they carry an economic cost of more than $150 billion a year (Consumer Education and Economics)!

Automobile Insurance:

Insurance plays a large role in most individual’s financial management plan. The purpose of automobile insurance is to help individuals limit their financial losses when an automobile accident occurs. It helps the individual to be prepared for the unexpected. When people buy insurance, they transfer part of the financial risk of accidents to the insurance company.

  • Auto insurance is an arrangement between an individual (consumer) and an insurer (insurance company) to protect the individual against risk from automobile accidents.
  • Risk is uncertainty about a situation’s outcome. Risk can be unpredictable events which lead to loss or damage. To purchase auto insurance, consumers purchase a policy.
  • A policy is a contract between the individual and the insurer specifying the terms of the insurance arrangements. The policy will state the premium and deductible amounts.
  • A premium is the fee paid to the insurer to be covered under the specified terms.
  • A deductible is the amount paid by the policy holder for the initial portion of a loss before insurance coverage begins.

The purpose of auto insurance is to help individuals limit their financial losses when an automobile accident occurs. It helps the individual to be prepared for the unexpected. When people buy auto insurance, they transfer part of the financial risk of accidents to the insurance company. Automobile Insurance

There are four types of coverages available for automobile insurance.

  1. Liability insurance
  2. Medical payment insurance
  3. Uninsured/under-insured motorists insurance
  4. Physical damage insurance
    1. Comprehensive
    2. Collision

Liability Insurance:

Liability insurance covers the insured if injuries or damages are caused to other people or their property. Liability insurance does not cover losses suffered by the insured or for property damage to the driver’s car if the insured caused the accident. Passengers of the at-fault car are covered under the driver’s liability insurance if coverage under medical insurance is exhausted and persons in other vehicles or pedestrians have been reimbursed. It is the minimum amount of insurance required by law for automobiles.

Two types of liability occur from owning and operating a vehicle.

  1. Bodily injury—the driver or car owner is held legally responsible for injuries suffered by another person.
  2. Property damage—the driver or car owner is held legally responsible for damaging another’s property.

Policy limits for liability insurance are usually quoted with three figures such as 25/50/10. Each figure represents a multiple of $1000 and is explained below. It may also be quoted as a single figure such as $250,000. This means $250,000 is the per-accident limit for all liability losses and is the most which will be paid in any liability losses occurring from one accident. Each state has set a minimum liability limit. The consumer must purchase at least this amount of insurance. Montana’s minimum liability limit is 25/50/10.

For example, a policy with the liability limit of 25/50/10 means:

  • 25 = $25,000
    • Per-person bodily injury limit – $25,000 is the most
      which will be paid for any one person’s bodily
      injury liability losses from an accident
  • 50 = $50,000
    • Per-accident bodily injury limit – $50,000 is the most
      which will be paid for all bodily injury losses
      from an accident
  • 10 = $10,000
    • Per-accident property damage liability limit – $10,000 is the most which will be paid in property damage liability from an accident

Learn more: What are Virginia’s insurance requirements?

Medical Payment Insurance:

Medical payment insurance covers injuries sustained by the driver of the insured vehicle or any passenger regardless of fault. It also covers insured family members injured as passengers in any car or if they are injured while on foot as a pedestrian or while riding a bicycle. This insurance pays for hospital and medical bills. Some policies may pay for funeral expenses. It is not required in all states. Subrogation rights enable an insurance company to take action against the at-fault party and its insurance company.

Uninsured/Underinsured Motorists Insurance:

It is illegal to own and operate a vehicle without auto insurance. However, some people still choose not to purchase it. Uninsured or underinsured motorists insurance covers injury or damage to the driver, passengers, or the vehicle caused by a driver with insufficient insurance. An uninsured motorist is someone without auto insurance. An underinsured motorist is someone who carries insurance, but not enough to cover the losses in the accident. It is not required in all states. Situations where this may be needed include:

  • Hit-and-run accidents where the driver leaves the accident before he/she is identified;
  • An accident with an uninsured driver;
  • An accident with an underinsured driver.

Physical Damage Insurance:

Physical damage insurance covers damages caused to the vehicle. Two optional forms of coverage are available:

  1. Collision—covers a collision with another object, car, or from a rollover.
    1. Paid regardless of fault
    2. Generally covered when driving someone else’s car with their permission
  2. Comprehensive—covers all physical damage losses except collision and other specified losses. Comprehensive insurance usually has a deductible between $500 and $1,000. Losses covered include:
    1. Theft, vandalism
    2. Fire, ice, windstorm, or hail
    3. Glass breakage
    4. Contact with animal

Other Optional Protection:

  • Towing coverage pays the cost of having a vehicle towed to receive repairs if it breaks down.
  • Rental reimbursement provides a rental car when the insured’s vehicle is being repaired after an accident or if the vehicle was stolen. It may provide only part of the funds.

Influences of Insurance Rates:

Insurance rates are determined for individual cases. The following factors influence the rates:

  • Age – people under the age of 25 pay higher premiums;
  • Gender – men have more accidents so they may have higher rates;
  • Marital status – married drivers have fewer accidents statistically, so their rates are lower;
  • Driving record – safe drivers have lower rates, number and type of tickets will change rates, and number and severity of accidents will change rates;
  • Type and age of vehicle – newer, more expensive, and higher repair cost vehicles have higher rates, frequently stolen vehicles have higher rates, color of vehicle does not matter;
  • Vehicle use – rates are usually higher when driving more than 7,500 miles a year; the more one drives, the greater the chance of an accident;
  • Place of residence – rates vary among states, people in large cities usually pay more than in rural or suburban areas, weather conditions may affect rates;
  • Number of drivers on the policy – additional drivers raise the premium, drivers under the age of 25 pay less to be added to his/her parents’ policy rather than purchasing a separate policy;
  • Driver training – may receive a discount for having taken a driver’s education course;
  • Good student – may receive a discount for good grades in high school or college;
  • Multiple car – may receive a discount for having two or more vehicles on the same policy;
  • Anti-theft systems – may receive a discount for anti-theft devices such as car alarms;
  • Multiple policies with the same company – having both auto, home, and life insurance;
  • Long-time customers – some companies may offer discounts to long-time customers.

Ways to Save Money on Auto Insurance:

The following are some ways for consumers to save money when purchasing auto insurance.

  • Research different insurance companies to find the best rates.
  • Select the appropriate coverage and limits for the driver’s situation. Do not become persuaded to purchase unnecessary coverage.
  • When choosing a vehicle to purchase, think about the insurance costs. Expensive, high-performance, and high-repair cost vehicles cost more to insure.
  • Ask about and take advantage of discounts offered by the insurance company.

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“Take Charge of Your Finances” 1.16.1
© Family Economics & Financial Education – Revised November 2004 – Transportation Unit – Automobile Insurance, Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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