"Car insurance is car insurance, right? - If I am comparing $80/month at Insurer 1 and $70/month at Insurer 2 - why would I ever want to pay the higher amount?"
"Why should I understand those pesky numbers?"
All valid questions - although, if you have ever found yourself asking them (or a version of them) you should be downright scared, and concerned that you do not understand how your car insurance works.
One of the most dangerous positions in this life to find yourself in is one where find out too late that you "didn't know something that you thought you knew" or you "didn't know something that the law or 'status quo' thinks you should know".
Let's imagine ...
You are driving along, as you do every day, heading to work and being the extremely conscientious driver you know yourself to be. You are NOT putting your make-up on; You are NOT talking on your cell phone; You are NOT fiddling with the radio; You are, in fact, paying close attention to the road and your surroundings.
While speaking to the police on the side of the road, you describe the incident:
"Somebody pulled out into the right lane from a parking lot going about 30MPH, forcing the car already there to cross into my lane in front of me, for some reason, immediately after entering my lane they slammed on their brakes and I smashed into them!"
Now, I am no police officer, nor do I play one on TV, but my guess is the accident as described is your fault. Fortunately, in our example, nobody is seriously hurt during the accident. For the sake of this article, lets admit that, while driving, things can happen very quickly and through no apparent fault of our own, we can be found legally "at fault" due to some other persons mistake.
What Do The Numbers Mean and Why Should We Understand Them?In Texas, the State minimum required coverage to demonstrate financial responsibility is 20/40/15. We have all seen these numbers over and over again, but you would be surprised how many people have no idea what they mean.
Each number is in thousands and is the maximum coverage you would receive - so 20 means up to $20,000, 40 means up to $40,000, and 15 means up to $15,000. The first number is the per person bodily injury number in thousands. The second number is the total bodily injury per accident and the last number is the amount of property damage covered.
In our example above, let's say that the person you hit received $10,000 in bodily injury. They were alone in the car and nobody else was hurt as a result of you hitting them. Their bodily injury would be covered because it is less than the $20,000 maximum per person limit, and also under the $40,000 per accident limit. However, they were driving a used 2006 Honda Odyssey Mini-van (a very popular model last year). This van is worth approximately $37,000. Now, depending on the speed you hit the van and how many airbags were deployed, let's say the repair bill was somewhere in the neighborhood of $18,000. Based on your coverages, if you were carrying the Texas State minimum required, your insurance company would pay up to $15,000 and you would be responsible for $3,000.
How can a low price on car insurance be bad?It is conceivable that our accident above would involve more than one car, or more than one person (in our example above, if the vehicle was a mini-van, it is likely that there would be at least 3 passengers). In the event that your maximum coverages do not cover the loss you may receive judgments to pay whatever balances are left over after your coverages have been exhausted.
In our example above, if the mini-van had 3 passengers and because you hit it, the driver swerved and hit another vehicle which had 2 passengers. If we leave everything the same so each person has $10,000 bodily injury and each vehicle sustains $18,000 damage. What would the numbers be?
5 people x $10,000 = $50,0002 vehicles x $18,000 = $36,000
4 of the 5 people would be covered by your state minimum policy because everybody was under the $20,000 per person limit, but you maxed out your per accident bodily injury at $40,000, so you would need to take care of the 5th person on your own.
Next, your property damage coverage would pay for $15,000 leaving the remaining $21,000 to you.
Now, in both cases if the two vehicles in the accident were carrying uninsured/underinsured motorist coverage, their insurance company would take care of the excess bodily injury, and property damage costs not covered by your policy. The insurance company would then come after you to subrogate (make themselves whole) - and, believe me - the insurance companies KNOW how to get their money back... all $31,000 of it!
Questions to be considered when weighing that lower priced policy:
- Would an extra bill for $31,000 put a strain on your family? - What would the wage garnishment cost us per month for a large judgment? - Which is easier to afford? An extra $30/month, or a judgment for $3,000 - $31,000?
This is an example of how a low price can be bad - if your agent or company never takes the time to explain why the price is lower than the competitor, it is possible that they are "low-balling" your coverages rather than ensuring that you have the best policy and leverage of your insurance dollar.
Hopefully, this will help you steer clear of situations where you "don't know what you don't know" and you will be able to make a more informed decision.
In my next article, I will discuss the "Myth of Full Coverage Auto Insurance"
