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One of the ways to keep car insurance rates down is to purchase a policy that offers the minimum amount of coverage allowed by law. But just purchasing minimum car insurance is not always a wise idea. Many different circumstances dictate drivers should go with a more comprehensive policy.
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Understanding how car insurance works is vital when trying to decide whether to go with just the minimum policy. This means you need to know what:
- The laws in your state are
- Types of coverage car insurance companies offer
- You need to protect both yourself and the value of your vehicle
Why People Choose Minimum Car Insurance
Before getting into the specific circumstances that would dictate a more comprehensive policy, let’s deal with the question of why people choose to get just minimum car insurance. The first and most obvious answer is the cost.
For some people, coming up with the money to afford a minimum policy is tough enough, let alone purchasing a more expensive policy with more coverage.
The second reason is based on a cost-to-benefit ratio. Just as insurance companies base their rates on similar ratios, many savvy drivers do as well. Think of it in terms of working extra hard at your job in order to be eligible for a bonus at the end of the month. If the bonus is not large enough you may not feel it’s worth it to put in the extra effort.
When it comes to car insurance lots of people come to the realization after 10 to 20 years of paying into the system, that they’ll never get out of it the same amount of money because they’ve never filed a claim. For these folks, car insurance is perceived as a losing proposition. So why purchase extra coverage if it’s not required by law?
The third reason for purchasing just minimum car insurance is the mistaken notion that you’ll never need the extra coverage. But nothing could be further from the truth. According to the U.S. Census Bureau, there were nearly 11 million auto accidents on American roads in 2009. With 211 million licensed drivers, that translates into a rate one accident for every 19 drivers annually.
Defining Minimum Auto Insurance
So what is the minimum car insurance? In most states, a liability policy covers bodily injury, death, and property damage. Some states also throw in uninsured/underinsured motorist (UM) and personal injury protection (PIP) requirements as well. We’ll look at Oregon as an example.
All auto insurance policies in the Beaver State are required to provide minimum insurance in the following amounts:
- $25,000 per accident to cover bodily injury and property damage to a single victim
- $50,000 per accident to cover bodily injury for multiple victims
- $10,000 per accident to cover property damage sustained by others not directly involved
- $15,000 per accident of personal injury protection
- $25,000/$50,000 per accident of uninsured/underinsured motorist protection
If this seems like an excessive amount of coverage, it’s really not. First, remember that none of this insurance will pay for repairing or replacing your vehicle. It’s only to cover the expenses incurred by the victims of accidents in which you are responsible. The last two categories pay for your medical expenses only if someone who happens to be driving without insurance hits you.
When Collision and Comprehensive Are Necessary
When an individual purchases a new car using a bank loan, he most likely won’t be able to purchase just minimum car insurance even if he wants to. Why? Because the bank loaning him the money has a vested interest in preserving the value of the car until the loan is paid off. In order to do so the bank will place a lien on the title of the vehicle.
As defined by the Merriam-Webster Online Dictionary a lien is a legal hold placed on the property of another in order to satisfy some sort of debt or duty.
In plain English, a lien on your car title states that the bank has an ownership interest in it as long as your loan is outstanding. To protect that interest they will require you to purchase comprehensive and collision coverage.
Without comprehensive and collision, the bank stands to lose a lot of money if your car is totaled in an accident. In order to avoid such a circumstance they include, in the loan contract, language that stipulates the borrower will purchase collision and comprehensive insurance. If a buyer fails to do so, the bank can usually purchase a policy and then pass the cost onto the customer. Even if you don’t have an outstanding loan, comprehensive, and collision is a good idea if your car is worth more than you’re willing to pay to replace it out-of-pocket.
As an example, if you own a 1970’s era Pontiac GTO, like the ones you see on the GTO Association of America website, you have to seriously consider purchasing more than just minimum liability. Especially if you restored the car and added customized parts.
Increasing Liability Limits
Another thing to consider about minimum auto insurance is increasing liability limits. Earlier we looked at what the state of Oregon requires; now let’s look at Oklahoma regulations. In the Sooner state, a minimum policy must include:
- $25,000 per accident for bodily injury/death to a single person
- $50,000 per accident for bodily injury/death to multiple persons
- $25,000 per accident for property damage coverage
Let’s just say you hit another car because of carelessness and excessive speed. Even at just 45 mph, a side-impact collision could send the passenger of the vehicle you hit to the hospital with life-threatening injuries. Assuming that victim needed emergency surgery and two to three weeks of hospital care, the $25,000 offered by your insurance could be gone in a matter of days. You’ll be left holding the bag for the rest.
In all likelihood, the victim will sue you to recover the costs of medical care, lost wages, and potential pain and suffering. Without adequate insurance, a court will garnish your wages and possibly seize personal assets to pay the bill. One way to avoid such stiff financial penalties to up your liability limits.
Purchasing an Umbrella Policy
Even if you doubled the liability limits required in your state, an excessive jury award from a lawsuit still may well exceed your insurance policy. That’s why some insurance industry experts recommend drivers purchase umbrella insurance.
In the simplest terms possible, and umbrella policy is designed to cover just about anything not taken care of by your other policies. For example, you may have both on auto and homeowners policy, which will pay out their portions of an accident claim according to the limits established in them. Any amount left over would be paid by the umbrella policy so you’re not caught paying out of pocket.
Umbrella policies are fairly inexpensive and easy to come by. You might even be able to bundle one of these policies if you currently have all of your other insurances with the same provider. Bundling is a great way to get all the insurance coverage you need for less than what you’d pay separately.
High Medical and Vehicle Repair Costs
The biggest case against purchasing just minimum liability insurance rests in the cost of modern healthcare and vehicle repair. As previously stated, emergency surgery and a hospital stay can very quickly blow through the limited amount of money a liability policy offers. But let’s go one step further and consider long-term care, rehabilitation, and so on.
The cost of modern healthcare is one of the primary reasons court awards in personal injury suits are so high. Without the millions of dollars awarded by the courts, some people would be immediately put in the poor house because of medical bills incurred after an accident. If the accident was someone else’s fault, the court usually requires that person to pay the bill.
As far as vehicle repair costs go, they are constantly on the rise as well. Today’s cars depend heavily on computer components, lightweight composite materials, and incredibly efficient parts. All of this involves technology, expensive technology that costs a lot of money to replace.
Replacing a brand-new vehicle cost tens of thousands of dollars today, in contrast to just a few thousand dollars 20 years ago.
If you are a fairly safe driver with an old vehicle not worth much money, you may be a good candidate for just the minimum car insurance. However, most of us don’t fall into that category. We have car loans, a couple of tickets and accidents on our records, and budgets that are rather tight. For us, adding extra coverage and increasing liability limits is a really good idea.
Thankfully, beefing up your insurance policy doesn’t necessarily have to break the bank. You can double liability limits without adding too much to your current premiums. And though collision and comprehensive can increase premiums as much as 50% or more, it’s well worth it should you ever need to make a claim against it.
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