You’re involved in a car accident. It’s your fault. The person driving the car you hit is injured. He visits with an attorney who runs late night commercials in between People’s Court re-runs. They decide to sue you. They win and are awarded $950,000. Who pays that bill? The insurance company? Hopefully. You? Possibly. If insurance, which one of those different types of coverage tells you how much they’ll pay? “Gee, I hope that when I saved 15% in 15 minutes I didn’t reduce that particular coverage.”
You’ve seen that commercial that claims to save you 15% on your auto insurance cost if you’re willing to spend 15 minutes. I’ve talked to several people who liked that idea, spent their 15 minutes, and, indeed, saved 15% or more on the premiums that they paid for their car insurance. What is not promised by the unnamed insurance company, which incidentally is also represented by an over-sized lizard and a couple of prehistoric humans, is whether new converts could be guaranteed to maintain or improve upon their auto insurance pricing and still have good coverage. In other words, they may be spending less…for less.
It is not my intent to demonize the above-referenced company. You may very well have your auto insurance with them and be properly insured for a reasonable rate. But it is inside the insurance realm that economic bias is so ever present that we must be very careful to understand what coverage we own for the stated price.
Too many have spent 15 to save 15, or followed through on some other tempting sales pitch, only to find that their auto coverage would leave them financially exposed in the case that it was needed. Another “forward thinking” company regularly invites television viewers to choose the price that they would like to pay for their car insurance and allow the company to build a customized policy around the spending restrictions.
Home and auto insurance are often the most neglected risk management tools because they’re so often commoditized. It is seen as insurance we are legally required to own if we wish to drive a car or own a home, and so people spend 15 to 60 minutes calling a couple of folks—or the guy at church who mailed them a fridge magnet—and not paying a second’s notice to the details of the policy. Let me show you why it’s so important to understand your auto insurance.
If you shopped your car insurance recently, you may recall the agent mentioning something about “fifty, one hundred,” or “one hundred, three hundred,” or “two-fifty, five hundred.” The type of coverage that would pick up the tab for the hypothetical lawsuit mentioned previously would be bodily injury liability (BIL). Typically, that coverage is quoted listing two successive numbers. The first number is how much liability protection you have per person. The second is the amount that covers you per occurrence.
The chances are good that you have $100,000 of bodily injury liability coverage per person and $300,000 per occurrence. In our example, because there was only one person in the car you hit, your liability coverage is going to top out at $100,000. I hope you have an extra $850,000 lying around somewhere, because that’s your responsibility! Consider increasing your BIL to a minimum of $250,000/$500,000. Read on for how to cover the rest of what you owe from that car accident.
The greatest risk surrounding our auto insurance is exposure to liability, and while there is more at stake in our homeowner’s insurance because we’re protecting a much larger asset, we must again address the oft neglected liability risk. Most policies come with $300,000 of liability coverage that will protect you when your neighbor sues after his kid trips falling down your stairs, but again, it’s not sufficient protection.
You might also be surprised to learn that your policy probably doesn’t cover damage resulting from earthquakes or floods. You’ll have to pony up extra cash to shield yourself from those potentially disastrous risks.
Since even the more appropriate levels of liability protection in home and auto insurance still aren’t sufficient to protect you from a plain vanilla lawsuit, where do you look to transfer that catastrophic risk? Excess liability—or “Umbrella”—insurance is designed for that purpose. It’s typically sold in increments of $1,000,000, and despite all those zeros, the premiums are surprisingly reasonable; most households will find an annual premium of between $150 and $250 per year will garner an extra million (or more) of liability coverage. Properly structured, the umbrella policy will give you an extra layer of protection over-and-above your home AND auto liability coverage.
More For Less
“GREAT,” you think, “I’m happy to learn I’m under-covered, but now I’m going to have to shell out more in premiums!” Not necessarily. While most folks are under-insured for liability coverage, they’re OVER-insured for smaller claims, in the form of low deductibles. Most people have auto deductibles of $150 or $250, even while they probably wouldn’t claim anything small under $1,000 or $2,000 and risk higher premiums forevermore. Therefore, if—and only if—you have sufficient emergency reserves and could self-insure the smaller risk, consider increasing your deductibles, thereby lowering your premiums.[iii] A skilled risk manager knows to bear the manageable risk and transfer the catastrophic.