Preferred Financial Group - Auto Insurance Services

Auto 101

Auto insurance is a policy purchased by vehicle owners that protects them against financial risks associated with auto accidents. Even if you are a very cautious driver, you are still subjected to these risks, which can be substantial and could prove devastating in the worst case. In our litigious society, it is not uncommon for juries to award hundreds of thousands of dollars or more to victims in auto accidents. Fortunately, this risk can be mitigated with the purchase of insurance. Like most insurance policies, the insured (the vehicle owner) pays a small annual premium to the insurer (the insurance company) for a large amount of protection.

A basic auto insurance policy provides protection in the following areas:

Bodily Injury Liability:

This coverage pays for the medical expenses of people injured in a crash in which you are at fault. You’ll often see this coverage described as a “20/50 policy” or a “100/300 policy”. These numbers describe the maximum dollar amounts that the policy will pay for a single person’s injuries and the maximum for all the injuries sustained by all the occupants of the other car combined. For example, a 20/50 policy will pay a maximum of $20,000 for a single person’s injuries, and up to $50,000 total for the injuries of everyone in the car you hit.

Property Damage Liability:

This coverage pays for damage done to the “other car” if you or the driver on your vehicle is at fault in an accident. Property liability is sometimes referred to alongside Bodily Injury Liability as the third number, so a 20/50/10 liability package will cover up to $10,000 for damages to the other car.

Personal Injury Protection:

This covers you, another driver of your vehicle and any passengers’ medical expenses after an accident. If time is lost at work because of injuries, this coverage may also covered lost wages.

Collision:

This coverage pays for damage to your car from a collision with another car, an object or even a rollover of your car, irrespective of who is at fault.

Comprehensive:

This covers your car against all physical damage resulting from causes other than collision, like fire, theft, vandalism, hail, contact with animals etc.

Uninsured/Underinsured Motorist Coverage:

In the event someone without insurance (or inadequate limits) causes damage to you and your vehicle, this coverage protects you, your family and others in the insured auto as well as protecting you and your family in someone else’s auto. If you are hit by a car as a pedestrian, this coverage will protect you.

Many states have mandated minimum limits of liability insurance, but many people purchase additional insurance for additional protection. In California, it is illegal for motorists to operate a motor vehicle without first showing proof of their ability to pay for judgments resulting from auto accidents. California’s financial responsibility requirement mandates minimum liability insurance limits of 15/30/5, outlined as follows:

Bodily Injury Liability

$15,000 for death or injury of any one person per accident
$30,000 for all persons per accident

Property Damage Liability

$5,000 per accident

Here are a few important “need to know” items/ facts

In California, driving without insurance is a serious offense. Drivers who do not carry evidence of financial responsibility will be cited and fined, their car could be impounded and their licenses suspended. If you are involved in an accident without proof of financial responsibility, you could lose your driver’s license for up to four years.

Auto insurance premiums, or the amount policyholders pay to be insured, vary depending on age, gender, years of driving experience, accident and moving violation history, and other factors. Each area of coverage is priced separately. A poor driving record and/or the desire for more complete coverage will lead to higher premiums. However, you can reduce your premiums by agreeing to take on more risk by increasing your deductible.

Examples of Auto Insurance

Each example is formatted to describe and provide the following as each relate to a specific auto insurance claim incident:

What Happened?
What Was Covered?
Explanation

Example #1

What Happened?: The insured’s daughter was texting when she crossed a double line and hit another car head-on.

Insured’s car was “totaled”.
The other car was “totaled”.
A passenger in the insured’s car suffered injuries of $7,500.
The driver of the other car was seriously injured and in a law suit was awarded $750,000 by the court.

What Was Covered?:

The insured’s car was valued at $35,000 and was covered under Collision for the full amount minus the deductible ($35,000 – $1,000 = $34,000)
The other car was valued at $20,000 and was covered under Property Damage Liability for the full
amount.
Medical expenses for the passenger were covered under Medical Payments up to the limit of the policy of $5,000. This left a balance of $2,500 which became the responsibility of the insured.
The court award of $750,000 was covered under Bodily Injury Liability up to the limit of the policy of $500,000. This left a balance of $250,000 which became the responsibility of the insured.

Explanation: In this example, the coverage provided was substantial but the insured was still held personally liable for the deductible of $1,000 as well as the excesses of $2,500 and $250,000 beyond the policy limits for Medical Payments and Bodily Injury Liability respectively.

Example #2

What Happened?: The insured’s unattended car rolled down a hill and crashed into a restaurant.

Caused $15,000 damage to his car
Caused $75,000 damage to the restaurant

What Was Covered?:

Insured’s car was covered under Collision for the full amount of $15,000 minus the $1,000 deductible.
Repairs to the restaurant were covered under Property Damage Liability for the full amount of $75,000

Explanation: In both cases the losses were within the policy limits and as such, claims were paid minus the policy deductible amounts where applicable. Please note:Collision coverage pays for repairs to your own car if it is damaged by another car or crashes into an object like a wall, tree an animal or even a restaurant

Example #3

What Happened?: An uninsured motorist made an illegal left turn and collided with the insured’s vehicle.

Caused $20,000 damage to his car
He suffered injuries of $12,000.
His passenger suffered more serious injuries of $125,000

What Was Covered?:

Insured’s car was covered under Collision for the full amount of $15,000 minus the deductible of $1,000.
His medical expenses were covered under Uninsured Motorist Bodily Injury for the full amount of $12,000.
Medical expenses for his passenger were covered under Uninsured Motorist Bodily Injury for the full amount of $125,000.
Explanation: In each case the losses were within the policy limits and as such, claims were paid minus the policy deductible amounts where applicable. Please Note: In most cases, Uninsured Motorist Bodily Injury coverage pays for injuries sustained by the insured, his family and guests in their car or family in someone else’s car and even as a pedestrian.

Example #4

What Happened?: The insured ran a red light and collided with another vehicle.

Caused $5,000 damage to his car
Caused $10,000 damage to the other car
A passenger in his car suffered injuries amounting to $3,000
The driver of the other car was seriously injured and filed suit which was settled for $425,000.

What Was Covered?:

Insured’s car was covered under Collision for the full amount of $5,000 minus the $1,000 deductible.
Damage to the other car was covered under Property Damage Liability for the full amount of $10,000.
Medical expenses for his passenger was covered under Medical Payments for the full amount of $3,000
The settlement of $425,000 was covered under Bodily Injury Liability for the entire amount.

- Explanation: In all cases the losses were within the policy limits and as such, claims were paid minus the policy deductible amounts where applicable.

Example #5

What Happened?: The insured let a friend borrow his car for the day and caused a very serious accident.

Insured’s car was “totaled”.
The other car sustained damages of $20,000.
The friend suffered injuries of $15,000
The driver of the other car was seriously injured and filed suit which was settled for $250,000.

What Was Covered?:

Insured’s car was valued at $25,000 and was covered under Collision for the full amount minus the deductible ($25,000 – $1,000 = $$24,000).
Damage to the other car was covered under Property Damage Liability for the full amount of $20,000.
Medical expenses for his friend were covered under Medical Payments up to the policy limit of $5,000. This left a balance of $10,000 which became the responsibility of the insured.
The settlement of $250,000 was covered under Bodily Injury Liability for the entire amount.
Explanation: Even though the insured was not involved in the accident, he is still responsible for $11,000. This consists of: his collision deductible amount of $1,000 as well as $10,000 for medical payments in excess of the policy limit of $5,000.

Comparisons of Auto Insurance

What’s the Relationship Between Increasing Coverage and Annual Premium?

While the obvious relationship is “the higher the coverage the higher the premium”, this needs to be put into perspective. The example below illustrates a base policy with 2 additional options, both of which increase coverage pretty substantially. The annual premiums are shown for each scenario, as well as the cost differential for increased coverages as they relate to the base coverage:

Conclusion:

Minimum liability coverage is mandated by the state of California and those limits are $15,000 per person and $30,000 per accident. The cost for a substantial increase in coverage is minimal when considering the protection it provides. What’s important here is to determine your appropriate amount of coverage, which begins with you knowing your personal net worth…That would be the maximum amount you could lose in a lawsuit, as the result of negligence on the part of the insured.

What’s the Relationship Between Deductible Amount and Annual Premium?

If you are willing and able to accept responsibility for a larger amount of a potential claim, the insurance company will reward you by decreasing your cost of insurance with a lower annual premium. The example below illustrates annual premium differentials based on the insureds willingness to accept deductible limits of $500, $1,000 & $2,500. The annual premiums are shown for each scenario, as well as the cost differential for increased deductible as they relate to the most expensive coverage:

Conclusion:

By increasing your deductible from $500 to $2,500, you can reduce your annual premium by approximately 20%. This is considered substantial, particularly when you think of insurance as a way to prevent against catastrophic losses, as opposed to minor ones. It’s as though the insurance company is giving you $135 a year just to assume a bit more responsibility for an event that may never occur. Here are a few thoughts on how you might use the savings of $135:

It could be enough to purchase an umbrella policy.
It could be used to purchase a decreasing term insurance policy, designed to pay off your mortgage in the event of an untimely death.

How do Premiums Vary Based on Annual Miles Driven?

There is not an industry standard for how annual miles driven impact your premium. Basically, the fewer miles you drive, the less chance or opportunity for you to have an accident subjecting you to a claim. Hence, you can expect a lower premium with fewer miles driven. Some insurance companies offer discounts for less than 15,000; some others offer discounts for as low 7,500 relying on your annual estimate of mileage as verification. Others will only offer discounts if the mileage can be verified. Here are some examples of what you can expect in terms of relationships between miles driven and premium:

Conclusion:

As you can see, the premium for each area of coverage is less than for the corresponding coverage with higher mileage. However, note that the differential in the relationship between the premium and mileage is not linear…Said differently, the premium for Bodily Injury Liability coverage for 6,000 miles is not twice as much as the premium for 12,000 miles…$199.08 vs. $247.64. Furthermore, there is no premium differential between 24,000 and 30,000 miles. Irrespective of differentials between premiums and mileage, you should make sure you are paying for coverage that matches your needs…You will likely be saving money.

How Valuable are Multi-Policy Discounts?

The truth of the matter is that multi-policy discounts are very valuable. Essentially, an insurance company will provide a discount to you if they have written both your homeowner’s insurance and your auto insurance. The policies remain separate, but the discount is applied to both. . The example below illustrates annual premiums with and without a multi-policy discount for deductible limits of $500, $1,000 & $2,500. The annual premiums are shown for each scenario along with the annual savings attributed to the multi policy discount:

Stand Alone vs Multi Policy

Conclusion:

The annual savings are substantial. Remember, this illustration reflects the multi-policy discount on the Auto policy only. You will receive a similar discount on your homeowner’s policy as well. Again,the savings are very substantial and should not be overlooked.

Stand Alone vs Multi Policy

Conclusion:

What is the Cost of an Umbrella Policy?

Oftentimes, this type of insurance is referred to as the “best buy in the insurance industry”. There are a few requirements before securing coverage. Basically, the insurance company will want to write both your auto coverage and your homeowners policies before agreeing to write an umbrella policy for you.

Conclusion:

It does seem like the cost for coverage is very low, and it is. However, keep in mind that it usually begins coverage only after the limits of your auto insurance and/or homeowner’s insurance have been exhausted. The key here is to properly determine your personal financial net worth, then match coverage to protect that amount.