Understanding Car Insurance: Premiums and How Coverage Works, Segment 1

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KRIS: Ah, there's nothing like the open road! …unless of course you run into a pothole, or another car, or a hail storm. Or maybe someone hits you from behind, or your car gets stolen while you’re in the motel.

Yes, it seems some things can go wrong on the open road. But these “would be” disasters become simple inconveniences if you have protection. Insurance can pave the way to a smoother journey should trouble arise.

On this episode of NFMS, we're going to drive home the importance of having car insurance—the one type of insurance teenagers are most likely to carry.

People pay money—called premiums—to insurance companies to buy protection. Your insurance coverage determines how much the insurance company will pay you for particular types of damages. If damage occurs, the insurance company will indemnify—or compensate—you for the damage.

With over 4 million miles of public roads in this country, car wrecks are common, but generally, the people involved in accidents do not bear the whole cost of the damages—not even the person who caused the accident.

But why?

On today’s show, we thought we’d open up the phone lines and let you, our loyal viewers and radio listeners ask questions.

OK, let’s go to the phones! First up we have Kent in Little Rock, Arkansas. Hi Kent, welcome to the show, what’s your question?

KENT: Hey, Kris… love the show, man… keep up the good work. Right at the beginning today you said people often don’t pay the whole cost of damages, even the person at fault. Can you tell me why?

KRIS: Thank you Kent; yes of course.

First, you should know that most states require liability insurance coverage on motor vehicles. Liable means legally responsible. Liability coverage pays for the damage you cause—or are responsible for— if you are at-fault in an accident. The minimum coverages and requirements vary slightly from state to state, however, so make sure you understand your state’s laws.

KENT: So, should everyone buy the minimum coverage amount required by their state?

KRIS: No, not necessarily, Kent. State laws require people’s automobile insurance to include liability coverage to protect others from damages caused by a driver’s mistake. But, liability insurance also protects the driver who is at fault. Without coverage, an at-fault driver could be wiped out financially after paying for damage to property or injury to a person. The basic liability protection in a car insurance policy includes coverage for bodily injury and property damage. The declarations page of your policy describes the coverages and dollar amounts in your policy.

Thanks for the call, Kent. OK, the next caller is… let me see… “DAWN” from St. Louis.

DON: (Deep voice) It’s DON.

KRIS: OOOHH, sorry Don… now that’s unfortunate. Folks, I misheard Barb our call screener right there…If you want to speak to me you have to get through Barb… Don, what’s your question?

DON: OK, I’ve been listening and I’m looking at my car policy as I’m talk to you

DON: (flipping through papers, making paper fumbling noises) it says here 100 “forward slash” 300 “forward slash”100. It looks like part of a website link or something… what does it mean?

KRIS: Folks, Don can’t see my screen unless he’s joining us online, but he is looking at a series of numbers that look like this: The translation of this is as follows: The 100 BI means $100,000 per person for bodily injury. The 300 means $300,000 bodily injury coverage per accident, and the 100 means $100,000 in property damage coverage. There are many liability coverage combinations available like 50/100/50, 250/500/100 and 300/600/250 among others.

The $100,000 BI per person means in the event you are at-fault or responsible for an accident, your policy will pay for any personal injuries resulting from the accident to the other driver and his or her passengers up to and including the $100,000/$300,000 limits. This means the insurance policy will pay no more than $100,000 per person, and no more than $300,000 in total for the accident.

DON: So, what happens if the damage amount exceeds the $300,000 policy limit?

KRIS: Great question Don!

Unfortunately, the insurance company would write a check for $300,000 and YOU would owe the remaining balance. A policy limit applies to property damage too. For example, if the policy states $100,000 in PD coverage, the insurance company would pay no more than $100,000 on a claim.

Property damage can include damage to another vehicle, a house, light poles, street signs, buildings; just about any property that belongs to someone else. Again, anything over $100,000 would be YOUR responsibility.

This is why carrying the minimum state required amount of liability insurance may not be wise. Remember, you can buy larger amounts of coverage. You pay more, but if the injuries to someone exceed the amount of insurance you carry, you will have to pay cash for the rest. If you don’t have enough cash available you may be required to sell assets like your car to pay for the injuries you caused or owe the money and make payments.

Thanks for the call Don. Ok, time for a quick break. We’ll be back right after this.