Follow the conversation between a father and daughter as they discuss car insurance in this episode of Personal Finance 101 Chats.
Katie: Hey Dad... you there?
Dad: Yep. Hi. Get those car insurance quotes yet?
Katie: Just one so far. Confusing! Expensive!
Dad: How can I help?
Katie: Pay for my insurance?
Dad: Ha! Not the deal! You graduate; you move out, you get to pay.
Katie: But I didn’t expect to pay so much!
Dad: I’m sure you didn’t! Now I bet you understand why we’ve always wanted you to maintain a “B” average for the “good student discount” when you were in school.
Katie: YES I do! Are you saying it could have cost even more?
Dad: Yep. The price of insurance is based on many things, age of the driver for one. More driving experience generally means fewer accidents.
Dad: Companies also look at your driving record, the type of car you drive, where your primary residence is located—in your case that’s your new apartment.
Katie: That it?
Dad: Not quite. They look at how much you drive, whether you own a home or rent, your marital status and even your gender.
Katie: WOW! All that? And gender too?!
Dad: Yes. Young men pay even more. Statistically, they get more tickets for speeding and reckless driving and engage in riskier behaviors.
Dad: Young men have more expensive accidents, and make the most insurance claims. So, until age 25, males pay much higher rates.
Katie: Will my rates go down as I get older?
Dad: Yes, IF you don’t have accidents or traffic tickets.
Katie: Me? Never! Question. What do 100/300/50 and $500 deductible mean in the quote?
Dad: Sounds like you need a quick lesson on car insurance.
Katie: DUH... just kidding. Yes I do!
Dad: OK, funny girl . 100/300 is the 'bodily injury liability.' This means you are liable—or responsible—for the vehicle if ANY driver is found to be at-fault in an accident.
Dad: The insurance company would pay a maximum of $100,000 per injured person and $300,000 total per accident.
Dad: There are several liability coverage combinations available like 50/100/50, 250/500/100 and 300/600/250 among others.
Katie: Hang on... Liable?
Dad: Yes. YOUR insurance could end up paying for the loss if a friend driving your car causes an accident.
Dad: You got it...so think twice before letting someone borrow your vehicle.
Katie: OK. Bodily injury liability... I get that. How’s it different from 'medical payments'?
Dad: Medical payments coverage is a specified dollar amount—$25,000, for example—that would pay medical bills for anyone in the car, including you, regardless of who is at fault.
Dad: So, if you were found at-fault in an accident, medical payments would pay the policy limit for YOUR medical bills, while bodily injury liability would pay for the injuries to people in the other vehicle.
Katie: OK, I see. So what would happen if the total bills for bodily injury liability go over $300,000?
Dad: The insurance company would write a check for $300,000 and YOU would owe the rest.
Dad: Yes, ouch is right. Drive carefully!
Katie: Always! And the 50 means?
Dad: 50 means $50,000 in property damage liability coverage per accident. It pays for other damage you cause to someone else’s property.
Dad: This could be damage to other cars, poles, signs, buildings, and just about any property that belongs to someone else. Again, anything over $50,000 would be YOUR responsibility.
Katie: OUCH again! And the deductible?
Dad: The deductible is how much YOU have to pay to get your damaged car fixed. Some companies call it physical damage or damage to your own vehicle. So you’d pay $500 and the insurance company would pay the rest.
Katie: So the deductible is part of the collision insurance?
Dad: Yes. If you’re in a collision and it’s your fault, the deductible is the part you would pay to have your car fixed. But there’s also comprehensive insurance, or 'comp' as some call it, which also has a deductible.
Katie: And comp is???
Dad: Comp pays for damage to your car for almost any event other than a collision. For example, comp would cover hail or fire damage. So, for repairs, you’d pay the deductible and the insurance company would pay the rest.
Dad: Although most often you don’t actually pay a deductible, the company subtracts the amount from the loss settlement.
Katie: Wow, there’s A LOT to this! Do I need comp and collision?
Dad: Both are optional in most states unless you have a car loan and your lender requires you to carry both, which is what you need to do.
Katie: OK. The quote says uninsured and underinsured coverage. And that means…???
Dad: UNinsured coverage means that if you are hurt by a driver who has no car insurance, your policy will pay for your medical bills.
Dad: UNDERinsured coverage means that if the person at fault doesn’t have ENOUGH coverage in their bodily injury insurance to cover your medical bills, your insurance will pay the difference between those bills and the coverage limit.
Katie: That coverage seems like a good idea.
Dad: It is, but you don’t HAVE to get it. Each state has different requirements for liability limits and uninsured and underinsured motorist coverage.
Katie: Well, how do I know what coverage to get?
Dad: Many agents and attorneys recommend you buy enough insurance to cover the total value of all of your assets, such as savings, cars, homes, or more. Listen to the professional’s ideas and make a reasoned judgment based on what you can afford.
Katie: But what do YOU recommend?
Dad: I recommend you get more quotes.
Katie: How many?
Dad: At least three with the same coverage options so you can compare prices. Shop around.
Katie: How do I know if I’m getting the best deal?
Dad: Once you receive the quotes, choose the agent you like best or the best price.
Katie: Really? It’s that simple? I expected another "Dad thesis!"
Dad: Thesis? Funny! Car insurance contracts are written according to state requirements, so the actual legal contracts are the same for every company in a given state.
Katie: So, policies are basically the same from company to company?
Dad: Yes. But companies do have slight variations in the coverage options available for you to purchase. For example, they may offer coverage for roadside assistance, rental cars, or full glass coverage.
Katie: Why would I want to pay extra for full glass coverage?
Dad: It waives the deductible on broken glass claims and usually provides windshield repair at no additional charge. Saves you some cash should you need a windshield.
Katie: At this point I am all about saving cash!
Dad: Well, then don’t forget to ask about discounts. Most often you can get a discount for having another policy like renter’s or homeowner’s insurance with the same company. Discounts vary by company, so be sure to ask.
Katie: I will…but back to the coverage options. Which ones SHOULD I get?
Dad: Good question.
Katie: Do you have a good answer?
Dad: Yes, but that would be too easy. Think about what you need and can afford, then get some more quotes based on different options. Then, let’s talk before you make a decision.
Katie: Thanks, Dad. You’ve been very comprehensive!
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