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Don’t wait until it’s too late to find out your auto-insurance policy isn’t enough. Most of us coast through life thinking that because we’re up to date on our car insurance premium, we’re covered in the event of an accident.
That could be the case, unless you’re hit by an uninsured driver. Or your car is stolen. Or a friend borrowing it gets into an accident. These are just a few of the situations that almost everyone believes they’re protected from, but actually aren’t.
If you’re not properly protected, any of these could end up costing you a small fortune. And if you think this could never happen to you, consider this: The Insurance Research Council estimates that 16.1% of drivers are uninsured, and just a few years ago, the California Department of Insurance reported that as many as 28% of drivers in California didn’t have any car insurance.
Often times, your state’s legal requirements aren’t enough to cover the costs that can occur in the event of an accident. Even the required comprehensive coverage necessary for most auto loans doesn’t include uninsured motorists or sufficient liability, for example.
The worst thing you can do is to wait until coverage is needed to find out your policy falls short. Here are seven common auto-insurance myths every driver must know.
MYTH #1: The state requirement is all you need.
TRUTH: The state requirement is all you legally need, but won’t actually cover all of your expenses for a serious accident.
While the state-required minimum for car insurance may protect you if you get pulled over for speeding, it may not be sufficient if you find yourself in a serious accident. According to the Insurance Information Institute, the recommended minimum for bodily injury protection should be $100,000 per person and $300,000 per accident.
Getting by with just the minimum necessary to meet legal requirements can be a huge financial mistake that can cost you in personal assets should you become involved in litigation resulting from an accident.
MYTH #2: You need to buy additional coverage for a rental car.
TRUTH: Your insurance policy also covers your rental.
It’s a popular sales pitch among rental agencies that you need to purchase separate insurance in order to be fully protected. The truth is the coverage you have on your own vehicle also applies to a rental car.
If you have full coverage on your personal car, it will also apply to your rental, if both of these vehicles are intended for personal use (not for business). Conversely, if you only have liability on your vehicle, that’s all the coverage you’ll have on the rental. In this case, you’ll be well served to purchase the additional insurance. Either way, be sure to review your insurance policy before you step up to the rental counter.
[InvestingAnswers Feature: 10 Ways to Save 10% or More on Car Insurance]
MYTH #3: If someone borrows your car, they’re responsible in the event of an accident.
TRUTH: Your car, your insurance — no matter who’s driving.
In most cases, auto insurance follows the car. So if it’s your car in the accident, your insurance policy is responsible for the associated costs — regardless of who was driving. However, if your policy isn’t enough to cover the damages, the person who was driving your car would be next in line to deal with the event.
MYTH #4: Your credit score doesn’t matter.
TRUTH: Insurance providers use your credit score to determine your coverage costs.
An insurance score is a rating that insurance providers generate based on your credit history to determine your coverage costs. Studies have shown that people with a low credit score are more likely to file an insurance claim, so you can bet that insurance providers will be paying attention to your credit score.
Taking steps to improve your rating — including paying your bills on time and eliminating bad debt — lowers the amount of risk insurers assume to provide your coverage, and can make a big impact on your insurance premium.
[InvestingAnswers Feature: 9 Ways to Save Thousands on Car Expenses]
MYTH #5: All insurance policies cover theft and natural disasters.
TRUTH: Unless you have comprehensive coverage, you’re not protected.
Comprehensive is the coverage that protects you against theft, natural disasters and collisions with animals. This is an optional policy that basic liability insurance does not include. Unless your car is financed and your creditor requires comprehensive coverage, chances are good you don’t have this additional policy.
MYTH #6: The colour of your car determines your rate.
TRUTH: Red, black, neon orange flames — your car’s paint job makes no difference to your rate.
#-ad_banner_2-# There are a wide variety of factors that go into determining your rate for car insurance. For the individual, insurers consider their personal driving history, credit rating, age, area of residence and other items. For the vehicle, insurers are mainly concerned with the cost of replacement or repairs should it be involved in an accident. The colour of the vehicle makes no difference.
However, if the bright colour (or sporty make) of your car makes you a target for speeding tickets, then you may have a problem. More than one ticket in a given timeframe (typically three to five years) can certainly cause your premium to increase.
MYTH #7: All policies cover you against uninsured motorists.
TRUTH: Protection against uninsured motorist is optional, and not covered in basic policies.
So what happens if you’re hit by an uninsured motorist? Unless you have uninsured motorist (UM) insurance, you’re out of luck. Your personal injury protection and collision coverage may not be enough to cover all damages. Purchasing this additional policy could increase the amount of your personal injury protection coverage from $10,000 to $30,000.
Even if you do have UM insurance, you’re only covered for physical injuries. For complete protection, you should also have collision insurance, which covers property damage (i.e. your car) caused by uninsured or hit-and-run drivers.
The Investing Answer: Protecting yourself from loss is a necessary component of smart investing. And when it comes to car insurance, a small monthly premium protects not only an asset that you rely on daily, but also you and your family’s health, should you find yourself in an accident. Insurance policies can be confusing, and overlap often exists. Be sure to review your policy with a representative who can fully explain your plan.
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