There are 25 people in our deck of cards at the office that can affect your life financially. It is unlikely you will ever get all of these people in the same room to speak with one another and make certain that they are all working in harmony. Today, we are going to be discussing the problems and concerns that you should have regarding your automobile insurance.
Automobile insurance has two main components that you need to be thinking about. The first component is liability, which is the most expensive part of a car insurance policy because this refers to lawsuit coverage. I want you to be thinking about the three ‘P’s when it comes to liability: Person, People, and Property.
Person. If you hurt one individual, what is the amount of liability insurance that you have in place if they sue you because you’ve hurt or killed them? You don’t want to be the one writing this check. This should be written by the insurance company because they have deeper pockets than you do. This is why we have insurance. That’s why you have a contract with the insurance company that says they are on the hook for your mistakes (as long as they were not intentional).
People. How much money does your policy pay if you have hurt a group of people? For example: think of a van filled with kids on their way to church on a Sunday morning. Now you need a higher amount of liability that will be divided among all the people who were injured.
Property. You mistakenly hit the gas instead of the break. You went through someone's front yard, through their living room, into the kitchen, out the back porch, and into their pool. That’s a lot of property damage. Or, you’ve simply hit someone’s car. Property damage can be large or small, but who’s going to be writing that check? You want enough coverage where the insurance company will be writing that check in your place.
This also works the other way around with uninsured and underinsured drivers. If someone injures me in an accident and it’s their fault, but they either don’t have insurance or it’s a small policy, what happens? Every state has minimum limits of liability for automobile insurance, but in many cases, it is very minimal or people will still choose to not have insurance. If somebody hurts you and you are out of commission for a long time: unable to work, with ongoing pain and injuries, what happens if that driver was uninsured or underinsured? That’s when your policy coverage needs to be as high as possible to pay that benefit. Your insurance company then acts like it’s the other person’s insurance company and covers you.
The second component that everyone usually asks about, but is the least important is coverage for damages to your vehicle. Who’s going to pay for that? First, you typically have to pay a deductible of $500, $1000, or $2000, and then for everything above and beyond the insurance company will reimburse you. However, they will only give you the value of the automobile that you were driving. If it’s a brand-new automobile and you paid $40,000 for it and that’s the value that the insurance company deems it’s worth, then they will give you that minus the $1000 deductible. They would be on the hook for $39,000.
This is what I’ve seen time and time again: the older the policy is the less that you are looking at it. Your car becomes worth less and less over time. You have a 10, 15, 20-year-old automobile now. It might only have a replacement value of $1,000. If you have a $1000 deductible and it's worth $4,000, the replacement value would be $3,000. If you’re spending several hundred dollars a year for that coverage, does that make sense to spend that much for only $3000 worth of coverage? This is why your car insurance needs to be reviewed regularly. What I have seen is most people don’t do that. They are on autopilot.
Again, make sure that the liability coverages are as high as possible (think lawsuit in your mind) because liability is the most important thing. Replacing your car, though very important, is secondary. You know this to be true by looking at the declaration page on your automobile insurance policy. You can see that the liability coverage is the most expensive because it’s the lawsuits we worry about. The price of the automobile is secondary.
If you have additional questions and would like us to review what you have and how it plays in with all the other parts of your life, then it is time to schedule your Financialoscopy®.
