Traffic around campus during the school year can be chaotic. I recall driving through campus on the first day of class. The sun was in my eyes, cars were lined up behind stoplights, students were crossing the street everywhere, and everyone was in a hurry to make it to class on time. Although I am gripping the steering wheel so hard my knuckles turn white, I have peace of mind knowing my truck has full coverage and I am financially prepared in case of an emergency.
I consider myself to be a great driver, but no one is perfect. Everyone carries the risk of getting in a car accident, but most people carry less financial risk because of insurance. The question many people ask is: “How do I know if I’m financially protected in case of an accident?” Insurance policies can contain language that may seem foreign, so sometimes it is difficult to understand what you are paying for. I will outline some of these terms and concepts, so you can select the best policy for you and be better prepared for financial emergencies.
Basic Insurance Terms:
Limits: The maximum amount that a policy will pay out. It can be expressed in several ways such as an annual limit, per person limit, or per accident limit.
Premium: The dollar amount you pay the insurance company for a particular policy.
Deductible: The amount you have to pay before the insurance policy pays. For auto insurance, this is typically the amount you pay per accident. Example: You get in an accident and your repairs are $2,000 and your deductible is $1,000. You are required to pay $1,000 and the insurance policy will pay the other $1,000.
Basic types of Coverage:
Liability: Coverage in case you get into a car accident and it is your fault. If the other person involved in the accident gets hurt or has damage to their vehicle, you are responsible for paying for these damages (including medical expenses resulting from bodily injury). Liability coverage will pay up to a certain limit to the injured third party. Your policy will often have stated limits of liability that look like this:
300/500/300 or $300,000/$500,000/$300,000
The first number represents the bodily injury liability limits per person. So this policy will pay $300,000 for every passenger that was injured in an accident you caused. The exception to this is if you reach the per accident limit (the middle number) of $500,000. The policy will not cover you for over that amount for each accident you cause. For instance, if you have the limits listed above and you injure 2 passengers who each have $300,000 worth of medical expenses for a total of $600,000, you will be responsible for paying $100,000 out of pocket. The last number represents how much coverage you have for damage to someone else’s property, stated on a per accident basis.
Vehicle Coverage – Comprehensive and Collison: This type of coverage protects you financially in case your vehicle was damaged in an accident. Collision insurance protects your vehicle if you were to get in a wreck. Comprehensive, also known as other-than-collision coverage, protects your vehicle from other things like fire, vandalism and hail. The purpose of this coverage is to pay for repairs to your vehicle after an accident, or help you replace your vehicle in the event of a total loss. An agreed upon deductible will apply in this type of coverage. So for instance, if you have a $1,000 deductible and your repairs after an accident only cost $750, you are required to pay for the repair fully out of pocket.
Keep in mind that there are many other types of coverage you can get in an auto insurance policy that are worth taking a look at. Accident forgiveness, Personal Injury Protection, and Uninsured/underinsured Motorist are all different types of coverages you can add to your policy.
Tips for selecting the right policy:
When it comes to picking the right policy for you, you have to find something that you can fit in your budget, but at the same time, protect you and your assets. Buying insurance is similar to setting up an emergency savings account, they are both helping you prepare for the unexpected.
When selecting liability limits, understand that Kansas law requires you to have at least 25/50/10 limits of liability. Is that enough? Absolutely not. How many vehicles in Manhattan are worth more than $10,000? In a bad accident with multiple vehicles, medical expenses can easily soar past $50,000. So what are acceptable limits? Most insurance agents recommend getting the highest limits that you are offered and can afford premium-wise. Financial guru Dave Ramsey says that you should have at least $500,000 worth of liability coverage. Keep in mind newer drivers might not be offered limits this high.
Comprehensive and collision coverage may be expensive depending on the value of your car. If you have a brand new vehicle, you’ll likely want to have this coverage. If you drive a very old and very inexpensive car, you’ll have to weigh your options and risk. One opinion indicates, if you have enough emergency savings to replace the vehicle and it carries a very low resale value, then you might consider forgoing the coverage.
One way to save on comprehensive and collision coverage is to raise your deductible. Although you will have to pay more out of pocket in the event of an accident, you will likely save a lot more by having lower premiums. Your premiums are also based on your driving history (tickets and accidents), age, and even your credit score.
The last piece of advice I would give is make sure that you understand your policy and how you need to react in the event of an accident. There are also certain exclusions in an insurance policy that will state when coverage will not be granted. Know how your insurance company wants you to handle reporting any claims.
Managing risk can be stressful. We deal with uncertainty every day. If you are wondering how you can be better prepared for emergencies and want some advice on saving and budgeting, make an appointment with a peer financial counselor! You can schedule a free appointment by visiting our website: https://www.k-state.edu/powercatfinancial/
References:
https://www.daveramsey.com/blog/how-much-car-insurance
Morgan Flax
Peer Counselor II
Powercat Financial
