Hi Dad, I just got my first paycheck as a schoolteacher; I want to change my cell phone and car insurance into my own name now and I will move into my own apartment next week. However, I have a question about insurance. What types of coverage should I get and at what limits?
Wow. What a responsible young adult. Wishing to get off her parent’s payroll per se. That is fantastic and I will bet she will be an outstanding schoolteacher that wants to pass down the concept of personal accountability. What could be tragic about this young lady’s question is twofold. First, this young lady has just graduated from college and was not taught much of anything about insurance. Had she had taken a basic course in insurance this topic would have certainly been addressed. But I would estimate that less than 10% of Colleges and Universities require all graduates to take a basic insurance course. Second, chances are really high, that her father knows no more about insurance…limits….coverages …etc. than what he learned from a REPTILE who saved him money on a xx minute phone call or a BIRD that let him buy only what he thought was necessary.
Things you should know. As of the latest data provided by Insurance Information Institute (III) the number of motor vehicles in Texas in 2022 without the required minimum liability insurance coverage is around 13.8% and the national average is around 14%. And, while it is hard to get an exact percentage, I would guess that about 50+% of the drivers in Texas carry only the state minimum required limits of liability coverage and many of those waived off uninsured/underinsured motorist coverage. So roughly one out of every seven drivers have no insurance and likely four out of every seven drivers only have the minimum limits. Furthermore, it is likely that the four out of every seven are carrying only the minimum limits have never been educated on why they should be carrying much higher limits thanks to TV ads, online insurance shopping, and insurance agents wanting only to save someone money. Therefore, I believe this maybe be a generational issue too; because in my example above, if the parents only carried the state minimum limits of coverage or (very low limits compared to their assets that need protected) then there is a good chance the daughter will too!
So, what might be an approach that this young schoolteacher could take to determine how much, and of what type of coverage she should carry on her car and apartment? First, let’s assume her parents bought her a new car for her graduation and the cost of the car was $60,000.
So, let’s start with the personal auto policy:
*Towing Coverage. This is cheap coverage and I suggest buying the highest limit offered. This coverage will pay to have your car towed (up to the limit in the policy) to the body shop if involved in an accident or pay the cost of labor to change a flat.
*Rental Coverage. Do you have access to an extra car for possibly several weeks, if you are involved in an accident that was your fault or your car is stolen? If you don’t, you should consider buying this coverage at a daily limit that makes sense for the type of vehicle you might wish to drive if yours is in the shop. It’s pretty reasonable and it makes sense for most people, but you likely must buy comprehensive and/or collision coverage to purchase it.
*Personal Injury Protection (PIP). Always buy this coverage and buy the highest limits you can. Some carriers limit the coverage to a max of $10,000. This coverage pays for you and your passengers medical bills and/or your loss wages. This is a no-fault coverage meaning you could be at-fault for the accident and still collect the PIP payments. Don’t let an insurance agent save you money by letting you waive off PIP coverage or substitute medical payments coverage (again, buy the highest limit available).
*Comprehensive (other than collision coverage): This is likely a no brainer if you have your car financed as it will be a requirement of the lender, and the lender will be listed as a loss payee on your policy. This covers most anything that “is not a collision” like fire, hail, stolen vehicle, etc. So, your decision here…assuming you do not have a lien on your car is this. Do you want to totally self-insure (i.e..not buying the coverage; so if your car is stolen you have no coverage) or partially self-insure (i.e you are self-insuring the amount of the deductible you select). By purchasing comprehensive coverage, you can select between a number of deductibles. The lower the deductible the higher the premium but the less you are self-insuring. Buy the highest deductible you feel you could afford if you had a covered claim under this coverage.
*Collision coverage: Again, a no brainer if your car is financed. If it is not…then you can again choose to self-insure or partially self-insure (with regards to the deductible). This coverage is pretty much exactly what the title says. Collision……hit something and this coverage will pay (subject to the deductible you select) for the damage to your car. If you don’t buy it…no coverage for your car if it’s your fault you ran into something OR a person with NO Liability coverage hits you and you don't have adequate UM/UIM limits to fix or replace your car.
*Uninsured/Underinsured Motorist Coverage (UM/UIM): This is where you have to consider the statistics above along with your personal situation. In my example above, this young lady has a new $60,000 car. The state minimum limits of liability are $30K/$60K/$25K. Which means the policy has a bodily injury liability limit of $30K if only one person is in the vehicle; $60K max bodily injury liability limit if two or more persons are in the vehicle(s); and a max payout of $25K for property damage. This young lady has a $60K car. Why would she want to buy limits of uninsured/underinsured motorist coverage (property damage) that would not pay for her car? Remember, one out of seven cars that she might be in an accident with have NO insurance and the other four out of seven likely are carrying only the $25K in property damage liability limits. That said, it should be obvious that at least $60K of uninsured/underinsured property damage liability is needed. What about the uninsured/underinsured bodily injury liability limit? Well….how much do you think her medical bills/loss time wages, pain and suffering, etc. might be if someone ran a stop light and hit her in the driver’s side door and the car that hit her was one of those five out of seven cars with either NO insurance or minimal limits? Does she have short and long-term disability coverage in case she can’t work for months? Does she have good medical insurance?
No one really knows what limit they will need until it’s too late. You CANNOT buy more coverage after the loss. So….guess high….but before you pick that limit let’s jump to liability coverage as you cannot purchase higher limits of UM/UIM coverage than you purchase for Liability coverage.
*Liability coverage: This is the coverage that is mandated by the State of Texas…you must carry at least $30K/$60K/$25K Liability limits. Again…while this is mandatory…remember one out of seven is the average of the cars on the road that do not have this coverage. If they did your insurance premiums would be lower because you would not need uninsured motorist coverage….you would still need underinsured motorist coverage but not uninsured motorist. So, when you hear people complain about the high cost of auto insurance you can look around. ONE out SEVEN cars you see are part of the problem by having no insurance, FOUR out of SEVEN are part of the problem because of the low limits they carry. How many cars/trucks/buses do you see on the road that cost less than $25K? How many weeklong stays at a hospital for a couple of injured people cost less than $60K? I think you get my point!
So how much liability coverage should you carry? How about…. exactly what you need at the time of an accident that you caused to cover the judgement(s) and claims against you! What if you rear ended a school bus and ten students were badly injured. How many judgements will you be responsible for? How much will they all total? How much did that school bus cost to repair or replace? How much did that truck/trailer full of new cars cost that you ran off the road that turned over and caught fire?
Consider this…What if this young schoolteacher, in my example, caused an accident where one person was hurt and that she only had $30K in liability coverage because she purchased the state minimum limits and the person she hit had not purchased UM/UIM coverage. A jury then finds this young lady liable for $90K; her insurance carrier only has to pay $30K. Remember, the person she hit only bought liability coverage, no UM/UIM, no collision, so no other coverage is available to the injured person. Who pays the additional $60K of the judgement against the schoolteacher? Oh yeah…she has a newer paid for car! Likely..... NOT ANYMORE!
As one begins to accumulate assets, this needed amount of liability coverage, in many cases, increases exponentially. But where does one start? For the young teacher in my example, struggling to get started in her new career, with an apartment full of furniture and a few hundred dollars in her checking account, what is the right limit for her liability policies? Again, no one knows….. but…. let’s assume she has the $60K car and she has about $15K in furniture etc. So, her assets might be a grand total of $75K. So, what if she purchased $75K/$150K/$75K in liability limits and then matched that for UM/UIM coverage? What about $100K/$200K/$100K limits and the same UM/UIM limits? It will all depend on her pocketbook and outlook toward saving money or saving her assets should she be the cause of a covered loss.
If you carry the right limits (whatever “Right” is) it takes a lot of pressure off the SOCIETY too. Say one chooses not to buy auto liability coverage or let the coverage lapse or only buys the state minimum limits. Just how many cars do you see on the road that cost less than $25K? So, if this person hits someone then most of the time the non-at-fault driver’s insurance carrier will pay out something on the physical damage coverage, assuming they have UM/UIM coverage and/or collision coverage. What if they hit the school bus and all the injured children are treated at the County hospital with significant medical bills racking up for a dozens of seriously injured kids....... seriously….the not-at-fault PARTY OF PAYORS gets much bigger! Not only will the school district's insurance policy likely max out the UM/UIM limits the remaining debt gets transferred to everyone in the County that owns property. It’s called property taxes that support the hospital district and the ISD (as the ISD will see an increase in rates due to this claim eventually). In short, SOCIETY is paying for something that should have been addressed by the person driving the uninsured or underinsured car in the first place.
Insurance companies charge different amounts for different driver profiles…if the young lady in this example wishes to find out the best rate for her insurance program she would go online or call an agent and say. Here is my personal info, here is my accident history, here is my driving history, this is who lives in my house/apartment, here is my car’s VIN, and I want a quote for:
$100/$200/$100 Liability Alternate: $75/$150/$75
$100/$200/$100 UM/UIM Alternate: $75/$150/$75
$10,000 PIP
$1,000 Deductible Comprehensive Alternate: $500 Deductible
$1,000 Deductible Collision Alternate: $500 Deductible
Rental Car (yes)
Towing (yes)
And since she also rents an apartment and has some stuff of her own and buying new things all the time…she should get a quote for $25K of contents coverage. Chances are the premium for the contents coverage with $200K (I suggest a rule of thumb that the homeowners/renters policy liability limit should be equal to the highest auto liability limit) of liability coverage will be mostly off-set by the discount afforded by buying two policies! (BUNDLING…where have you heard that before? Could it have been on TV about 25 times today?).
One will likely be surprised by the vast difference in rates from several different carriers for the exact same coverages and limits. There are too many reasons to get into concerning the wild swings in rates and I am certainly not a believer in changing insurance carriers every year or so to save a few dollars. However, starting out as a young buyer of insurance it is important to shop around for the best rate for the coverages you need as your “customer profile” will constantly be changing, and likely dramatically, for a while. Things like: coverages and limits purchased, length of time with one carrier, getting older, different roommates, getting married, speeding tickets, accidents etc. is what makes up your profile. Always make sure you get quotes for the coverages you have decided you need and want. Do not let an insurance agent save you money by reducing or eliminating coverage. That only saves the money in your checking account today…it will not save your assets later should you cause an accident or someone else with little to no insurance hits you, or you don’t buy coverage for your contents at your apartment, and it burns down. (Think California)
Last but not least, as one gets older, hopefully two things will happen. One, the fluctuations in rates from one insurance carrier to another will narrow; most likely due to claims history of both you and your family (your insurance profile) and the insurance carrier’s appetite for your “profile” of a customer. Secondly, guessing what limits you need will become more simple. Why, just assume this young lady in my example gets married, buys a house, eventually buys a boat and/or RV etc. She will soon realize that she needs coverage in the millions of dollars not in the tens or hundreds of thousands. She will eventually buy an umbrella policy of a million dollars or more and the umbrella carrier will dictate the underlying requirements of liability limits on all her liability contracts (i.e. Auto, Home, Boat, RV).
The bottom line is this……make the best guess you can with regards to the limits you need to carry as you can’t fix it after the loss.
Also, as one gathers toys, more and more issues with contracts will become another potential liability. For instance, with the purchase of a boat and/or RV will likely result in a leased storage building and that lease contract will likely have an indemnification clause in it. So, what is the limit of liability coverage you might need then? I don’t know. How much does the entire storage building cost and how much do all the boats/RV’s stored in it cost? If, due to your negligence, you somehow cause the storage building to burn completely down,…the limit of liability coverage you will need is going to likely be in the millions due to the indemnity agreement you signed and the judgements from the insurance carrier’s for all those boats/RV’s you destroyed!
