Auto Insurance - How It Works

Anyone who has ever owned a car knows that automobile insurance is expensive. A survey conducted by the National Association of Insurance Commissioners found that the average annual premium for each car was $855 (that includes liability, collision, and comprehensive coverages). Understanding auto insurance is the first step towards ensuring that you have the right coverage at the best price.



The cost of your individual coverage depends on many factors -- factors that the insurance company calls Risks. The lower risk you represent to the insurer, the lower your insurance will cost. The cost of your insurance will be impacted significantly by the type of car or truck you buy. A few of the factors that impact your risk include:

  • Safety features on your auto.

  • Crash test results for your auto.

  • Average repair cost for your auto.

  • How many miles you drive each month.

  • If in school, your grades may impact your cost.

  • Your age (younger drivers statistically have more accidents.)

  • Your gender (males typically have more accidents than females.)

  • Your geographic location.

  • Your driving record.

  • Your marital status.

  • How you use your vehicle.

  • The make and model of your vehicle.

  • Your claim history.


Reducing the Cost of Your Auto Insurance

You can often significantly reduce your auto insurance coverage costs by taking advantage of discounts offered by insurers. Discounts are available to drivers who seem like better risks to insurance companies. Look for the following types of discounts when pricing your insurance needs:

  • Insure all your vehicles with the same insurer.

  • Insure your home and car with the same insurer.

  • Consider purchasing your life insurance coverage and car insurance from the same company.

  • Take a driver's education course.

  • If in school, get good grades.

  • Buy a car with safety equipment like air bags, automatic seat belts, and antilock brakes.

  • Invest in antitheft devices.

  • Keep your mileage low. The less you drive, the less risk you have of being in an accident.

  • Drive safely. A good driving record is your most valuable cost cutting opportunity.



Many features of your auto insurance coverage will be based on your state of residence, but many are the same across state lines. Here are a few coverage options you will have to consider:

  1. Liability Insurance: This coverage protects the owner against losses from legal liability arising from bodily injury or property damages caused by an accident. This coverage can be in one single amount for each accident, or it can be broken down and "split" such as $50,000 / $100,000 / $25,000 (per person / per accident / per property damage.

  2. Medical payment coverage: This provision covers medical and/or funeral expenses incurred though bodily injury resulting from an auto accident. The coverage is generally $5,000 to $10,000 per person per accident.

  3. Physical Damage Coverage: This helps to cover the physical damage to the insured auto. Collision covers collision costs. Comprehensive covers losses from non collision incidences. Some examples of this would be theft or storm damage. Policy limits for physical damage are generally based on the value of the insured automobile and are typically limited to the lesser of repair cost or actual cash value.

  4. Uninsured/Underinsured Motorist: Although most states require car owners to have insurance, some motorists do not. Uninsured motorist coverage pays for injuries sustained in an accident with an uninsured (or hit and run) driver. Uninsured motorist insurance covers the difference between actual losses sustained and what an insured can collect from an at-fault driver, up to policy limits.



In addition to standard coverages, you may want to consider additional coverages called endorsements. Two of the most common are:

  1. Extended Liability: This insurance is used to cover automobiles that are not legally owned by the insured, such as an auto owned by the employer but furnished for the use of the insured, which would not generally be insured.

  2. Miscellaneous Type Vehicle Endorsement: This insurance allows other vehicles to be covered such as motorcycles, campers, golf carts, snowmobiles, etc.


Other Considerations

When purchasing auto insurance or in reviewing your existing policies, there are some general considerations you will want to be aware of. Make sure the policy provides as much protection as is necessary. Know the maximum dollar amount the insurance company will pay. Be aware of your deductible amount, which is the amount you must pay before your insurance company will pay anything. Know what your responsibilities are if an accident occurs.

Homeowners Insurance

What is Insured

Coverage A - Dwelling:

Provides protection for the dwelling on an all risks basis up to the policy limits. The policy limit is set by the policyowner at the time the insurance is purchased. You can choose to insure your home and belongings for either replacement cost or actual cash value. The home should be insured for replacement cost. Replacement cost is the amount it would take to replace or rebuild your home or repair damages with materials of similar kind and quality, without deducting for depreciation. Depreciation is the decrease in home or property value from the time it was first built or purchased because of age or wear. Actual cash value is the amount it would take to repair or replace damage to your home after depreciation. Most insurers require homeowners to insure their homes for at least 80 percent of the replacement cost. If you insure for less than 80 percent of the replacement cost of your home, any loss payment from your insurance company will be subject to a coinsurance penalty. You may wish to insure at 100 percent of replacement cost so you will have sufficient coverage in the event of total loss.

Coverage B - Other Structures:

Provides protection for unattached structures such as tool sheds, detached garages, houses and their contents. Coverage B is usually equal to 10 percent of the policy limit on Coverage A.

Coverage C - Personal Property:

Provides protection for personal belongings. Items such as clothing, furniture and standard electronics are covered. Some policies may include credit card theft and away from home theft. The policy limit on Coverage C is equal to 50 percent of the policy limit on Coverage A. Most standard home insurance policies cover the contents of your home on an actual cash value basis. Many insurers offer an option to insure your belongings at replacement cost. The premium will be higher for this coverage but may be worthwhile. Some forms of personal property, such as, silverware, computers, guns, money, expensive antiques and jewelry, have limited coverage under the homeowner's policy and may be added to the policy as an endorsement.

Coverage D - Additional Living Expenses:

If your home is damaged to the extent of being uninhabitable, this coverage will pay for the living expenses away from the home while repairs are being made. These expenses could include limited motel, restaurant and warehouse storage. The policy limit to Coverage D is equal to 20 percent of the policy limit on Coverage A.

Coverage E - Personal Liability:

This coverage protects you against a claim or lawsuit resulting from bodily injury or property damage to others caused by your negligence. For example, your dog bites someone, your child breaks a window or a friend or stranger hits his or her head on something. This coverage applies to you and all family members who live with you. The amount of coverage is determined by the policyowner at the time the policy is issued.

Coverage F - Medical Payments to Others:

Regardless of who is at fault, this coverage pays for the medical expenses for persons accidentally injured on your property.


Types of Policies

There are two types of policies: all risks and named perils. A named perils policy covers losses that are due to only those perils listed in the policy. The perils typically covered include fire, windstorm, hail, and other direct physical losses. An all risks policy covers losses that are due to any peril except those specifically excluded in the policy. It is important to note the all risks policy provides broader protection than do named perils policies.

The five types of homeowner packages offered to owners of single family owner occupied homes are HO-1, HO-2, HO-3, HO-3 with HO15 and HO-8.

HO-1 Basic Homeowner

Insures your property against the following 11 basic named perils: fire/lightning, loss of property removed from premises endangered by fire or other perils, windstorm/hail, explosions, riot/civil unrest, aircraft, vehicles, smoke, vandalism/malicious mischief, theft, and breakage of glass constituting a part of the building.

HO-2 Broad Basic Homeowner

Insures your property against the 11 basic named perils in HO-1 plus 7 additional named perils: falling objects, collapse of roof due to weight of ice or snow or sleet, collapse of building(s) or any part thereof, bursting of steam/hot water system , leaking of plumbing or heating system, freezing of pipes, sudden and accidental damage from artificially generated currents to electrical appliances or devices or fixtures or wiring.

HO-3 Special Extended Homeowner

Provides for comprehensive coverage (all risks) on your home and the 18 (HO-2) broad named perils coverage on your contents. This is the most popular of all homeowner policies.

HO-3 with HO-15 Comprehensive Homeowner (all risks)

Covers your home and personal property for everything that is not specifically excluded. This policy usually provides the broadest all risks coverage available, but is not offered by all insurance companies.

HO-8 Modified Homeowner

Covers homes that have suffered extensive depreciation. Historical or architectural features may make the home more expensive than its market cost. This coverage is more restrictive much like HO-1 but is geared towards older homes.