We are going to begin with the most basic product that everyone must own. Auto insurance. Today the insurance industry is the second largest TV advertiser behind the automobile industry. Everywhere you turn, there’s an insurance ad. What are they promoting…coverage…or price? Price, you bet ya! It’s all about cheap, cheap, and cheap. How do they provide you with cheap auto insurance? Simple…cut your coverage to the bone. In Tennessee, the bare minimum coverage to carry is 25,000 per person/ 50,000 per occurrence/ 10,000 property damage. Auto policies are “liability policies” in their purest form. They cover damage for which you are liable.
Comprehensive is for “non-moving” issues…weather related, theft, flood, hitting a deer. Collision is for “moving”…meaning you collided with another vehicle or structure. More on this later…
Did you know uninsured motorist is optional coverage, and that you are not required to carry it? Truth. (Right now, you should be digging out your auto policy pages to see what you are buying.) I could never completely document this, but it’s estimated that somewhere between 30-40% of Tennessee drivers have no auto insurance in force.
What completely contradicts this thought of cheap auto insurance are city busses driving all over Nashville with an attorney stating “You deserve to be paid”. How does he do this? Simple, he sues insurance companies, and when that’s not enough for his client he goes after their assets and incomes. We will talk more about that later.
The absolute bare minimum you should be carrying is $100,000 per person/$300,000 per occurrence/$100,000 property damage for both what you are liable for and in the event, you’re hit by an uninsured motorist. Pictures are worth 1000 words, right?
That WAS my car on the left. This is after the ambulance came and I was on the way to the hospital. July 2008. The guy with his hands on his hips was my friend I called after the collision. I won’t repeat the word he said when he got there. Young girl, narrow road, texting, not paying attention, was 2/3 in my lane when I first saw her. No insurance, expired driver’s license. I remember turning the wheel to about 2 o’clock. That’s the only reason it wasn’t full head on. No skid marks…no time to even think about the brakes. I WALKED FROM THAT ACCIDENT…by the grace of God…and airbags.
When a claims adjuster, who looks at wrecked cars all day long, asks you “How did you get out that car, and how are you not hurt?”, it makes you think. By the way, at the time I was carrying $250,000 per occurrence/$500,000 per accident for uninsured motorist. That young girl could have completely ruined my life. It is within the realm of possible that I could be totally paralyzed or bedridden today. Do you think she cared? Obviously not. Other than the police report, that was the only information I ever learned about her. When I’m talking to my clients about coverage, I’m always recommending the most they can buy at the best price they can get it…for this very reason.
“Long after you’ve forgotten the price you’ve paid, you will remember the quality you bought” – Unknown
Let’s reverse this accident, and say it was totally 100% my fault. She is critically injured, and she consults the attorney I mentioned earlier. How is that going to play out?
Let’s say I’m carrying $25,000 per person, minimum state limit coverage. Think that is going to cover her out of pocket medical expenses, hospital stay, loss of wages, pain, and suffering, etc.? How much is she going to sue me for…because as the busses say “She deserves to get paid!” For illustration purposes, let’s say it’s……………$1,000,000. (Had to put this picture in…it’s just too funny.)
So, we go to court…and she gets a judgment for $1,000,000. How is this going to work out? The insurance company represents me for the $25,000 in my policy. The remainder, I had to hire my own attorney at my expense. (Cost indefinite). Here’s how it plays out. Let’s say I make $100,000 as a widget salesman. I also just earned a one-time bonus (after tax) of $100,000. I have a house with equity, 401(k) plan at work, IRA rollover from my previous employer, and I have a whole life policy with cash value.
Here’s how this plays out for me.
TOTAL JUDGMENT: $1,000,000
Insurance settlement: -25,000
Home w/equity: -0-
Cash value in life policy: -0
SUBTOTAL: – $875,000
A little different that you thought? It got a little better, but it’s going to get worse. In Tennessee, in this situation, cash assets and non-retirement assets (including investment real estate) are attachable in judgments.
Retirement plan assets, such as IRAs, 401(k) and company profit sharing plan accounts are creditor protected. Because Tennessee is a homestead state, my personal residence is protected. (Check to see what your state says). Because my life insurance policy has a beneficiary designation, and is for the welfare of another person, my cash values are protected as well.
But here’s where it gets worse. After the initial amounts are collected, in the state of Tennessee, the court can garnish my wages up to 35% per year in perpetuity until the debt is settled. Try paying that debt annually and accomplishing your financial dreams & goals. Think that will put a dent in my future planning for virtually everything I want to do for myself and my family?
Next, we will look at how to solve this dilemma.
Building your Moat…Auto Insurance…Additional Coverages.
Essentially an auto insurance policy is a LIABILITY policy. It protects people and things that you are liable for in an accident. Comprehensive and Collision coverages are optional. They are designed to protect your vehicle.
Comprehensive is for claims that are “non-moving”. Some of the most prevailing are
- Tree falling on car in driveway
- Hail hitting car while parked.
- Windshield repair or replacement
- Flood (its covered by an auto policy, but not a homeowners)
- Hitting a deer while moving
If you don’t own a house with a garage, you need comprehensive coverage. When the major hail storm hit Nashville in March 2012, many cars were deemed “totaled” as the repair damage exceeded the Actual Cash Value of the car. My nephew’s car was on campus at the University of Tennessee and got caught in this hail storm…he had no comprehensive coverage…so he had to drive a car that looked like it had been sitting on a driving range!
I always recommend full glass repair/replacement because it’s a nice convenience to know it can be fixed with zero out of pocket cost…especially in “Pothole Season” …rocks are flying everywhere.
The same goes for flood. In the “Nashville Flood of 2010”, many homes didn’t have flood insurance, but their cars were covered if they had comprehensive. Most were a total loss.
Yes, hitting a deer is considered Comprehensive as you cannot avoid this situation, and the insurance industry has deemed it unfair to surcharge you in the event this happens…and this can cause a lot of damage!
Collision is just that. It covers others or things that you collide with. Backing into a mailbox, or another car in a busy parking lot are considered collision. I like a higher deductible on this coverage because it helps prevent small claims, which can result in rate increases. The average rate increase in Tennessee for a $1000 claim is about 30% for three years.
Many times, I’ll talk my clients out of filing the claim to avoid this if possible. It’s those parking lot “love taps” that get you into trouble.
Some of the optional coverages I’ve seen recently are Accident Forgiveness and new(er) car replacement. Many national companies are advertising these. You must qualify for them by the way.
Accident Forgiveness means just that. You have an at fault accident where damages are paid, either to you or to another party, and this benefit avoids that 30% surcharge for the first accident…but not the next one.
However, you must have a perfectly clean driving record for 5 years…meaning no tickets or accidents at all. See if your company offers this, and see if you qualify. It’s a nice benefit for little annual expense.
New(er) car replacement is available to people that purchase their vehicles. Leased vehicles are not eligible. I drive a 2013 vehicle bought new from the dealership. I have new(er) car replacement. In the event of a total loss, this benefit reimburses me enough $$$ to purchase one model newer…or a 2014.
Granted, given its four years later (2017), the depreciation factor has kicked in, but how about those first 1-2 years? Everyone knows you take a huge hit in value the second you drive it off the lot! I had a client that bought his new car about a month of me getting mine. He called me one morning and you could just tell something was wrong. Brand new car, less than two weeks old, and he was driving home, playing with the new technology in the car, wasn’t paying attention, and drove it down a concrete culvert totaling the car.
The company reimbursed him enough $$$ to buy a brand-new model. It worked well there in his situation…I still tell him he owes me bigtime when I see him.
Hopefully this has been helpful as most of the people that are referred to me have little to no knowledge on how auto policies even work, or what they are paying for. In addition, this industry has done a lousy job of educating their policyholders.
They are the Number Two advertiser in the country, so the next time you see an ad on TV, ask yourself “What are they trying to tell me…or sell me?” Coverage or price?
“It’s very easy for trusted companies to mislead naïve customers, and insurance companies are trusted.” – Daniel Kahneman, Nobel Prize 2002