A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products, including home, life, auto, and commercial, and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, mainly in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: Oct 14, 2021

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Here's what you need to know...

  • Even though all carriers licensed to sell products in a specific state need to abide by state laws, not all companies are created equal
  • As consumers shop for coverage, it’s important to differentiate the reputable companies from the less reputable ones
  • As you compare insurers, you should focus on only companies that are financially stable, licensed, and have a good customer satisfaction rating
  • It’s important that you know exactly what limits and coverage types you need as you’re shopping for the best product at the best price
  • It’s important that you read your policy closely to find out how your coverage will pay if you file a claim for damage
  • It’s always important to find out what discounts are being applied to the policy

Car insurance is a product that you must carry but that you don’t necessarily want to rely on using. Since the only time that policyholders file a claim is when they’ve experienced a loss, it’s often a product people dread buying. Because of this, many consumers focus more on finding a policy with low rates than the reputation of the provider or the type of coverage afforded. Start comparing car insurance rates now by using our FREE tool above!

While price is important, it shouldn’t be a priority when you’re building a policy that’s meant to provide you with protection during a scenario that could otherwise be financially devastating. It might not be a fun task at hand, but you must do some thorough research when you buy an auto insurance policy so that you know you’ve made the best decision. If you’re not sure what to look for, read this guide and you can learn how to save all while you build a comprehensive policy.

Deciding How Much Coverage You Need

You can’t buy a product if you don’t know what insurance you need. Unfortunately, shopping for a product like car insurance isn’t quite like buying the standard consumer good in a big box retail store.

You’ll need to understand some industry terms that you won’t come across every day before you can comfortably say that you know which coverage options will keep your family protected. This is why doing research is vital before you decide to take only the coverage options required by law.

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What’s required by law?

In virtually all states car owners are required to buy auto insurance. While coverage is required, you only need a minimal amount of coverage to satisfy the state-mandated law.

In most states, you need nothing more than third-party liability coverage that pays for the expenses incurred by others because of an accident that you’ve caused.

The required limits for this liability coverage tend to be extremely low, but these limits vary by state. Other coverage options, even if required, can be rejected in writing.

Types of Coverage Options Offered Under an Auto Policy

It’s only advised to take state minimum coverage options and to reject coverage options after you understand how they work. If you jump at the opportunity to save without fully understanding what you’re signing away, you may have an uncovered loss that could eat up your savings. Here’s a breakdown of each type of coverage you’ll have to choose from when buying a Personal Auto Policy:

  • Bodily Injury Liability: Bodily Injury (BI) is a form of personal liability coverage that’ll pay for someone else’s medical bills, lost wages, or final expenses when you’re negligent for an accident. For BI to be claimed, you’ll need to be at least 51% at fault for a loss.
  • Property Damage Liability: Property Damage (PD) is a form of personal liability coverage that’ll pay when you damage someone else’s car, home, or other real property. Just as with BI coverage, you will need to be more than 51% at fault before your policy pays. It’s also important to realize that PD doesn’t pay to fix cars or property that you own.
  • Medical Payments: Typically considered optional, medical payments are coverage that can be rejected. This is because it pays for the policyholder’s medical expenses when they are injured in a car accident. One great thing about medical payments is that claims settlements aren’t based on fault. This means payments can be issued quickly even as a claim is being investigated and fault determination hasn’t been made.
  • Uninsured Motorist: Uninsured Motorist, which might be transcribed as UM, is another coverage that’s required but can typically be rejected in writing. UM is a form of protection that provides you with payment for your medical bills if someone hits you and doesn’t have Bodily Injury coverage.

UM also pays if the driver doesn’t have enough BI coverage to pay for all of your medical expenses. Since, as the III reports, the rate of uninsured drivers in the U.S. is currently is at 12.6% nationwide, it’s important to consider buying this coverage even if it’s not legally required.

  • Comprehensive: Comprehensive is a form of physical damage coverage that pays for your vehicle repairs. It doesn’t pay to buy a new car but will pay for replacement if it’s totaled in a comprehensive loss. Comprehensive losses include fire, theft, explosion, vandalism, collision with an animal, wind, hail, or falling objects.
  • Collision: Collision is the second form of physical damage coverage that pays to repair a specific vehicle. It will pay when the car is in a moving accident or is overturned while being operated. Most of the time collision claims are filed when you’re at fault, but they can also be filed when you’re in a hit and run accident or when there’s a dispute on fault. Physical damage isn’t legally required, but it’s a must when your car is being financed or leased.
  • Uninsured Motorist Property Damage: If your car is damaged in a loss, you can claim for repairs only if you have physical damage coverage. If you don’t, you have to pay for repairs outright. Uninsured Motorist Property Damage (UMPD) helps pay for up to $3500 for repairs for vehicles without full coverage and will help waive the collision deduction if collision is carried.

What if you live in a no-fault state?

Most states operate under what’s called a tort law or fault-based system. There are, however, 12 states that have their own form of no-fault system in place that applies to accidents that result in injury. States with a no-fault system include:

  • Florida
  • New York
  • Michigan
  • New Jersey
  • Hawaii
  • Kansas
  • Minnesota
  • Utah
  • Kentucky
  • Utah
  • Massachusetts
  • Pennsylvania

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Coverage Required in No-Fault States

If you live in any of these states, you’ll be required to carry Personal Injury Protection in addition to Property Damage and sometimes in addition to Bodily Injury Liability. Personal Injury Protection, more fondly called PIP, pays for your expenses regardless of who’s at fault for the collision.

In no-fault states, you file a claim and your insurer will be the one to issue payments that cover your bills even as the at-fault party. Some states have a minimum limit and some require the company to cover all reasonable costs regardless of how much they add up to. Some different types of expenses covered under PIP are as follows:

  • Emergency medical transport
  • Medical bills for reasonable treatments
  • Rehabilitation costs for care and assistance
  • Costs for lost wages
  • Funeral expenses if someone dies as a result of an accident

The Dangers of Selecting State Minimum Limits

Insurance can become a huge expense. This can be especially frustrating when you have a policy that you haven’t used in years. While you can’t predict if and when you’ll have a loss, you also can’t gamble on the odds that you won’t. You put yourself at risk when you take the state minimum limits, even if they satisfy the law. Here are some of those dangers:

  • You’ll pay out-of-pocket for someone’s medical bills or repairs
  • You’ll get stuck in court fighting claims made against you
  • Claims won’t be settled quickly and will loom over your head
  • Judges may order you to liquidate assets to pay for costs
  • You could have your wages garnished

How much liability insurance do you need?

Now that you know how each coverage option works, you might still be at a loss when it comes to deciding on a liability coverage limit. As you begin to compare quotes, you might notice that liability has three different coverage limits that you must select.

For Bodily Injury, you’ll need to select both a per person and a per-occurrence limit, but for Property Damage, only one per accident limit applies.

It’s hard to pull a number out of thin air, but that might be what it feels like when an agent asks you to choose a number. Selecting a higher limit than required by law is recommended by all credible and honest agents. No number guarantees protection, but some limits are better than others. While you’re free to select the number, most agents recommend that someone with an average income buy the following:

  • Bodily Injury: $100,000 per person, $300,000 per accident
  • Property Damage: $100,000 per accident

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Do you really need physical damage coverage on your car?

Once you’ve looked at liability, you can move on and take a look at physical damage coverage. If your car isn’t leased or financed, you aren’t obligated in any way to buy full coverage. Not being obligated to buy something and not needing it are two different things. There’s still a possibility that you should have the coverage just in case your car is severely damaged.

In most cases, you’re recommended to buy full coverage if you can’t pay out-of-pocket to replace the car on your own. This is a broad rule of thumb, but some experts have come up with more specific ones. While the rule doesn’t work for everyone, usually you should drop full coverage if the annual premiums for comprehensive and collision are a big portion of the car’s value.

Knowing How Your Car Will Be Valued

What you think your car is worth and what it’s actually worth to the company depends on the valuation method the company uses. When a damage claim is being paid, the sentimental value you hold for it won’t be worth anything in monetary terms. Many people are shocked by settlement offers and looking into property valuation is key to choosing the best plan.

What is Actual Cash Value?

Not all companies are the same, but in most cases, a Personal Auto Policy will use an Actual Cash Value when determining what a car is worth following a claim. The policy will then pay up to this amount to either repair or replace the vehicle, even if damages exceed the value.

Actual Cash Value is the car’s actual market value minus any depreciation.

Since depreciation is factored in, you’ll need to determine if the value of your car is high enough to justify the full coverage expense when it’s older. You can also find out about other valuation options if you’d prefer not to be penalized for depreciation.

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What are the alternatives to Actual Cash Value?

The other popular type of valuation method that’s used to settle property insurance claims is Replacement Cost Valuation (RCV). RCV is when a company researches the value of the property by learning what something of like kind and quality costs to buy today. Depreciation isn’t considered.

Unfortunately, many consumers don’t look into the option to buy RCV coverage through their insurers. Some companies are beginning to advertise that it’s an option for an added premium to attract new car buyers to buy coverage. If this is important to you, look for a policy with a replacement cost rider or a new car protection option.

Comparing Auto Insurance Companies

Once you know what types of coverage you want, the limits you should carry, and whether or not you want to pay more for replacement cost valuation, the next step will be to look into each carrier’s reputation.

A policy is only as good as the company that offers it and some companies with very low pricing also receive very low satisfaction ratings.

Not all insurance companies are created equal. Some companies put all of their focus on new business and overlook how important it is to take care of the clients they already have. Other companies want to attract new clients so bad with their low premiums that they overlook how important stability is. Here are some of the different things to look at when you’re deciding on a company:

  • Financial Rating: An insurance company’s financial statements are public records. It might be hard to read these on your own, but some companies take the time to do it for you just so that you can make smart buying decisions. Check out a company’s financial ranking grade through AM Best, and you can cross companies with bad grades off of your list.
  • Licensing and Complaint Ratio: You should only buy coverage through a company licensed in your state. Look at the companies complaint ratio and see if they have a load of official complaints on claims settlement procedures or policy provisions that have been investigated through the National Association of Insurance Commissioners.
  • Customer Satisfaction Ratings: Unhappy customers don’t always file complaints but they do tell their friends and give their opinions on the Internet. If you want to find out if a company is known for delaying claims or providing bad service, you can find out by referencing customer satisfaction survey results. These are available through trusted agencies like J.D. Power and Associates, which conducts surveys on an annual basis to see which companies in the industry are best.

As you can see, there’s a lot more to an insurance policy than just the premium. You’ll need to look into what you’re buying, what you need, and who you’re buying it from before you can make a decision you’re confident with. Once you’ve taken the time to learn about options, requirements in your state, and claims settlement methods, you can begin to look at the companies and their rates. Using an online rate comparison tool will truly help you save time in price shopping after you spent a great deal of time doing research. Enter your zip code in our FREE tool below to get started comparing car insurance rates now!