Owning or operating a car might be convenient, or even necessary for your job, but it can be a source of serious financial risk. Personal liability arising from damage or injury to others, and the cost of repairing a damaged vehicle or replacing a stolen one, can be very high.

Also, most states have compulsory auto liability insurance laws, requiring car owners to maintain liability insurance to register their vehicles. Other states require owners to show proof of financial responsibility.

When shopping for auto insurance, it is important to identify your needs, consider only policies that meet those needs, and then consider the cost. Don’t assume that the minimum legal limits in your state will meet your needs. Like all insurance, the types and limits of coverage, as well as the premium, should be tailored to fit your specific circumstances. Finding the right auto insurance solution is not about simply minimizing the premium you pay, but about optimizing the cost-benefit relationship. Doing this requires a basic understanding of these policies — what they are and how they work.

Personal policy

Automobile insurance usually covers a number of risks in one policy. The most frequently used policy is the personal automobile policy. This policy is designed primarily for private passenger vehicles, but protection can be extended to cover other types of vehicles. The specific coverage and terms of a policy may vary from company to company, and from state to state, but typically, coverage includes the following:

  • Liability insurance — This coverage protects the owner against losses from legal liability arising from bodily injury or property damage caused by an automobile accident.
  • Medical payments coverage — This provision pays medical or funeral expenses because of bodily injury.
  • Physical damage coverage — This section of the auto policy is designed to cover physical damage to the insured auto. Collision, as the name implies, covers collision losses. Comprehensive insurance covers incidents such as theft, fire or storm.
  • Uninsured/underinsured motorist — Even though many states have enacted financial responsibility laws, not all drivers comply. Uninsured motorist coverage pays for injuries, and in some states, property damage, sustained in an accident with an uninsured or a hit-and-run driver.

Read key provisions

An insurance policy is a written contract between the insured and the insurance company. The protection provided by the policy typically represents a significant part of an individual’s overall risk management. Thus, it is important to read and understand key policy provisions such as:

  • What perils are covered in the policy? Virtually all vehicle owners should or must have coverage for personal injury liability. Most must also have coverage for property damage liability. If your car is financed or leased, you will also be required to have collision and comprehensive coverage to protect the lender’s interest. If you own your vehicle outright and could easily afford to replace it in the event of a total loss, you might forego collision or comprehensive coverage. Because of the potential for large costs associated with injuries caused by an uninsured motorist, this coverage is also a must-have in most cases. When deciding which coverages to purchase, outside of those mandated by law or a lender, start by determining the cost of an incident in a worst-case scenario. You should purchase coverage if this cost would derail your financial plan.
  • What are the deductible amounts? A deductible is a dollar amount the insured must pay before the insurance company pays its portion. Set these limits as high as are affordable.
  • In the event of a loss, what are the duties of the insured? A policy will usually list the steps that must be taken in the event of a loss. Make sure that you understand these and that nothing seems unreasonable.

Once you’ve established your needs and understand how a policy can be configured to meet them, you should compare at least a few policies from leading, reputable insurers. You should also ask about special discounts, including rates for federal employees. GEICO is the best known for these discounts, which can range from 3 percent to 10 percent. Just remember that it’s finding the right solution, not the largest discount, that matters most.

Written by Mike Miles
For the Federal Times
Publication August 23, 2004