The President's Auto Insurance Choice

What is wrong with this statement?

When I was young, just got out of college, I had to buy auto insurance. I had a beat-up old car. And I won’t name the name of the insurance company, but there was a company — let’s call it Acme Insurance in Illinois. And I was paying my premiums every month. After about six months I got rear-ended and I called up Acme and said, I’d like to see if I can get my car repaired, and they laughed at me over the phone because really this was set up not to actually provide insurance; what it was set up was to meet the legal requirements. But it really wasn’t serious insurance.

This story happens every day, and it does not have a happy ending. Nobody likes stories with unhappy endings. Neither the insurance company nor the policyholder wants a claim to come out with an unhappy ending.

This is the story of a young man who did not understand different types of insurance; he bought insurance for one thing, and he learned the hard way that it did not cover something else. Insurance is complicated, and sometimes we in the industry make it too confusing for customers.

In this case, however, the man who did not understand what he was buying went on to become the President of the United States. This quote is taken from a speech that President Obama made earlier this week. (See the video at http://www.whitehouse.gov/photos-and-video/video/bipartisan-meeting-health-reform-part-2. Skip ahead to the 52:00 minute mark.)

What I Would Have Explained to President Obama

Most car insurance policies have the following three types of coverage available:

1. Coverage for legal liability to other people. If you hit somebody or otherwise cause injury to them or damage to their property, you are responsible for the bills.
2. Coverage for injuries to you, your family, and your passengers. You might also have health insurance that would cover you.
3. Coverage for your car and other property. This pays to to repair or replace your car if you damage it in an accident. (If another driver was at fault, his or her coverage for legal liability (#1 above) would pay for the damage to your car.)

The insurance customer can choose which of the three types of coverage he or she thinks is worth the money. Often we talk about the government forcing us to buy insurance. In most cases, however, the government requires us to buy only #1, coverage to protect other people from us. The government has no authority to tell us to buy coverage to protect our own car. We are free to make that decision based on whether the car is worth it.

In the story above, it appears that President Obama decided that the car was not valuable enough to insure. In that case, however, do not blame the insurance company for refusing the pay the claim. It was still real insurance, but only for #1, only the part that the Illinois government required him to buy.

How does one decide whether to buy #3?

It is much easier than deciding the right amounts for the first two options. There are two simple questions:

• Would you need the car repaired or replaced if something happened to it? If not, then do not buy insurance for the car--only for the liability.
• If you would need the car repaired or replaced, however, then how much is the car worth? How much can you afford to pay to repair or replace it? Is the car worth more than you can afford to lose? If so, then buy #3, and choose a deductible that is as high as you can afford to pay out of pocket, without causing a hardship.
  

Please, talk to your agent! Get answers to your questions, determine how much coverage you need and how much you are willing to pay for it. If you do, then you will never have a story like Obama's.