Auto Insurance Supplemental Coverage

What Supplemental Coverage Is

With all insurance coverage, there are certain things that basic policies cover and things that they do not. This is all spelled out in sufficient detail in the terms and conditions of all insurance policies, which serve to provide clear direction to both the insured and the insurer and look to avoid uncertainty or disputes.

Many people do not read their policies that carefully, if at all, and the time to become aware of a policy’s limitations is not after an incident happens, and especially learn that you would have purchased additional coverage or even another policy if you were sufficiently aware of what you purchased.

We can think of supplemental coverage as any add-ons to a basic policy, in order to purchase additional protection against things that the base policy did not provide for or provide enough protection against.

Insurance companies do want to offer additional protection should we desire or require it, and even though this does apply to other forms of insurance, they do offer extra protection with auto insurance policies as well.

When people think of auto insurance, they generally just think of the three main components, which are liability, collision, and comprehensive protection. We need to look at and understand everything that may be included in an insurance policy though, even with auto insurance policies, in order to make an informed decision about the type of coverage we want to purchase.

We can define supplemental coverage with auto insurance as something that may or may not be included in a basic policy covering these three main types, and this may involve it not being included at all or not offering the level of coverage we require or desire.

There are therefore two types of decisions that we make when we consider auto insurance, the main types that we will purchase, whether that will be just liability insurance, or liability plus one or both of collision and comprehensive, and anything else beyond that is in the realm of selecting supplemental coverage, whether this be adding more coverage or selecting other particular types of coverage not included at all with basic policy types.

Adding More Liability Coverage

One of the most basic decisions, and one that everyone makes, is whether to go with just the basic liability coverage or to add additional coverage of various amounts. The base amount these days is usually a million dollars, although in some areas this may be lower or higher, and we can just go with that amount or select a higher one.

Everyone’s needs are different and while we may want to economize here and just refuse to pay more for auto insurance coverage than we are required to by law, we should be thinking about this a bit more at least and really determining whether we would not be better off selecting additional coverage.

We do need to be aware that the rationale for insurance always is to protect against financial hardship, and it may very well be the case that claims against us over a certain amount, whether that be a million dollars or perhaps higher, will not really result in much more financial hardship for us.

Auto Insurance Supplemental CoverageIf we are insured for a million, and get a judgement against us for two million, or three million, and have minimal financial assets, we are often in a similar situation with these larger amounts, as we may not be able to pay neither. Therefore, going from two to three million may not represent any additional financial hardship, if both exceed our capacity. It would not make sense then to pay more for something we will not get enough benefit out of or any additional benefit in this case.

If the size of judgements were so high that no one would ever be able to pay them, buying any liability insurance at all would not make sense, as people would be equally screwed financially in all cases, with the amounts well beyond their ability to handle.

This all needs to be kept well in mind when looking to add additional liability coverage, if it would really make much of a difference and enough of one to justify the higher premiums.

There are people though who would be materially affected with the two or three million dollar decision, for instance if they were worth a million and only bought the two million worth of liability coverage and had a judgement against them for three million dollars. This would wipe out their net worth and this is what they are seeking to protect with this liability coverage.

In this example, while we might think that one would be well advised to purchase enough coverage to protect against the largest settlement one could encounter, this isn’t necessarily the case as we still want to make sure that we’re getting fair value out of the extra premiums. As it turns out though, supplementary liability coverage is generally pretty modestly priced, and one cannot go too far wrong in this situation where we have much to lose and just purchase the largest amount that may be expected to be needed.

Insurance Deductibles

Reducing or eliminating deductibles is also a form of supplemental coverage, given that standard auto insurance policies do contain these deductibles where one pays the first amount of a claim themselves and the insurance company only pays amounts that exceed this.

We can usually pay more to have these deductible limits reduced or even eliminated, and there are some people who relish the idea of being able to make an insurance claim and have the insurance company bear the full cost of it.

While we do not want to ignore the potential psychological benefits that may be apparent here, and peace of mind is a big component of any insurance, we also want to make sure that these psychological benefits do not accrue as a result of our not thinking well enough about the actual value of purchasing this additional coverage amounts to.

This is not to say that reducing or eliminating the normal deductibles included in auto insurance policies is always a bad idea, but for this to make sense, one would have to be truly in a bad situation as a result of having to pay these deductible payments.

It’s not hard to imagine one being in such dire financial straits that this would really be the case, where this may lead to such things as taking food off one’s table, not being able to pay the rent, or defaulting on loan payments, this is usually not the case. If it isn’t, we need to be asking ourselves why we would want to pay several times the valuable of this extra coverage without a real need for it.

Gap Insurance

One of the more popular add-ons to policies, and one that should be carefully considered by anyone who has comprehensive and collision insurance as well as a secured loan against a newer vehicle, is called gap insurance.

If the full value of the vehicle is lost, for instance if it is stolen and not recovered or damaged severely in an accident such that it would cost more to fix it than its market value, insurance companies will only pay you what the market value is worth.

Due to the fact that newer vehicles depreciate pretty quickly, this can have you owing more on your loan than you get back from the insurance company. While this might only be a few thousand dollars, if you don’t pay off the entire amount of a loan, you still need to make regular payments on your existing loan.

This prospect does have people becoming more alarmed than they probably should be, thinking that they aren’t going to be able to manage two loans at the same time. This may be true, but there are usually other options involving refinancing that will reduce the impact of this upon one’s finances.

Still though, this does not result in a pleasant situation at all and will at a minimum require larger loan payments on the new vehicle or require us to purchase one of lesser value to compensate for this gap. Many people therefore choose to add gap insurance and it can be purchased for pretty modest amounts and eliminate this concern altogether.

Other Auto Insurance Add-Ons

There are a number of things that you can add on to your insurance policy, which starts by becoming very familiar with what is covered by a basic policy as well as what additions may be available at what cost.

The guiding principle here needs to be what situation the loss would put yourself in, and you can bet, without any calculation whatsoever, that any insurance coverage of any type is going to cost you more over time than it is worth.

Things like income coverage can certainly qualify here, and if you become injured as a result of an accident and don’t have any other coverage for this, being able to keep your income at a minimal level to maintain your basic financial obligations can be plenty important indeed, and this is a loss that we would want to protect against often times.

Other things, like loss of use coverage, where if our car is in the repair shop the policy will cover the cost of renting a car, is not something that tends to cause much of a financial burden, as it really doesn’t cost more than a few hundred dollars for this and this is well beneath the threshold of a significant financial hardship for most people.

If a person is broke all the time and spends every cent as soon as they earn it, and they won’t have a way to work if this happens, then this may make sense, but generally it would not.

We can often purchase special glass coverage that does not involve any deductible, and that might make sense for some people, but once again, this not result in a very significant financial loss if you have to pay the rather small deductible that standard comprehensive insurance tends to come with.

What throws people off here is their thinking that having a deductible that is higher than the typical cost of a claim leaves them uninsured basically against glass damage, but this is one example where being uninsured against something may be indeed the most sensible choice.

We should be looking carefully at all the options that are available with our auto insurance companies, and also comparing them across insurance companies, with the goal of selecting to coverage which makes the most sense to us at the best price we can find. This may involve our adding coverages to the basic ones but we should only do that when it is wise to do so after careful consideration.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.

Contact John: [email protected]

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