Wednesday, November 23, 2011

Uninsured Motorists Insurance - It's Not What You Think!

What the heck is Uninsured Motorists Insurance and do you need or want it?

I just returned from a legal conference (on a tax-deductible cruise, no less, take that, 99 percenters!) and one of the topics covered again was Uninsured Motorists Insurance.  In view of my recent posting about Super-Cheap Car Insurance and the comments about that post, it seems appropriate to investigate Uninsured Motorists Insurance more thoroughly.

I do not have Uninsured Motorists Insurance, myself. Perhaps this is foolish, but my take on it is that it covers some pretty long-shot accidents, and it costs a lot of money. Lawyers love it, as it gives them another place to collect money in the event of an accident. But you, the consumer, who has to pay the premiums, should think about it before buying it.

What is Uninsured Motorists Insurance and who and what does it cover? It covers more than you think and that is perhaps one reason the premiums are so high.

The name is confusing, to begin with. Uninsured motorists insurance covers, as the name implies, uninsured motorists. But it also covers "unknown motorists" (the hit-and-run driver) and "under-insured motorists" (drivers who cause you great injury, but have only minimal insurance). So right off the bat, the name is confusing and misleading.

Who the insurance covers is confusing as well. If you have a family and have a car and have uninsured motorists insurance, in many States (such as Georgia) it turns out that not only are you covered, but your spouse is, and your kids. And this coverage extends to the immediate family members in your household, regardless of whether they are riding in your car or not.

So, for example your daughter is in a friend's car, and is hit by a hit-and-run driver. She might be covered by her friend's insurance - but also by your uninsured motorists insurance! Or, for example, she is crossing the street and hit by a hit-and-run driver, she may be covered by your uninsured motorists insurance.

Uninsured motorists insurance comes in two initial flavors - bodily injury and property damage. And usually, if you buy one, you have to get the other. Bodily injury, as the name implies, covers personal injuries. But of course, if you need to go to the hospital, you already have health insurance, right? So there is a first conundrum with uninsured motorists insurance - it covers something that other insurance already covers.

The property insurance can be handy if someone sideswipes your parked car. Of course, if you had collision/comp (something I also do not have) then this would be duplicate coverage as well. But here is an area where this insurance is ripe for fraud. People who do not have collision/comp can claim an accident was due to another, unknown or uninsured motorists. And this is one reason premiums are so high.

As noted previously, the coverage often overlaps other coverages, and who pays what can be confusing - and there are set rules in place as to who pays first, second, third, etc. And today, we have two additional flavors of insurance as well "added-on" or "reduced".

Say you get into an accident with some kid. He is at fault, but has only $25,000 of insurance - the minimum in your State. You have liability insurance, collision insurance, and uninsured motorists insurance. Your passenger has uninsured motorists insurance as well, on their own car. You were driving on work-related business, and your employer has uninsured motorists coverage, too. Plus, your wife has a car policy with uninsured motorist insurance. Who pays out?

The answer is, potentially everyone, depending on the damages and how the policies are structured. Some companies, when issuing polices to a family, issue separate policies for each car - and these policies "stack" uninsured motorists coverage. So if you have $50,000 of uninsured motorists coverage on each car, this may stack up to $100,000 overall. Other companies have one policy per household, and they do not stack at all.

And, like I said, there are convoluted rules as to who pays out first and how much. Usually the liability policy of the "at fault" driver pays out first, so the kid's $25,000 policy pays out initially. Then, we go hunting for more insurance. If the next policy is an "added on" policy for $50,000, then there could be an additional payout of $50,0000 on top of the $25,000, provided there are damages to justify it.

But if it is a "reduced" policy, then it pays out only to the limit of the policy minus the coverage limit of the underlying policy.  In other words $50,000 - $25,000 = $25,000.

And so on down the line, until all damages are paid for.  Like I said, personal injury attorneys like to see these policies in place, as it means there is a greater chance of recovery - of their legal fees.  These guys usually take 50% or more of what is recovered, so they want to see lots of potential insurance to go after, in the event of an accident.

But on a personal level, does this help you, the consumer?  I have tried to figure this out, seven ways from Sunday, and I am not sure it is such a good deal for me.  Other than a payout for a catastrophic long-shot accident, I cannot see it being such a good bargain.

Uninsured Motorist insurance is a conundrum.

A friend of mine, from New York City, says it is a good thing.  "A friend of mine stepped off a curb, was hit by hit-and-run driver and was paralyzed for life!  Fortunately, he was covered by his uninsured motorist insurance!  He had $2M in coverage!"

Perhaps in the big city, being run down by hit-and-run drivers is a real risk.  I don't know.  Myself, I try to look both ways before crossing the street.  I am not sure that paying $1000 a year for "hit by a car" insurance is worthwhile.

And that is the problem right there.  Uninsured Motorists Insurance sounds like a great deal, right?  But $2M in coverage is staggeringly expensive - thousands and thousands of dollars a year.  I literally could not afford to have such coverage.

While a $25,000 policy would run me $100 a year or so, in order to get $1M coverage from GEICO, I would have to raise my liability policy as well  (GEICO only goes to $1M on uninsured motorists).    In order to get this coverage, my six-month premium, for one car raise from $89.20 to $479 every six months, or an increase of $1559.20 a year, for both cars.

I talked with some insurance agents and they agreed.  "It is expensive coverage, so I just get $25,000 worth, which is affordable."

OK, so it is affordable.  But what good is $25,000 going to do me if I am hit by a hit-and-run driver?  It ain't a lot of money, in the greater scheme of things.  And if it is "reduced" coverage, it likely will never pay off.

Incidentally, the numbers listed here are from the website, which really, really rocks.  You can go on and change coverage limits and coverage types and hit 'calculate' and it gives you the new numbers - so you can see, with a few mouse clicks, how much your insurance will be with different coverage levels.  Try calling your State Farm Agent to do this - they will first try to talk you out of dropping any coverages, and then they will "get back to you" with some confusing verbal numbers over the phone.  Sorry, websites rock and brain-dead blondes on the phone, suck.  And not in the good way!

And I already have health insurance, which would cover my medical bills.  I don't care about damage to the car.  And my passengers would be covered by their own health insurance or my liability insurance.

So what does this insurance really do?  It allows you to sue your own insurance company for "pain and suffering" from an auto accident, or perhaps to cover expenses not covered by your medical insurance.  But again, you have to get a million bucks worth to cover that debilitating accident that leaves you a quadriplegic.  $25,000 ain't even going to buy you that electric wheelchair!

I looked at this and decided that (a) $1500 a year for a long-shot "OMG" payout is a lot of money to pay to be paranoid and that (b) paying $100 a year for a crappy amount that barely pays for a new car is just silly, too.  I can't afford the $1500.  I'd rather have the $100.  $100 buys a lot of beer.

And as a result, my overall car insurance cost is $360 a year - to insure two BMWs, on of them a high-performance model.  This is a staggeringly small amount of money when you consider when I was 22, I paid close to $3600 a year for collision and liability insurance, when I was in the "risk pool".

So, Uninsured Motorists Insurance is an interesting product.  But from a PERSONAL PERSPECTIVE, I declined it.  It is expensive, as it is very prone to fraud (e.g., you sideswipe a car, coming home drunk and then claim to be hit by a hit-and-run driver) and the chance of collecting is sort of a long-shot - and the payout is trivial, at least to me.

Again, this is a personal decision that individuals have to make.  When I was 20, I got the least amount of insurance necessary, as it was so darn expensive. 

Sometimes, I think I was smarter at 20 than at 50.  Insurance becomes more "affordable" so we buy it, not thinking whether it is necessary or a good value.

NOTE THAT YOUR AGENT MAY AUTOMATICALLY ADD THIS COVERAGE TO YOUR POLICY.  And yet, I am not aware of any State that requires it.   I noticed that State Farm, for example, added a lot of coverages to my policy, such as uninsured motorists, towing insurance, etc. without my asking.  If you call and ask for "insurance" they will assume you want this coverage, unless you specify otherwise.

I have the basic coverage, at 300/300/100, for liability.  I upped this by adding a $1M umbrella liability policy ($198 a year) on top of this.  This provides a lot of liability coverage for the lowest possible cost.  However, how much liability insurance you need or want depends on your personal situation.  If you are broke, living in a trailer, you don't need much liability insurance - they can't squeeze blood from a stone.

I do not have collision or comprehensive, as I do not think insuring a car worth less than $10,000 is worth spending $1600 a year to protect (no deductible) or $262 a year (with a $500 deductible).  The odds of being in an accident are about once in 11 years, and even then, most accidents do not "total" your car, but are more along the lines of fender-benders.

Car rental insurance, which pays for a rental car while yours is being fixed, sounds like a good deal - for $50 a year, you can get a free rental car - provided you wreck yours.  But I have two cars and can live without one for a few days or weeks.  Fifty bucks is fifty bucks.

Towing insurance sounds like a bargain, too.  But I have AAA, and it costs about the same as towing insurance, and they provide free maps and a 10% discount at most hotels.

You may see these come-on ads on the Internet about the "one trick to cheap car insurance" as if it were some big secret.  Dumping coverage you don't need is that trick.  And yet, so many people put collision and comp on $5000 cars, and wonder why the cost is so high. "But if I wreck my car, they will buy me a new one!" they say.  Not really - you get the book value, minus deductible, and that ain't much.  But they don't see it that way.  They think what is parked in their driveway is the most precious possession they have, and must be protected at all costs.

And since it is insured, they drive like stink all over the place, not worried about a collision, because "Hey, it's insured!". 

But again, that is an example of Poverty-Think.

Not having collision insurance does make one drive more cautiously, I believe.