Fundamentals of Buying a Car in America: Insurance

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 Min read
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February 3, 2021

Trying to figure out how to buy a car as a tourist in America can be a struggle.  From purchase to registration to insurance, there are quite few details to sort.

That's why we're putting together this series, called Fundamentals of Buying a Car in America, to help road-trippers, business travelers, and everyone in between understand the process.

This third article in our Fundamentals series focuses on the fundamentals of insurance.  This step follows ownership transfer, and registration and titling.

In this post, we’ll cover the American auto insurance basics:

Insurance Premiums

Insurance Limits

Deductible

Liability Insurance

Collision and Comprehensive Insurance

Roadside Assistance

Emergency Medical Insurance

Then we’ll discuss some specific insurance topics:

Insurance Policy Periods

Breakdowns / Wear and Tear: Not Covered

Specialty Auto Insurance (RV’s, trailers, motorcycles)

Letting Someone Else Drive Your Vehicle

Insurance and Registration Status

Insurance and Foreign Driver’s Licenses

Insurance Address

Insurance for Vehicles Registered to a Company

Let’s get started!

American Auto Insurance Basics

Insurance Premiums

The amount you pay an insurance company to put a policy in place is called the premium.  The premium compensates the insurer for the risk that they’ll have to pay for a loss you may incur.  So, the larger the loss the insurance company may have to pay out, or the more likely it is to happen, the higher the premium the insurance company will charge.

We’ll come back to premiums several times in the next sections, so keep it in mind.

Insurance Limits

Insurance is a “contract of limited indemnity.”  The insurer agrees to indemnify (or restore to its pre-loss condition) the insured, up to a pre-defined limit.

In other words, if you have a policy with a $50,000 limit that protects you against damage you do to another’s property, and you hit someone else’s Tesla, you may be found financially responsible for the damages beyond $50,000.

However, a policy with a $100,000 property damage limit may cover all of the damages, leaving you with little or no out-of-pocket cost.

But, since the insurance company was taking a larger risk by issuing you a policy with a higher limit, they likely would have charged you a higher premium for the policy.

We’ll discuss limits in American auto insurance in a bit more depth below.

Deductible (known in other places as Excess)

If an insurance company paid for every single ding and scratch you put on your car, well, we would all be less careful about dinging and scratching our cars.

This is why many insurance policies include a deductible, or an amount that the insured must pay before the insurer will pay a claim.  This amount (known in other parts of the world as an excess), incentivizes drivers to be a bit more cautious, as they know they’ll at least partly share any losses.

Changing the deductible amount changes the amount of risk an insurer is taking, which changes the premium they’ll charge you.  All else being equal, an insurance policy with a $1,000 deductible will cost less than an insurance policy with a $500 deductible.

Liability Insurance

Now that we understand premiums, limits, and deductibles, we’re ready to dig into the insurance itself.

American auto insurance contains two basic types of coverage: liability coverage, and collision and comprehensive coverage.

Liability Insurance protects you from damage you may do to someone else’s person or property.  (An easy way to remember this is that liability and lawsuit both start with the letter L.)  If you cause an accident, liability insurance pays (up to your policy’s limit) for repairs to the other person’s property, medical bills to bring the other person back to health, and the legal costs to agree what those amounts are.

All 50 United States and Washington, D.C., require some form of liability insurance in order to drive a vehicle on public roadways.  (In fact, liability insurance is required throughout the Americas.)

But because there are multiple risks involved in an auto accident (damage to property and injury to people), American auto liability policies have “split limits.”  Split limits express different payouts for different types of loss, even if they occur in the same incident.

American auto liability policies have three limits:

  • Bodily Injury, per Person.  This is the limit that the insurance company will pay out to cover injuries suffered by any one person (other than the person who caused the accident).
  • Bodily Injury, per Accident.  This is the limit that the insurance company will pay out to cover injuries suffered by all people in the accident, excluding the person who caused the accident.
  • Property Damage.  This is the limit that the insurance company will pay out to repair property (not owned by the person who caused the accident) damaged in the accident.

These limits are expressed in the following format:

25/50/15

Where the first number ($25,000) is the Bodily Injury per Person limit, the second number ($50,000) is the Bodily Injury per Accident limit, and the third number ($15,000) is the Property Damage limit.

Each US state has its own minimum limits that a person must carry in order to legally drive.  (Colorado’s minimum limits are 25/50/15, while New Jersey’s are 15/30/5.)

Since medical bills and property damage in any given accident can exceed the minimum required insurance limits, people often opt for higher limits.  In addition to minimum required coverage, insurance companies offer higher levels of protection, commonly at the following limits: 25/50/25, 100/300/100, and 250/500/100.

Finally, liability policies don’t have deductibles.  This means that the insurance company will pay for every dollar of damage or injury done (up to the limit of your policy), without asking you to pay anything.

Collision and Comprehensive Insurance

Did you notice that liability insurance only covers damage or injury done to others?  That’s because a person cannot be held liable to (and therefore file a lawsuit against) him or herself.

Liability coverage does not cover damage to your own property in an accident you cause.

That’s why collision insurance exists.  It covers damages to your vehicle resulting from an accident that you cause.

Collision insurance is optional, meaning that it’s not legally required to drive a vehicle on public motorways.  Without it, however, you’ll have to pay for any damage that you cause to your own vehicle.

But what about damage to your vehicle resulting from a non-collision event, like theft, fire, vandalism, hail, falling objects, or flood?  Risks like these are why people also take out comprehensive insurance (also known as other-than-collision insurance).  This coverage pays to repair or replace a vehicle that’s stolen or damaged in a non-collision or roll-over event.

Collision and comprehensive insurance usually carry a deductible, which means you’re responsible for paying the deductible amount (usually $500, $1,000, or $2,000) before your insurance policy kicks in.

The limit for collision and comprehensive policies is usually set at the “Actual Cash Value” of the vehicle.  While there’s a technical definition for Actual Cash Value (ACV), in practice, most insurers use values published by the National Auto Dealer’s Association (NADA).

If the cost to repair damages exceeds a pre-determined percentage of the vehicle’s value (usually 80%), the insurance company will declare the car “totaled,” and pay the policy holder 100% of the vehicle’s value.

Roadside Assistance

Roadside assistance, which usually costs less than $10 for a six month policy, can be a handy addition to your policy.  If your vehicle has stopped running for non-accident reasons, a roadside assistance package will cover:

  • Towing within a pre-defined radius (usually 15 miles, or the nearest qualified repair shop)
  • Jump starts, if your battery dies
  • Fuel delivery, in case you run out of gas
  • Locksmithing, if you lock yourself out
  • Flat tire change
  • On-site labor, up to a pre-determined time (usually an hour)

Emergency Medical Insurance

Neither liability nor collision / comprehensive insurance will cover your medical costs in an accident that you cause, in a hit-and-run, or an accident where the person at fault has insufficient insurance.

Health care costs in the United States are no joke - even a short ambulance ride can cost thousands of dollars - and your home country’s insurance or health care system usually will not pay for care delivered here.

That’s why you should consider emergency medical insurance for your visit to the States.

A number of providers, such as Allianz, AIG, and AXA offer emergency medical insurance with the option to buy a bunch of other useful coverages, such as trip cancellation coverage, personal effects (i.e., in case your camera gets stolen), and more.

At visitor.us, we’re fans of World Nomads.  They offer reasonable prices and great customer service.

Specific Insurance Topics

Insurance Policy Periods

The standard auto insurance policy in the US is six months, while policies for motorcycles and RVs often run for 12 months.

If you know you’ll need coverage for a full six months (or close to it), consider taking advantage of the insurer’s paid-in-full option, which can save you as much as 10-15% of your premium.

Most people don’t realize how insurance companies make money.  Most property and casualty insurers (of which auto insurance is a type) pay out an amount in claims roughly equal to the amount they take in from premiums, so that’s not a source of profit.

Instead, insurance companies turn a profit by receiving money up front and then investing it until a claim needs to be paid out.

That’s why insurance companies are offering you a 10-15% paid-in-full discount - take advantage of it!

Breakdowns / Wear and Tear: Not Covered

While auto insurance protects you financially if an event - such as an accident, a fire, a theft, or a number of other events - happens, it doesn’t protect against processes that happen over time, such as wear and tear, or rust.  Repairs resulting from normal wear and tear (such as a brake replacement, a gasket change, or a belt replacement) aren’t covered by auto insurance policies.

Specialty Auto Insurance: Motorcycles, RV's and Trailers

A standard insurance policy is designed to cover a four-wheeled vehicle of a certain weight without living quarters.  Insurers create policies for vehicles that don’t meet those criteria (i.e., motorcycles, RV’s, and trailers) by adding an amendment or endorsement to a standard policy.

A motorcycle endorsement updates the policy to describe a two-wheeled vehicle, and it usually adds a coverage that protects your safety equipment (helmet, jacket, boots, pants, etc.) against damages up to a certain amount (usually $3,000).

An RV endorsement or amendment updates the vehicle’s description, and usually adds a handful of other coverages, such as:

  • Replacement cost for personal items inside your RV - such as a computer, camera, or smartphone - lost due to theft (standard insurance only covers the vehicle itself, not the unattached items inside, against theft)
  • Premises liability coverage, which covers you up to a specified limit (usually $10,000) in case someone hurts themselves in or around your RV
  • Emergency expenses coverage, which covers transportation and hotel costs if your RV is disabled away from your home.

Trailers take advantage of a feature embedded in all standard auto liability policies - liability protection automatically extends to anything that your vehicle is towing.  For instance, if you are towing a trailer and merge into someone else, hitting them with your trailer, your liability policy will protect against damages to their vehicle.  Collision and comprehensive coverages don’t automatically extend from your vehicle to your trailer, though, so you may want a separate collision / comprehensive policy for your trailer.

Letting Someone Else Drive Your Vehicle

Standard auto insurance policies have a “permissive driving clause,” which extends your coverages to (almost) anyone you permit to drive the vehicle.  (Coverage may be refused if the car is lent to someone without a license, or under the influence of drugs or alcohol, for instance.)

If someone else will drive your car more than occasionally during your policy period, your insurer will often require the other person to be named on the insurance policy (and their driving history incorporated into your policy’s rates).

Insurance and Registration Status

Your vehicle’s registration status has little to no impact on your insurance policy’s validity.  Whether you’re driving on temporary tags or your registration is a bit out of date, your insurance will still cover you.

Insurance and Foreign Driver's Licenses

Most major American auto insurers require an American driver’s license.  Progressive and National General (through Good Sam) are two we’ve found that provide coverage to drivers with foreign driver’s licenses.

An international driver’s permit (IDP) is not required to take out an insurance policy with either of these carriers.

While the other insurers will let you buy a policy on their website, they will send a letter shortly after the policy takes effect, requesting a scan of your American driver’s license.  If they do not receive it (usually within 30 days), your policy will be automatically cancelled.

Insurance Address

Just as every US state has its own process for vehicle registration, each US state has its own insurance regulations.  The regulations that govern your policy depend on the address (and therefore, the state) that you list on your insurance application.

(This is why you can’t get an insurance policy in the US without a US address.)

Even though your policy will be governed by the regulations in one specific state, your policy will be in force wherever you travel within the coverage territory (which, for a standard US auto policy is defined as the United States, Canada, and US territorial possessions).

Should you travel to another state, and that state’s mandatory insurance limits are higher your liability limits, your coverage will automatically bump up to equal that state’s minimum limits.

Insurance for a Vehicle Registered to a Company

Should you decide to register your vehicle to a company, it’s usually a good idea to inform your insurance company, so there is no confusion in case you need to file a claim.

The best way to do this is to inform (or have your insurance agent inform) your insurer that you’d like to add your company as an additional insured interest to the policy.  This arrangement, which is commonly used when vehicles are financed, extends the policy’s protections to the party named as the additional insured interest.

Wrapping Up

At first blush, insurance in the US can be intimidating, especially if you’re an international visitor.  We hope this post helps demystify the subject.  If you have further questions, don’t hesitate to get in touch.  We’re a licensed insurance agent (NIPR #18787154) and happy to discuss the specifics of the visit you're planning.  If you want to know more about buying a vehicle in the US, be sure to check out our other Fundamentals posts on ownership transfer and registration and titling.

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