By Jim Rogash, Getty Images

Last week New England Patriots quarterback Tom Brady was involved in an accident after another driver allegedly ran a red light hitting Brady’s vehicle. Luckily, Brady was not injured in the accident because with a contract to make $6.5M per year, an injury affecting his professional career could have cost millions. In addition, Massachusetts has state minimum auto insurance liability coverage of $20,000 and a Brady injury could have left the other driver financially devastated. I realize that millionaire Tom Brady’s are not driving all over Lancaster PA roads but the story teaches 3 important lessons about liability auto insurance.

Lesson 1 – State Minimum Liability is Very Minimal

Pennsylvania has 2 state minimum liability limits that are required for every auto insurance policy. The first is called “Bodily Injury Liability” and it pays when you are liable for injuring someone else in a car accident. The PA state minimum amount of Bodily Injury Liability is only $15,000 for injuries to one person and up to $30,000 for one accident. The other state required liability coverage is called “Property Damage Liability” and it pays when you are liable for damaging someone else’s property, typically their car. The PA state minimum amount of Property Damage Liability is only $5,000 per accident.

Thus, if you are liable for a single injury totaling more than $15,000 or cause damage to a car that costs more than $5,000, the auto insurance coverage will run out and you will be personally accountable for paying the remaining balance. With the high cost of medical treatment and the average new car costing $30,000, you can see it would not take hitting a Tom Brady professional or a Tom Brady car to exhaust these state minimum limits quickly.

Lesson 2 – Reducing Liability Risks A lot for A Little

Everyone is looking for a way to save money right now and one place people are turning to is their auto insurance policy. I think that shopping your car insurance, reviewing your policy to maximize discounts or raising your deductibles are all great ways to reduce costs, however, reducing liability coverage is generally a bad idea.

Bodily Injury and Property Damage Liability are usually one of the cheapest coverages on the auto insurance policy and reductions in these coverages usually will not result in big cost savings. More importantly, liability is what protects your assets and family when you are liable in a car accident. Remember once your auto insurance liability limits run out, you are personally liable for the difference. Liability and your financial future are not worth risking just to save a few dollars.

Lesson 3 – Protect Yourself from Low Liability Insurance Drivers

Even if the person who hit Brady had excellent liability limits, it is still unlikely they would have had enough insurance to cover a serious injury to Brady. In this situation, Brady could have filed an “Underinsured Motorists” claim on his own auto insurance policy to cover his injuries after the other person’s liability ran out. Can you image the potential size of that Underinsured Motorists claim?

Even if you do not make millions like Tom Brady, a serious auto accident injury could still lead to very expense medical bills, lost wages and pain and suffering. In a down economy, many people are driving with state minimum or low liability insurance and Underinsured Motorists coverage gives you a resource to pay for your family’s injury when the other person’s insurance is not adequate. Make sure to find if you have this important optional coverage on your auto policy because you never know how much liability insurance the other driver may have.

What Does Renter Insurance Cover?

Coverage for your Personal Belongings

Whether the contents of your home – furniture, clothing and other items – are stolen or destroyed in an insured disaster, such as a fire, they are covered under this part of the policy. However, just like a homeowner insurance policy, most renters insurance policies have special limitations for certain types of property.

Buy the replacement cost option. This will help ensure you get what it costs to “replace” your belongings at claim time and it only costs a few extra dollars per year.

Liability Protection

When most people think of buying renters insurance they want to protect their belongings, but the most valuable part of a renters policy is the liability coverage. Liability protection covers you against claims or lawsuits for bodily injury or property damage that you or your family members negligently cause to other people or property. It also pays for injury or damage caused by pets.

So if your son, daughter or dog accidentally ruins your neighbor’s valuable rug, you’re covered. But if they destroy your rug, your liability coverage does not provide compensation.

Your policy also provides medical coverage up to a specified limit. In the event a friend or neighbor is injured in your home, he or she can submit the medical bills to your insurance company. Expenses are paid without the injured party filing a liability claim against you.

Coverage for Additional Living Expenses

If you lose the ability to live in your apartment because of a covered loss this coverage pays for additional living expenses you incur due to temporary relocation. Note that it does not pay for the total expense, just the expenses due to the vacating of your home.

How Much Does Renters Insurance Cost?

Renters insurance is one of the best insurance buys on the market. Most policies in the Lancaster, PA area range between $50-$250 per year depending on the amount of personal property and the deductible on the policy.

Sometimes renters insurance can even be free! When renters insurance is also placed with the same company as your auto insurance, you can get a new discount on your auto insurance that can completely offset the cost of the renter insurance.

Although renter’s insurance is usually not required, it is just as necessary to have. It is a great example of using the philosophy of getting a lot for a little.

When Do I Need to Get Car Insurance for My Teen?

The simple answer is to check with your insurance agent. Each car insurance company has different requirements for adding new drivers. Some require that new drivers are added to a car insurance policy when they first get their permit and others wait until they are licensed.

Should My Teen Have Their Own Car Insurance Policy?

From a risk perspective, teen drivers should have their own car insurance policy. A separate policy for a teen is more likely to keep a teen’s accidents or violations from affecting the parent’s policy. This helps to protect mom and dad’s car insurance price from going up or being cancelled/non-renewed because of a teen driver. Note that for a teen driver to have a separate policy, most car insurance companies require that the teen’s car is solely titled or co-titled in the teen’s name. Also remember that car insurance follows the car. So if a teen gets into an accident while driving the parent’s car, the accident would be on the parent’s policy, not the teen’s.

From a price perspective it is usually cheaper to put a new teen driver on the parent’s car insurance policy. The parents normally qualify for more discounts and have a better insurance score that leads to lower insurance prices. Regardless, have an insurance agent quote a teen driver on their own policy and on the parent’s policy. The price difference may be small and worth separating the risk.

How Can I Keep the Price Low?

Stay Accident and Violation Free – Accidents and violations are the quickest way for a car insurance policy to skyrocket in price. One way to help prevent accidents and violations is communicating about driving tips and setting driving guidelines. Go to Pennsylvania Department of Transportation to share driver safety tips with your teen and learn how parents can effectively teach a teen to drive.

Shop Around – According to the PA Insurance Dept “A good rule of thumb is to get quotes from at least 3 different insurance companies”. Different car insurance carriers rate teen drivers differently and shopping a few different car insurance companies helps ensure the best car insurance solution for your family’s situation. Remember that the lowest price is not always the best solution and make sure to compare “apples to apples” when getting quotes.

Good Grades Matter – Most car insurance companies offer good grade discounts of 5-10% for students with a GPA of 3.0 or higher. Edmunds.com suggests finding out how much you can save if your teenager gets the discount and giving all or a portion of that money back to your teen. This not only provides a reward for academic performance but it motivates the teen to continue to get good grades.

Driver Training Pays – Most car insurance companies offer a driver training discount if a young driver completes a combination of classroom instruction and behind the wheel training from an accredited driver training course. Click here to find a driver training school near Lancaster, PA.

Don’t Finance a Car – Normally the biggest cost for a teen’s car insurance policy is the comprehensive and collision coverage, which covers damage to their car. Financed cars are required to carry both comprehensive and collision coverage because the financing organization wants to ensure that they get their money back if the car is damaged or totaled. The best advice is to buy a used and reliable car with safety features (airbags, ABS brakes, keyless entry) that does not require financing. That way you can choose to add comprehensive or collision coverage and keep the car insurance price reasonable.

If you have any other teen related car insurance questions, please leave them in the comment box below.

Claims May Add Surcharges

Most insurance carriers surcharge an existing homeowner insurance policy once a customer submits 2 or more paid claims in a 5 year period. Even if a policy has 2 paid claims costing $500 or 2 paid claims costing $50,000 in a 5 year period, the homeowner insurance policy will still have the same surcharge. Thus, before submitting a claim it is important to consider the estimated cost of a claim and how much your insurance carrier may surcharge the policy.

A CLUE Records All Claims

In a our prior blog post “Get A C.L.U.E – A Carfax Report for Houses”, we talked about how a CLUE report shows homeowner insurance claims on a property for the past 5 years. However, did you know that all homeowner insurance claims submitted to the insurance carrier are documented on a CLUE report regardless if the claim is paid or not. Thus, it is always good to talk with your insurance agent to understand if your claim is covered or excluded before it goes on a CLUE report for the next 5 years.

Claims Information Can be Available to Buyers

Home buyers and real estate agents can now get a CLUE report by requesting the seller to purchase a CLUE Home Seller’s Disclosure Report from Choicepoint. This special CLUE report removes all the personal information about the property owner but it still has the 5 year claims history. Thus, it is important to remember that submitting a homeowner insurance claim could impact a future real estate transaction.

Overall, submitting a homeowner insurance claim can be a very smart decision but make sure to consider all the implications of a claim with your agent before submitting one. Being surprised when your next homeowner insurance bill comes in the mail or when you try to sell your home is never a fun experience.

Your credit score is extremely important these days. Like your social security number, your credit score follows you wherever you go, whether it’s to get a mortgage, apply for a car loan, purchase insurance or even to get a job. So naturally, if you know how to check your credit and if you’re armed with tips on how to improve your credit score, you will be in better shape than someone who isn’t.

Main Factors That Affect Your Credit Score

- Your payment history. The most important factor to a potential lender is whether or not you will pay your bills in full and on time. The more recent your good (or bad) payment history, the more important it will be for your credit score.

- Your outstanding debt. The more credit cards you have that are maxed out, the lower your score will be. Try to keep your credit card balances at 25 percent or less of your limits.

- The length of time you’ve been building credit. The longer your credit history, the higher your credit rating.

- The number of inquiries on your credit report. The more times you’ve applied for credit cards or loans, the more credit report inquiries will show up on your credit report. A higher number of credit report inquiries may indicate that you’re struggling financially. However, there is also a myth about inquiries. All inquiries received with a 14 day period are seen as a single inquiry; shopping for credit several times throughout the year can raise a red flag. So, for example, it does not hurt when you have an auto dealer have several banks check your credit when you buy a new car.

- Steady employment. People who are steadily employed are viewed as being better able to pay their bills on time.

- Late or missed payments

- Using more than 80 percent of your total amount of available credit

- Bankruptcy, liens or foreclosures

9 Ways to Improve Your Credit Score

1. Review your credit report for any errors and correct glitches that may not be accurate (but are still hurting your current score). You can obtain a free copy of your credit report by visiting www.CreditReport.com.

2. Refrain from opening a lot of new accounts over a short period of time, especially if your credit history is on the shorter side to begin with.

3. Pay your bills on time.

4. Don’t open any credit lines you probably won’t use. For example, don’t open a lot of store credit cards just to get the initial 10 percent discount.

5. Instead of moving credit card balances to lower rate cards, try to pay them off. Transferring balances can change the ratio of your total credit card balances to your total available credit lines, hurting your credit score.

6. Open a few new credit accounts, use them responsibly, and make your payments on time.

7. Try to use your credit cards less. Even better, pay them off every month. The bigger the space between your total credit limits and the balance you carry, the better.

8. Contrary to what you may have heard, don’t close old, paid-off accounts. Credit companies used to advise people to close old credit cards they were no longer using. But closing these cards shortens your credit report and makes you seem less credit-worthy.

9. Avoid bankruptcy. Declaring bankruptcy is one of the worst things you can do for your credit score. It may seem like the easy way out in the short term, but over time it will cost you tons in the way of high interest rates.

Overall, keep in mind that negative items on your credit report are a lot more powerful than positive items. A late payment can affect your score in a month or two, while making payments on time can take six to 12 months to improve your credit rating. Also remember that having too much credit can be as bad as not having enough, if your credit has been mismanaged.

To help determine if raising your car insurance deductible is a good financial decision, you need to analyze the payback period.  The payback period is how long it would take to buy back your deductible from insurance premium savings. It can be calculated in 4 simple steps and is best explained by using an example.

Assume that our friend Mr. Fancypants is paying $1000 per year for car insurance and he currently has a $250 collision deductible on his car. To save money, Mr. Fancypants wants to increase his collision deductible to $500 making his auto insurance drop to $900 per year. Is raising Mr. Fancypants collision deductible the most economical decision using the payback period method?

Step 1: Calculate Retained Risk – When you raise your deductible that means you will pay more out of your own pocket before the insurance policy starts to pay.  Originally Mr. Fancypants would pay the first $250 for a collision claim but raising his deductible means he would now pay the first $500. Thus, Mr. Fancypants is retaining $250 of additional risk by increasing his deductible. (Learn more about retained risk in our prior blog article)

New Deductible – Original Deductible = Additional Retained Risk
$500 – $250 = $250 (Additional Retained Risk)

Step 2: Calculate the Savings – Since Mr. Fancypants is retaining more risk, the car insurance policy goes down to $900 per year and he saves $100 per year.

Original Premium – New Premium = Savings per Year
$1000 – $900 = $100 (Savings per Year)

Step 3: Calculate Payback Period – The payback period in this example is how long Mr. Fancypants would have to drive without having a covered collision claim to make his money back. It is calculated by dividing his additional retained risk (Step 1) by the additional savings (Step 2) for raising his collision deductible.  For Mr. Fancypants, he would have to drive 2.5 years without a covered collision accident claim before he would make his money back from the savings on his policy.

Additional Retained Risk / Savings per Year = Payback Period (yrs)
$250/$100 = 2.5 years

Step 4: Compare Payback Period – Since Mr. Fancypants does not actually know how long he will drive without having a collision accident, he needs a guideline to help make a decision. A general rule of thumb is if the payback period is less than 4 or 5 years, it usually makes financial sense to increase your car insurance deductible. Since the payback period for Mr. Fancypants is 2.5 years, the payback period method suggests that he should raise his deductible.

Remember that the payback period is just one guideline for making the decision to raise your insurance deductibles. Other factors to consider would include your likelihood to submit a car insurance claim, if you have the cash to pay the higher deductible and your prior driving record just to name a few.

Have you used the payback period to determine if your car insurance deductible are the most economical? Leave a comment below.