Understanding Automobile Insurance

Posted on May 7, 2009 by Dr. David Edward Marcinko MBA MEd CMP™

A Review for Physicians

By Gary A Cook; MSFS, CLU, ChFC, RHU, CFP® CMP™ (Hon)

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Like the Home Owners policy, automobile insurance comes in a package (commonly called a Personal Auto Policy, or PAP) containing declarations, forms and endorsements.

These are: Liability Coverage, Medical Payments coverage, Uninsured Motorist coverage, and Coverage for Damage to your auto.

Important Elements

The important elements of automobile coverage are:

  • The vehicle or vehicles is covered, whether owned or leased
  • The insured – the covered driver
  • What is covered?
  • What are the limits of coverage – for both property and liability?

Exclusions

What are the exclusions – for example, the business use of a vehicle may not be covered under the personal policy? Other coverage for example includes a friend driving your car, or, coverage driving a rental vehicle. The medical payments coverage outlines the limits of liability for medical services needed as the result of an accident.

PULP

The final area of common personal coverages is the Personal Umbrella Liability Policy. To say that our society has become very litigious may be a gross understatement. The umbrella liability policy transfers the risk of losing substantial assets or future personal income to pay legal obligations resulting from an adverse judgment. The umbrella policy originated to provide risk protection against catastrophic legal claims or judgments. Typically, coverage limits begin at $1 million with upper limits of $10 million, and some unique situations, more. The term “umbrella” arises from the contract language that reflects that the individual carries the appropriate underlying basic coverages (homeowners or automobile) and that this coverage is triggered after the limits of the base contracts are exhausted.

Provided Coverage

An important element of this policy is that coverage provides for protection for the named insured, spouse, and family members living in the household.  This coverage should be very important to those households with teenage drivers.  Organizations may also obtain the protection of an umbrella policy, with certain limitations and exclusions. Unfortunately, “failure to render proper professional services” is very frequently a common exclusion, though some insurance companies will cover this loss exposure with an increased premium.

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Other Policies

Other common policies available include: Watercraft and Airplane coverage, Title Insurance, Flood Insurance (offered by very few private insurance companies), Renters Insurance (which covers the contents), and Condominium protection (like homeowners, but has language for common wall risks).

Personal Legal Expense Protection

Finally, there is the issue of the taxation of premiums and claim payments. Premiums for personal property and casualty coverage are not deductible. Therefore, only under unusual circumstances will any benefits received from the coverage be considered taxable income.

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Assessment

However, the benefit payments may be considered capital gain if they happen to exceed the insured’s basis in the property. Uninsured losses are generally deductible under the current Internal Revenue Code.

As usual, specific questions concerning the taxation of premiums or benefits should be directed to your professional advisors.

Conclusion

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