Compensatory damages received for physical damages are tax-free. Similarly, claims paid for auto repair work are not considered taxable income. However, punitive damage awards, awards for emotional distress and reimbursement for lost wages are taxable.
PLANNING PROCESS
Step 1: Understand Client’s Objectives and Needs. First understand the client’s goals, financial capacity to pay the financial loss, and the premiums. Different states require varying liability coverage minimums. However, considering the daily risk exposure, most motorists prefer to have auto liability coverage far in excess of these state-mandated minimums. The amount of liability coverage needed to pay for the other person’s car might also be affected by the area in which the motorist does most of the driving. For example, it is advisable to carry higher Part A coverage for the other person’s vehicle when living in, say, Southern California, or New York as compared to driving in smaller towns and cities across the USA.
Step 2: Review the Current Risk Management Plan. Before making are commenda- tion for buying the best auto insurance policy, the planner should review the following items:
• Available coverage (for gaps in current coverage)
• Current coverage (for excess or overlapping coverage)
• Maximum limits on current coverage (for appropriateness)
• Drivers covered under the policy (for additions or deletions)
• Vehicles covered under the policy (for additions or deletions)
• Need for collision and/or comprehensive coverage
• Appropriateness of increasing deductibles for physical damage coverage
• Factors that affect premiums.
Step 3: Recommend Improvements. Based on weaknesses and gaps in the current plan, a planner can make recommendations for improving the coverage. If the premium cost is a factor, then the planner can try to lower the premium by increasing the deductible or eliminating the Part D coverage for old vehicles (i.e., low Blue Book value). The planner should also prioritize and tailor the rec- ommended PAP based on the severity of the risk exposure.
Steps 4 and 5: Select Insurance Company and Policy or Modify the Existing Policy. The final two steps require implementing the plan, and many of the factors discussed in the previous sections apply. Recognize that multipolicy discounts are available when the coverage is provided by the same insurer. Some insurers provide other incentives for maintaining coverage over a number of years (e.g., discounts, disappearing deductibles, free road side assistance, auto loans, and so on).
Self-analysis
Planning for adequate auto insurance coverage means ensuring that the exist- ing coverage compares favorably with the desired limits. A worksheet is pre- sented in Table 5.11 for completing the task.
Annual Checkup
One must have the auto policy revised annually by an insurance professional. We refer to John Sipe’s letter to the Smiths presented earlier, which he attached the Family Insurance Checkup list (Form A) and the Automobile Policy Status (Form C).
The Smith family met with Jim Sipe to discuss their auto policy. Following the meeting, a number of changes were made, as listed next:
1. The bodily injury liability and the property damage liability on the 2002 Mercedes were increased from 100/300/50 to 100/300/100 to make them consistent with the coverage on the other cars.
2. Limited property damage coverage (Y) was increased for the Mercedes which had a lower coverage.
Table 5.11 Automobile Insurance Worksheet
Current Coverage Desirable Coverage Liability Insurance:
Bodily injury ______ 100/300
Property damage ______ $100,000
Umbrella policy* ______ $1 million
Collision ______ $500 deductible
Comprehensive ______ $100 deductible
Uninsured Motorists’ Coverage ______ Same as liability coverage limits Underinsured Motorists’ Coverage ______ Same as liability coverage limits
Medical Payment Coverage ______ N/A
No-fault Insurance:
Medical expense ______ Coordinated
Other coverage ______ Full
Source: Author’s own work.
Note: *Insurance companies generally require higher limits (e.g., 250/500) in order to provide an umbrella policy.
3. Comprehensive coverage on the 2012 Infiniti car was increased because it was a “fancy” car.
The Smiths also discussed the advisability of purchasing a 2013 Mercedes 380 SE. However, when they discovered that it would cost $2,400 a year to insure this car, the idea was dropped.
Form A: Auto
How many cars are in the household? Uninsured 100/300
Are cars driven to work/used for business: Death, dismemberment, loss of sight: None
One car Loss of earnings: Full coverage to state
Which children drive/which cars: maximum Other regular drivers: H/W Other coverage:
Annual mileage: Under 7,500 each Nonowned auto coverage:
You should consider Do you have?
High liability limits: Motorcyles/scooters:
Higher medical/no-fault coverage: Trucks/RVs/motorhomes/campers:
Higher deductibles comp./collision: Other vehicles/trailers:
Emergency road service: Cellular phone/CB/cassette radios:
Rental/travel expense coverage: Plans to purchase new car:
Form C: Auto Policy Status, January 1, 2015 Infiniti 130 Car,
2012 Mercedes
Benz Car, 2002
Mazda Car, 2010
Policy number 0139849 0298379 0391365
Class 6A 6C 6B
Vehicle description Infiniti, G20 4D SED 350 SD “LX” 4D SED
Total premium 584.08 522.88 719.86
Covered date 8-1-12 8-1-12 8-1-12
Birth date 2-14-45 5-13-40 5-13-40
Bodily injury liability (A) 100/300/100 100/300/50 100/300/100 Limited property damage B 500 limit 100 limit 500 limit
Comprehensive deductible 100 100 100
Collision regular deductible 500 500 500
Uninsured motorist 100/300 100/300 100/300
Personal injury protection Active Active Active
Property protection Active Active Active
Catastrophic claim Active Active Active
Application discounts: (a) multiple car discount, (b) multiple line discount, (c) accident- free discount, (d) vehicle safety, (e) anti-theft, and (f) safety belt discount.