Auto insurance is a requirement in most states, but many of the coverages offered are optional. You may have purchased car insurance because you were required to, but do you know what the terms mean on your declarations page? Understanding your auto insurance policy is important so you can know what is covered, what is not covered, and whether you need the optional coverages offered by the auto insurer.
The cost of car insurance can vary greatly by the state you live in, the type of vehicle you drive, your driving history and the coverage options you choose. If you want to make an informed decision when buying auto insurance, knowing the insurance terms and what they mean can help you shop for insurance.
Nearly all states require liability coverage on vehicles driven on public roads. Liability insurance covers the other person if you injure them or damage their property in an accident where you were at fault. There are two types of liability coverage:
- Bodily injury liability: This coverage pays for the other parties’ injuries you cause in an accident. This could be another driver, pedestrian, motorcyclist, bicyclist and passengers in the other vehicle. Bodily injury liability is usually divided into two limits – the highest limit the insurance company will pay per person for injuries and the highest amount it will pay total for the accident.
- Property damage liability: This coverage pays for damage to public or private property you cause in an accident. Most often, it will be another vehicle, but this could also include objects such as a telephone pole, fence, public or private building and mailboxes. The amount listed on your policy for property damage liability is the most the insurance company will pay per accident.
2. Uninsured and underinsured motorist coverage
Uninsured motorist coverage pays if someone injures you or passengers in your vehicle or damages your property but does not have auto insurance. This coverage could apply to hit-and-run accidents, where someone leaves the scene after causing an accident.
Underinsured motorist coverage pays if someone causes damage or injuries to your property or you but does not have enough insurance to pay the full claim. For instance, you are injured in an accident that was not your fault. Your injuries were $50,000 in medical expenses, but the responsible party has bodily injury liability coverage of $25,000. You can file an underinsured motorist bodily injury claim for the additional $25,000.
Some states mandate uninsured and underinsured motorist coverage, while it is optional in other states.
3. Personal injury protection and medical payments
Personal injury protection and medical payments help cover you and your passengers if you are injured in an accident, no matter who is at fault. You are also covered if you are a passenger in someone else’s vehicle, a pedestrian or on a bicycle.
Medical payments coverage pays for your medical bills if you are hurt in an accident. This generally includes:
- Medical deductibles
- Ambulance and EMT fees
- Nursing home or rehabilitation care
- Certain medical equipment
Personal injury protection, or PIP, also pays for medical-related expenses, plus more. Lost wages, funeral costs, child care or home services can be included, as long as the need is a direct result of your injuries from a covered auto claim.
PIP is mandatory in some states, but you can waive the coverage in most PIP states if you sign a form. Medical payments is required in a few states but optional in most states.
Comprehensive is physical damage coverage for your vehicle. It is sometimes referred to as other-than-collision coverage because it usually covers what collision does not. Comprehensive insurance provides coverage if your vehicle is damaged by:
- Weather events
- Natural disasters
- An animal
- Theft of the vehicle
- Falling objects
Broken windows or windshields are also covered under comprehensive insurance coverage. A deductible may apply to use this coverage. Comprehensive is usually optional unless you have a loan or lease and the lender requires it.
Collision insurance provides physical damage coverage if your vehicle is damaged by hitting another object. Objects include another vehicle or item other than an animal. Collision insurance is most often used when you are at fault in an accident, and your car needs to be repaired or is totaled. A deductible applies, and it is deducted from your claims payout amount when your auto insurer pays your claim. Like comprehensive, collision is usually optional unless a lender requires it.
A deductible is an amount you pay out of pocket to help cover repairs from an insurance claim. Not all coverages have a deductible. Comprehensive, collision and uninsured motorist property damage are the most common auto insurance deductibles. You can usually choose your comprehensive and collision deductible, but the state typically has statewide uninsured motorist and PIP deductibles.
When you choose a deductible, the higher the amount, the lower your premium. But if you have to file a claim, you have to pay more out of pocket. If your vehicle is totaled, the insurance company will deduct the deductible amount from the market value. For example, if your car is totaled with a value of $4,500, but you have a $1,000 deductible, you will receive $3,500. If your vehicle needs to be repaired after an accident, you are responsible for paying the $1,000 deductible to the repair shop and the insurance company pays the rest.
7. Optional Coverage
Optional coverages, sometimes referred to as add-on coverages, are coverages you can include in your car insurance policy but are not required. These coverages generally include:
- Full glass coverage
- Rental car reimbursement
- Roadside assistance
- Gap insurance
- New car replacement
The premium is the amount you pay to your insurer for your auto insurance policy. How much you pay will vary by insurance company. Many factors go into determining your premium, such as:
- ZIP code (except in CA and MI)
- Age (except in HI)
- Marital status (except in MI)
- Driving record
- Claims history
- Year, make, model of your vehicle
- Coverages and deductibles selected
Many auto insurance policies are effective for six months, though annual insurance policies are also an option with many insurers. You can pay the insurance in a lump sum, but most companies offer different payment options, such as monthly payments.
9. Full coverage
Full coverage car insurance is a term that refers to liability and physical damage coverage to help cover you and your vehicle. Most often, full coverage includes state-mandated coverage plus comprehensive and collision coverage. Add-on coverages like roadside assistance and rental car reimbursement may also be included in full coverage.
While the state may not require you to carry full coverage auto insurance, a lender likely will if your vehicle is financed or leased. It is important to understand the terms of your loan or lease, just like understanding auto insurance terms.
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