Edited by Paul Martin
If you own a car, auto insurance is crucial and required in most states. If you get into an accident, whether it’s your fault or not, insurance provides financial protection for damages caused.
There are several different types of auto insurance, and it can be confusing to navigate and understand each type, as well as how much you’re covered for. It’s important to carry different types of auto insurance to protect yourself in different scenarios.
For example, if you hit another car and cause minor damage, liability insurance would cover the repair costs to another party’s property. Collision would cover damages to your auto. If you get into a major accident, liability insurance would cover the costs of both liability and property damage to others up to the limit of insurance you purchased. And if you have your car stolen or hit by a tree, Other than Collision coverage (often called “comprehensive” coverage) can cover this. In this article, I’ll provide a breakdown of each type of insurance and make sure you understand what you’re paying for and what protection you have.
What Is Auto Insurance and Why Do You Need It?
What exactly is auto insurance? It’s a contract between the insured (you) and the insurer (the insurance company) that provides you with financial protection in case of an accident or damage to your car. In exchange for a fee (known as the premium), the insurance company will cover a certain amount of expenses related to accidents. It also provides you peace of mind in case of large, unexpected expenses. Additionally, a minimum amount of insurance is required in most states in order to register and drive your car.
How do insurance companies determine the premium you pay? There are many factors that they consider. No two people will pay the same exact premium for their car. A major factor is driving history. The more accidents you’ve been in and the more moving violation tickets you have on your record, the more you will pay for insurance, because you are considered a higher risk. Another factor is the car type you have: How much is it worth? What make and model is it? How old is it? Is it new or used? Your age also impacts your premium. Younger people will pay more, as they tend to be more reckless. As you get older, your premium will go down, until you get really old and it can rise again. Finally, where you are located has an impact on your premium. Some cities or towns are more accident prone and some have more costly repair shops.
The key to making smart decisions is understanding the different types of insurance and how they work.
Liability Coverage
Almost every state requires liability insurance at a minimum, although you should carry other types of insurance. There are two types of liability insurance: Bodily Injury (BI) and Property Damage (PD). Bodily Injury Liability insurance covers medical bills, rehab, pain and suffering, and legal fees if an auto accident is your fault. For example, if you rear end another car and cause injury to other people in the car, BI insurance will cover their medical bills related to the accident. Property Damage Liability covers damage to someone else’s car or property when you cause an accident. For example, if you get into an accident where you cause damage to a another auto, PD insurance will cover the costs, including loss of use of that auto during repair. If you cause $10,000 in damage to another car, PD insurance will pay for the damages.
With liability insurance comes limits that the insurance company will pay for different types of damage. They are usually shown as three numbers, such as 30/55/15. The first number represents the maximum bodily injury per person that they will pay, in this case $30,000 per accident. The second number represents the maximum bodily injury per accident, $55,000 regardless of the number of persons injured. And the third number represents the property damage limit per accident, $15,000. The higher the liability amount, the higher your premium and the more flexibility your insurance company has to satisfy the claims of the injured parties. It’s important that you carry more than the minimum required by your state, if you can afford it, as the potential financial expenses you will have could be large if you get into a big accident.
Collision Coverage
Collision coverage covers damage to your car, regardless of who is at fault. It covers the cost of repairing or replacing your car as a result of an accident. Hitting another car, a tree or a guardrail would all be covered under collision insurance. It’s typically required when you have a car loan or lease as the lending company wants to protect their investment. Even if it’s not required, it’s a good idea to get collision insurance, especially if you have a newer or high value car.
Most collision policies come with a deductible. A deductible is the amount you have to pay for repairs before insurance kicks in. For example, if you get into an accident with $2,500 worth of damage and your deductible is $500, you will pay $500 and insurance will pay $2,000. The deductible affects the premium you will pay – the lower the deductible, the higher your premium.
Other Than Collision Coverage
For non-collision damage, Other Than Collision coverage pays forrepair to your auto. Examples of this include “acts of God” such as water damage, trees falling, damage from tornado/hurricane, hail and other natural disasters. Other acts covered by Other Thank Collision include theft, fire and hitting an animal. Like collision insurance, it is often required when you lease or finance a car, but is not required by any state.
Personal Injury Protection and Medical Payments
Both Personal Injury Protection (PIP) and Medical Payments (MedPay) cover certain medical expenses related to an accident. PIP covers medical expenses, lost wages and sometimes loss of wages when you are injured in an accident. It is mandatory in “no fault” states – states where the injured party pays for expenses themselves, regardless of who caused the accident. MedPay is similar, except it is more limited in that in only covers medical expenses. For example, you get into an accident and both you and the passenger are injured. Both PIP and MedPay would cover your hospital bills, up to the limit purchased, while PIP would also cover other expenses due to your injuries. Even if it’s not required in your state, it’s a good idea to have one of these coverages as the cost associated with medical injuries can add up quickly.
Uninsured and Underinsured Motorist Coverage
What happens when you are in an accident, and the other driver has no insurance or doesn’t have enough to cover your repair or medical costs? That’s where Uninsured and Underinsured Motorist coverage kicks in. Millions of drivers in America don’t have insurance, so it’s important to get this kind of coverage and states may require it. An example of where this coverage applies is a hit-and-run driver who collides with your car and takes off, so you don’t know who the driver is. Another example is if you get into an accident and the other driver’s insurance is not enough to cover your medical or car damage expenses.
Other Optional Coverages
There are several types of insurance that are always optional and you may decide that some of them are worth the premium. These additional coverages are known as endorsements.
<1> Roadside Assistance provides help when you are stuck on the road with a flat tire, dead battery or just need towing. It’s similar to AAA services but may be a cheaper alternative.
<2> Rental Reimbursement pays for the cost of renting a car while your vehicle is being repaired. There is usually a limit of how much they will pay per day, but it’s always enough to cover the rental cost of a car.
<3> Gap Insurance covers the difference between the value of the car and the balance of a loan or lease when a car is totaled. If you don’t have this coverage, you could be out of pocket of a large amount of money if there is no salvage value after an accident. This insurance is often provided by the lender who financed your auto loan.
<4> Custom Equipment Coverage is for modifications you have made to your car that have value. The cost/value of the equipment should be significant enough to make this coverage is worth it. These types of equipment can include custom furnishings, stereo, or video equipment.
How To Choose The Right Coverage
With all these options, it can seem confusing to decide which types of coverage and how much coverage to get. Think about your financial situation to help figure out the monthly premium that you can afford and how much deductible you could cover in the event of a loss. It’s important to balance affordability with the potential for a serious loss to determine the right amount of protection. .
Navigating auto insurance can seem overwhelming, especially if you’ve never purchased it before. Make sure you understand the different types of insurance and the options available as you shop around. Remember, while many types of coverage are optional, it’s important that you get the right amount and type of insurance for your specific needs.
FAQ
How do I know how much auto insurance I need?
First, check the requirements in your state to learn what the minimum coverage you will need. Then consider the worse case scenario and what you hope the insurance will do in that case
Why are everyone’s insurance rates different?
There are many factors that determine the premium you will pay. First is the amount of coverage and types of insurance that you get. Second, rates are based on many other things such as gender, age, location, credit score and the amount of driving you do. .
Do I need all the different types of auto insurance?
The insurance you need is based upon your unique situation and risks. Find an insurance professional who can guide you through the process of acquiring the coverages that are right for you.
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The information provided on this website is for general informational and educational purposes only and should not be considered legal, financial, or insurance advice. While we strive to keep content accurate and up to date, insurance laws, policies, and regulations can vary by state and may change over time.
Nothing on this site constitutes professional advice or a recommendation of any specific insurance product, provider, or strategy. You should consult with a licensed insurance agent, financial advisor, or legal professional regarding your individual situation before making any decisions.
