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Car Insurance Coverage Explained

Car Insurance Coverage Explained
Jennifer G Gregory
Updated September 14, 2021
5 Min Read

If you started shopping for car insurance – either for the first time or looking to save money – and started to feel overwhelmed, you aren’t alone. The terminology, policies and different coverages can feel complex and complicated. While it may be tempting to just purchase whatever your agent recommends or the cheapest policy, it’s important that you fully understand the different types of coverages.

If you make a hasty decision and purchase a policy that does not provide the coverage that you need, then you find yourself in a situation with bills you cannot pay and being unable to afford car repairs. However, buying more coverage than your situation warrants means that you are spending money that can be used for other purposes, such as saving for retirement or paying off your credit card. By taking the time to learn what coverage you are legally required to carry as well as what coverage can protect yourself in the event of an accident based on your situation, you can make the smartest financial decisions for your future.

Required Auto Insurance Coverage

All states, except Virginia and New Hampshire, require all car owners to carry liability insurance on every registered car. However, drivers in both of these states are required to pay for any damages in at-fault accidents. Virginia drivers are also assessed a $500 fine, which interestingly is more than the average cost of liability insurance in the state. In the majority of the other states, you are required to show proof of insurance when you register your vehicle each year, and insurance companies typically are required to notify the state if your policy lapses.

While many people refer to the required insurance as simply “liability insurance,” technically there are two different types of liability insurance coverage that auto owners must carry. Here are the types of car insurance explained:

  • Bodily Injury Liability – If anyone driving the car causes an accident that involves injury or death to anyone in the cars, this policy will pay for medical costs and damages. The injured parties can also receive payment for pain and suffering as well as repayment for lost wages. For fatal accidents, funeral costs are also covered. However, Bodily Injury Liability does not cover injuries to the driver.
  • Property Damage Liability – This policy covers damages caused to other cars, property, or objects incurred in an accident that is your fault. However, this policy does not cover damages to your own car. For example, if you hit another car and then run into a fence, this policy pays for the damages to the other car and the fence, but you are responsible for paying for repairs to your car.

When reviewing policies, you will see text such as 25/50/15 in the description. This means that your policy pays up to $25,000 per person involved in the accident, $50,000 is the maximum amount paid for the accident across all people involved, and $15,000 is the maximum in property damage costs covered. Because the amount of coverage required varies based on state, auto owners should check with an agent in their state to make sure that their coverage is within the law. A licensed agent will know the specific laws and can ensure that you are complying with state insurance laws.

When shopping for insurance, in addition to the car insurance coverage amount, look carefully at the deductible for the policy. If you make a claim on your policy, you are responsible for paying the deductible amount out of pocket. For example, if your deductible is $500 on a comprehensive policy and your car is damaged in an accident, then you pay $500 for the repair and the insurance company pays the rest of the amount.

Additional Types of Coverage

Other types of policies may be required depending on your state or situation. Here are four additional types of auto policies:

  • Medical Payments or Personal Injury Protection (PIP) – This type of policy covers medical care for you and other passengers, similar to Bodily Injury Liability. States that are no-fault, meaning that each driver pays for their own damage regardless of who is at fault, often require all drivers to have this type of insurance. If you do not have health insurance or have a very high deductible policy, this type of insurance can provide coverage for medical costs in an accident that you would otherwise be responsible for. While the two types are similar, PIP often reimburses you for lost wages, something that is not covered under most MedPay policies.
  • Uninsured Motorist Coverage – If a person who does not have insurance causes an accident, this policy will pay for your damages.
  • Collision– If you cause an accident, then comprehensive/collision pays for the damage to your car. Otherwise, you will be responsible for paying for your own car repairs. Most lenders require you to carry this type of insurance if you have a loan on the car. Otherwise, if your car is totaled, you would still be liable to pay on a car that is not operable.
  • Glass and Window – Before purchasing this type of optional policy, check to see if glass repair is included in your comprehensive policy. Otherwise, you will have to pay for glass damage, such as a rock breaking your front windshield, out of your pocket. Many optional glass policies are no-deductible, meaning that your insurance company pays the entire amount.

How can I pay for my insurance policy?

Most insurance policies are calculated on a six-month payment plan. Some companies may offer monthly payments, often at a slightly higher rate. You can also opt to pay annually for the policy, but may have to make additional payments if your policy rate increases due to claims or accidents.

Many people opt to set up their insurance policies with an automatic draft payment, which means that the amount is automatically taken from their account at a predetermined interval. However, your company may also bill you when the policy is due and you pay either with credit card, check or electronic transfer.

What are the leading insurance companies?

For many years, large traditional insurance companies such as State Farm, Allstate and Nationwide dominated the insurance industry. In recent years, newcomers such as Geico and Progressive have become popular with customers due to often lower costs and personalized service.

Because auto insurance rates vary based on location, you should compare rates in your specific geographic area. The best value in terms of price and service may differ from one state to another. For example, in the JD Power US Auto Insurance Study, the top agencies vary based on region. In California, the top company is Wawanesa, while Allstate earns the top marks in Florida.

Getting the right coverage and policy for your needs

Each situation is unique and requires careful consideration for the best balance between your financial situation and the risk you can afford to take in terms of coverage. While sometimes it may seem that you cannot afford extra insurance, in reality, those are often the exact situations where skimping on coverage is a big financial risk, because you would be unable to pay for expenses out of pocket after an accident.

Start your insurance shopping process by understanding what is required in your state and also by your auto loan lender. Then meet with several agencies to compare companies in terms of price, features and services. By approaching insurance as an important purchase, you are more likely to purchase coverage that is the best fit for your specific circumstances.

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