You purchased an auto insurance policy and aren’t quite sure what the coverages mean. Or maybe you’re planning to shop for a new policy soon or switch providers and would prefer to be well-versed in auto insurance jargon to select the right coverages.
This guide dives into the specifics of auto insurance, including both mandatory and optional coverages and factors that influence the price you pay for premiums. It also includes a discussion on how to select the right car insurance policy with coverages that best suit your needs.
The Importance of Auto Insurance
Auto insurance is essential for protecting your finances if something happens to your vehicle. More specifically, car insurance helps cover costs when accidents occur. This includes costs for your vehicle as well as others involved. Depending on your insurance policy, it can also cover medical expenses and repairs.
Protecting yourself with an auto insurance policy saves you from paying huge bills after an accident. Plus, it can shield you from sustaining major financial losses if you’re hit by a drier who doesn’t have insurance. Knowing you have support for unforeseen events can bring you peace of mind.
It’s also worth noting that purchasing a car insurance policy isn’t just a smart financial move. Doing so is often required by law, and failing to carry the mandatory coverages could lead to steep fines or, even worse, legal trouble.
What Does Auto Insurance Cover?
Below is a closer look at what car insurance covers, whether you’re involved in an accident or if your vehicle is stolen.
Liability Coverage
Liability coverage is an essential part of auto insurance. It helps protect you if you are at fault in an accident by covering costs related to injuries or property damage to others.
Bodily Injury Liability
Bodily injury liability covers medical expenses, lost wages and legal fees if you cause an accident that injures someone else. Most states require you to have this type of coverage, which is a major plus since you won’t have to pay for these expenses out of pocket.
This coverage can have limits, which are usually represented in a format like 100/300. This means $100,000 per person and $300,000 per accident. Choosing higher limits protects you better, but it also raises your premium.
Property Damage Liability
Property damage liability covers the costs of repairing or replacing another person’s property if you are at fault in an accident. This could include damage to another vehicle, buildings, fence or other structures.
Most policies have a basic limit, but higher coverage is often recommended, as repairs can be costly. Property damage liability is also a required component of liability insurance in almost every state.
Collision Coverage
Collision coverage helps pay for damage to your vehicle in certain situations. It applies to events like a car accident or hitting objects like fences or trees. While it is not legally required, having this coverage can be beneficial.
What Collision Coverage Entails
Collision coverage is designed to protect you by covering repair costs to your vehicle after it collides with another car or object. This can include hitting a guardrail or a tree. It also typically covers damage from potholes.
With this coverage, you are protected regardless of who is at fault in the accident. A key aspect of collision coverage is the deductible. This is the amount you have to pay out of pocket before the insurance kicks in. The higher your deductible, the lower your premium, and vice versa.
Before filing a claim, keep in mind that doing so may increase your future premiums. This is a common practice among insurers, reflecting the greater risk they perceive after making a claim.
When to Consider Collision Coverage
Collision coverage is particularly beneficial if you have a new or valuable vehicle. It ensures that you can afford to repair or replace your car without significant financial strain. If your vehicle is leased or financed, the lender usually requires this coverage until the car is fully paid off.
Even if it’s not mandatory, consider whether the cost of collision coverage is worthwhile based on your car’s value and your driving habits. Maintaining this insurance could be a smart choice if your vehicle’s value exceeds the premium’s cost.
Comprehensive Coverage
Comprehensive coverage is another significant component that deals with incidents that do not involve collisions. Instead, it’s designed to protect against damages caused by theft, natural disasters and other occurrences that are beyond your control.
Definition of Comprehensive Coverage
Comprehensive coverage is an optional insurance type that safeguards your vehicle against harm not caused by a traffic accident. If your car is stolen, vandalized, or damaged by weather, comprehensive insurance can help cover the repair or replacement costs.
Unlike liability insurance, which only covers damage to others, comprehensive coverage focuses on your own vehicle. It’s important to note that this type of coverage is not mandatory. Still, it can be worthwhile and provide valuable protection if you’re concerned about non-collision damages.
Situations Covered by Comprehensive Insurance
Again, it applies if natural events like hailstorms, floods or fallen trees harm your car. Damage from fire or explosions is also included. And if your vehicle is stolen or vandalized, comprehensive coverage will help you recover the costs.
Personal Injury Protection (PIP)
PIP covers medical expenses and lost income after a car accident. These costs are covered regardless of who’s at fault for the accident.
Medical Expenses
PIP covers medical expenses for you and your passengers after an accident, such as hospital visits, surgery and rehabilitation. It can also include costs for necessary medical supplies and equipment. Coverage typically extends to medical bills from licensed healthcare providers. Sometimes, PIP may even cover alternative treatments like acupuncture or chiropractic care if deemed necessary.
PIP may cover family members involved in the accident, ensuring their medical needs are also addressed. Some policies provide for funeral expenses for involved parties in the unfortunate event the accident is fatal.
Lost Wages
If you can’t work due to accident-related injuries, PIP can cover a portion of your lost income to help you stay afloat financially while you recover. The coverage amount and duration typically depend on your policy limits. It often provides a percentage of your regular earnings up to a maximum amount defined by your policy.
PIP might also cover costs associated with hiring help for household responsibilities you can no longer perform.
Uninsured/Underinsured Motorist Coverage
When you’re in an accident caused by another driver, their insurance should cover your damages. However, not all drivers have adequate insurance, which is where these coverages kick in.
Protection Against Uninsured Drivers
If you’re in an accident and the at-fault driver doesn’t carry an active car insurance policy, this coverage can pay for medical expenses and property damage. In some states, having this coverage is mandatory.
Differences Between Uninsured and Underinsured Motorist Coverage
While uninsured motorist coverage deals with drivers who have no insurance, underinsured motorist coverage applies when the at-fault driver doesn’t have enough insurance to cover all your expenses.
To illustrate, assume you’re in an accident and the other driver’s policy limits cannot fully cover your damages. Underinsured motorist coverage would help cover the shortfall.
Specialized Auto Insurance Coverage
Specialized auto insurance coverage offers optional protections that go beyond standard policies.
Gap Insurance
Gap insurance is a type of coverage that pays the difference between what you owe on your car loan and the car’s actual cash value in the event of a total loss. This can happen if your vehicle is stolen or totaled in an accident.
It is particularly useful if you financed a large portion of your car’s purchase price or made a small down payment. Without gap insurance, you could end up paying out of pocket for a car you no longer drive.
When Gap Insurance is Useful
Gap insurance is most beneficial during the early years of owning a vehicle when depreciation is highest.
If you have a loan for a lengthy period or you’ve chosen a model known for rapid depreciation, gap insurance could also save you significant money. Or if you’re concerned about finding yourself in a situation where your insurance payout doesn’t cover your loan, considering gap insurance might be wise.
Leasing companies often require it because it covers the difference between the car’s value and the lease buyout amount, protecting both you and the lender.
Rental Reimbursement Coverage
Rental reimbursement coverage is an optional part of auto insurance. It helps pay for a rental car if your own car is in the shop for repairs covered by your policy.
Understanding Rental Reimbursement
Rental reimbursement coverage is not automatically included in basic auto insurance. It is an add-on that you can purchase to avoid being stranded without a vehicle.
If your car gets damaged in an accident and needs repairs, this coverage helps pay for a rental car while yours is being fixed. The cost for this coverage is relatively low, often around $40 per year per vehicle.
Policies usually cover the cost of a standard sedan. If you typically drive a larger vehicle like an SUV or need a specific type of rental, you might need to adjust your plan and limits.
Scenarios for Rental Reimbursement
Imagine your car is involved in a collision and needs to spend a week in the repair shop. With rental reimbursement, you won’t have to worry about staying mobile.
Whether it is a fender bender or a major repair, this coverage helps keep you on the move. It’s also helpful in cases where car parts are delayed, extending repair times.
Roadside Assistance
When your vehicle faces unexpected issues on the road, roadside assistance can provide the help you need to get moving again.
Services Included in Roadside Assistance
Roadside assistance offers a range of services to handle different vehicle troubles. If you experience a flat tire, many plans provide tire change services.
If your car battery dies, jump-start service is usually available to get you moving again. Or, if your vehicle is disabled, you can have it towed to a nearby repair shop. Lockout services are available if you accidentally lock your keys inside your car so you’re not left stranded.
Many plans also offer fuel delivery if you run out of gas. They will bring enough fuel to get you to the nearest station.
Factors Affecting Auto Insurance Coverage
Several factors impact the price you pay for car insurance premiums.
Driving History and Record
Insurers assess the risk of future claims by looking at past behavior. A clean record, free from accidents and violations, usually results in better rates. But traffic tickets, DUIs, and accidents can increase your premiums.
Vehicle Type and Usage
Insurers consider the likelihood of claims based on a car’s value, repair costs, theft rates, and safety features. High-performance vehicles or those with expensive parts tend to have higher rates. And if you use your vehicle for business, it may require coverage different from personal use.
Geographical Location
Your ZIP code can determine likely risks, such as theft or vandalism. Natural disasters, like floods or hurricanes, common in certain areas, also influence coverage needs. Urban areas, with more traffic and higher crime rates, often have higher insurance costs than suburban or rural areas.
Conclusion: How to Choose the Right Auto Insurance Coverage
Be sure to compare different insurance providers to find the best deal on a policy. There are so many to choose from, though, which can make the search process overwhelming. Luckily, there’s the Experian Auto Insurance comparison tool that you can use to view and compare insurance quotes from the top providers in the industry. It’s accessible free of charge and comes with several other perks. Sign up for a free Experian account today to get started.
