Understanding Auto Insurance: Coverage Basics Every Driver Should Know
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Auto insurance is a critical tool for all drivers, providing financial protection against accidents, theft, and other unforeseen events. Maintaining certain types of insurance is actually mandatory for all 50 states, although the type of insurance depends on the state. Understanding the basic types of coverage can help you choose the right policy and ensure that you are adequately protected on the road.
What is Auto Insurance?
Auto insurance is a contract between you and an insurance company that protects you against financial loss in the event of an accident or theft. In exchange for paying a premium, the insurance company agrees to pay your losses as outlined in your policy.
The word premium refers to the amount of money you pay the insurance company for a policy. Auto insurance policies are generally set for six months, although some companies offer twelve month policies. Most companies will allow you to either pay the entire policy up front, or pay in installments, however there is usually an additional fee for installment payments.
The reason auto insurance policies expire and renew in those increments is to allow the insurance company to reevaluate your driving. If a driver has an accident, or receives a ticket, at the next renewal of the policy, the insurance company has the ability to raise the cost of your premium, or choose not to renew, in which case you would need to find a new insurance company. Alternately, if you maintain a driving record free of accidents and tickets, your insurance company may choose to reduce the cost of your premium.
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Types of Coverage
Liability Insurance
Bodily Injury Liability: Covers costs associated with injuries or death that you or another driver cause while driving your vehicle.
Property Damage Liability: Pays for damage you cause to another person’s property, such as their car, fence, or building.
Liability insurance, both bodily injury and property damage, is required by law in all but two states (New Hampshire and Virginia) in order to drive a vehicle; although Florida does not require bodily injury liability, just property damage and PIP coverage. In some states, like North Carolina, drivers are required to maintain insurance just by having a driver’s license, even if they do not own a car.
Liability Limits
There are different levels of liability insurance, which look like 50/100/50 on your insurance policy. These numbers mean that if there is an accident that is your fault, the policy will pay up to 50,000 dollars per person (the person injured by you) for medical expenses and things like loss of work, up to a total of 100,000 dollars.
This means if three people are seriously injured by you in an auto accident, no one person could receive more than 50,000 dollars, and no matter how much their medical bills total, the insurance company will pay no more than 100,000 dollars, and you would be responsible for the remainder.
The last number stands for property damage, meaning that the insurance company will pay out a maximum of 50,000 dollars for property damage caused by an accident. While this may seem unnecessarily high, remember that it covers more than just vehicles. If you accidentally drive into a building, or cause an accident where multiple vehicles are seriously damaged, that amount can be used up very quickly.
Each state has their own requirement for liability limits, for example, Virginia requires 25/50/25, meaning 25,000 dollars per person, for a maximum of 50,000 dollars for injuries, and 25,000 dollars for property damage. Insurance agents in your state will be familiar with your state requirements and will make sure your policy is legally acceptable.
Collision and Comprehensive Coverage
Both collision and comprehensive coverage are considered optional coverages, however if you have a loan on your vehicle, your financing company will usually require both of these. Collision coverage reimburses you for damage to your vehicle resulting from a collision with another vehicle or object, regardless of who is at fault. It’s particularly valuable if you have a newer or more expensive car.
Comprehensive insurance provides coverage against theft and damage caused by an incident other than a car accident, such as fire, flood, vandalism, or hitting an animal. Comprehensive coverage can be purchased on its own, or along with collision insurance, although most insurance companies will require comprehensive insurance if collision insurance is purchased.
Both of these coverages have a deductible, which means that the insurance company will pay for the damage to your vehicle, minus the deductible you have chosen. Higher deductibles mean the premium will be lower, but if you are in a car accident that requires 1500 dollars worth of repairs, if you have a 1000 dollar deductible, your company will only pay you 500 dollars. Additionally, if your vehicle is financed, your finance company may have specific deductible requirements, usually 500 dollars or lower.
Personal Injury Protection (PIP) or Medical Payments
PIP or Medical Payments, depending on the state you live in, covers medical expenses for you and your passengers regardless of who is at fault in an accident. It can also cover other costs that arise from injuries, such as lost income and child care expenses. As this is paid through your insurance policy, it can be particularly helpful in an accident that is not your fault, so you don’t have to wait for the other driver’s insurance to pay these expenses.
Uninsured/Underinsured Motorist Protection
This coverage protects you if you are in an accident with a driver who either does not have insurance or does not have enough insurance to cover the damages they caused. It can cover both bodily injury and property damage costs.
Choosing the Right Policy
Choosing the right auto insurance policy requires understanding your specific needs and comparing offers from several insurers. Start by determining the minimum insurance requirements in your state and consider any additional coverage that might be beneficial based on your driving habits and the value of your car.
For example, collision coverage is vital if you frequently drive in heavy traffic, while comprehensive coverage is crucial for protection against non-collision events like theft or natural disasters. When comparing policies, don’t just look at premiums. Examine deductibles, the limit of liability coverage, and the ease of filing claims. It’s also wise to check customer reviews to gauge the insurer’s service quality. By carefully assessing these factors, you can select an auto insurance policy that offers the best balance of cost and protection.
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