Possessing auto insurance when you slip behind the wheel of your vehicle is a legal requirement in almost every state. However, what are you actually paying for when you purchase this coverage? Here is a guide to understanding auto insurance, as well as some of the more popular types of coverage.
Just like makes and models of cars, auto insurance comes in many different sizes and scopes. Here is how you can begin to understand what you are paying for and how these different components can help keep you and your personal finances protected.
What Is Car Insurance?
Car insurance–like other types of coverage–is there to pay for damages when things go askew. Hopefully, you will never be in an accident or have an incident that requires you to make repairs to your car or other property.
However, in the real world, accidents happen. When they do occur, auto insurance exists to offset at least some of the costs involved.
There are three basic different numbers to understand when it comes to your auto insurance: the premium, deductible, and coverage amount.
(1) Premium: Your premium is the amount that you will pay on a regular basis to enjoy the coverage from your chosen insurance company. These are often paid on a monthly basis, though sometimes this can happen on a quarterly or bi-annual schedule. You should account for this regular outlay of cash as part of your transportation budget.
(2) Deductible: This is the amount that you will be on the hook for paying before the insurance company begins to contribute payments. Your deductible is calculated for each individual claim, and is not an annual limit on the amount you can pay. This will vary according to the plan you elect to purchase, with higher premiums corresponding with lower deductibles.
(3) Coverage amounts: This is the maximum amount that your insurance company will pay per incident. This depends on the type of your policy coverage, the particular incident, as well as the specifics of the plan that you have chosen.
What Does Auto Insurance Cover?
There are different types of auto insurance, which relate to the manner in which the damage occurred and what is covered. Here are some of the more common types of auto insurance coverage:
(1) Liability insurance: Liability insurance is designed to protect you in a scenario in which you are at fault. It exists to offset damages you may have caused to others. This includes both property damages (like repairs to other people’s cars) and health costs (paying for the treatment costs of others if there was an injury that requires healthcare). It also could be used to pay for legal costs, if applicable. Liability insurance is required in almost every state.
(2) Collision insurance: This type of insurance will pay for damages to your vehicle if it is in a car accident. This could be when you are driving or if it is hit by another car while parked on the side of the road. The maximum amount of this insurance is usually capped at the value of your car. Therefore, depending on the value of your car and the deductible, it may not make sense to hold this insurance.
(3) Comprehensive insurance: This will cover any damages to your vehicle which are not related to driving. This could include theft, vandalism, or having a tree branch fall on your parked car. Comprehensive insurance rounds out the coverage of collision insurance, and can be used to either repair your car or pay for a replacement should an incident occur.
It is also capped at the value of the car, similar to collision insurance. Therefore, depending on the value of your car and the deductible, this may or may not be worth your while.
(4) Personal injury protection insurance: Also known as PIP, this will help pay for medical bills, lost wages, and the costs of other tasks that you are no longer able to perform because of a car accident. It could also help pay for any funeral costs and/or a death benefit. If you have PIP, it will be triggered regardless of who caused the accident. PIP is not required in every state.
(5) Medical payments insurance: This will cover medical costs that occur following an accident, regardless of who is at fault. This can be for you or one of your passengers. Depending on the type of coverage, it could also cover you if you are hit by a car, even if you are not in a vehicle, such as when you are walking or riding a bike.
(6) Uninsured or underinsurance coverage: Assuming you are in an accident with another vehicle and the other driver is at fault, their insurance should cover your damages. However, even though liability insurance is a requirement, it is possible that your counterparty might not have any (or at least not enough to cover all of your costs). These types of insurance will protect you from paying out of your own pocket for any expenses stemming from an accident for which someone else was at fault.
Conclusion: Protecting Your Finances
At the end of the day, auto insurance is about much more than simply taking care of your car. You are protecting yourself from getting into a financial hole caused by an accident, one that could take years to climb out of.
You have numerous options regarding both providers and types of insurance plans. It is important to have a good grasp of what goes into the insurance plans–and what they cover–as you make your decision for which one to choose.
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