Introducing Auto Insurance

Auto Insurance Basics

If you own a car, you are legally required to purchase auto insurance in almost all states. On its simplest level, auto insurance is an agreement between you and your chosen insurance company in which you pay the insurer regular payments known as premiums. In exchange, your insurer will provide financial protection against a variety of potential harms.

That said, auto insurance can get quite complex when you dive into the details. There are many different coverages available, and you can vary the coverage limits as well — the more coverage you purchase, the more money your insurer will pay you in case of a major incident.

In addition, you will need to pay a deductible each time you make a claim. A deductible is a fee you pay to your insurer to get them to pay for the damages: the higher your deductible, the lower your premiums and vice versa. In essence, you can choose whether you’d like to have higher up-front costs (higher premiums, lower deductible) or higher costs when you make a claim (lower premiums, higher deductible). Now let’s discuss the core principles of auto insurance to help you assess your coverage needs.

What Are The Core Components of Auto Insurance?

There are six main coverage types included with auto insurance policies. However, depending on the exact policy you purchase, you might buy all of them, or you might only buy one type of coverage. Each state has its own guidelines, but many states only require drivers to purchase liability insurance.

Liability Insurance

If you’ve shopped for auto insurance before, you’ve likely heard the phrase “liability-only insurance.” This is the minimum level of car insurance in many states, but it actually consists of two primary components: bodily injury liability and property damage liability.

Bodily Injury Liability

With bodily injury liability coverage, your insurer will pay for injuries caused to others. Therefore, if you (or another person listed on your policy) are at fault in an accident that requires the other driver or their passengers to seek medical attention, your insurance company will cover the costs up to your policy limits.

Your state will have a legally required minimum level of bodily injury liability insurance, but it’s usually advisable to purchase a higher level of coverage. Medical expenses resulting from car accidents can add up very quickly, and some injuries could require months or even years of treatment. It’s important to buy enough bodily injury liability insurance as a means of protecting your other assets. After all, if you don’t have sufficient coverage, you might have to sell your house or car to pay for the rest of the claim.

Property Damage Liability

Similar to bodily injury liability, property damage liability provides coverage for damages when you (or someone else on your policy) are at fault in a traffic accident. While bodily injury liability covers medical costs for third-party injuries, property damage liability covers damages you cause to the property of others.

The most common claim for property damage liability insurance is the damage you cause to the other driver’s vehicle in a crash. However, there can also be many other applications. If you back into a light post in a parking lot and knock the post over, property damage liability coverage will pay for the damages. Or, let’s say you lose control of your vehicle and crash into the side of someone’s house. Again, property damage liability insurance would pay for damages up to the policy’s limits, minus your deductible.

Personal Injury Protection (PIP)

Personal injury protection coverage is also commonly referred to as medical payments coverage — there is no difference between them. This component of auto insurance is also legally required in some states. With PIP coverage, your insurance company will pay to treat any injuries to you and your passengers. It doesn’t matter if you cause the accident or if someone else is at fault — personal injury protection coverage pays out either way.

Consumers are often surprised by how many different things PIP insurance covers. In fact, this coverage can provide financial compensation for much more than just injuries. Depending on your policy’s specifics, PIP insurance can also cover lost wages if you can’t work because of injuries suffered in the accident. It can also provide funds for funeral expenses if you or one of your passengers passes away as a result of your injuries. In some cases, you can even get funds to cover hiring someone to take care of your daily responsibilities, like cleaning the house or caring for your children.

Depending on the guidelines of your state, PIP can provide coverage even if you’re not in your car. For instance, if you’re struck by a car while riding your bicycle or crossing a street as a pedestrian, you may be able to secure funding for treating your injuries from your auto insurance provider.

It’s important to note that PIP coverage only provides payment for injuries to people in your vehicle. Any third-party injuries will instead be covered by your bodily injury liability insurance.

Uninsured and Underinsured Motorist

This is the final component of auto insurance that’s required by some states, as just under half of all U.S. states require drivers to have uninsured and/or underinsured motorist coverage. As the name implies, this form of insurance provides financial compensation if you’re in an accident caused by someone who has insufficient liability insurance. It protects you from drivers who lack liability insurance entirely, as well as from those who have liability limits lower than your expenses.

If the at-fault driver has no liability insurance at all, your uninsured motorist coverage will pay to treat your injuries and repair your vehicle. If the driver has insufficient liability coverage, their insurance will pay for damages equal to their policy’s liability limits. For any costs above those limits, your underinsured motorist coverage will pick up the check for the remainder of your expenses.

Collision and Comprehensive Coverage

Typically, collision and comprehensive insurance are purchased as a bundle. However, for simplicity’s sake, we’ll discuss the specifics of each coverage type separately.

  • Collision coverage pays for damages to your vehicle caused by a traffic collision with another car. That said, this form of coverage also pays for quite a few other potential incidents. These include collisions with inanimate objects, damage from running over potholes, and damage from your car flipping over. Like PIP coverage, collision insurance pays out regardless of who is at fault — even if you cause the accident, your insurer will still pay for your vehicle repairs. If you aren’t at fault, your insurer will do everything they can to get the other driver’s insurance company to pay them back for the money they spent on your collision claim. If they succeed in this process, your insurance provider might even pay back your deductible! No state requires collision coverage.
  • Comprehensive coverage pays for damages caused by a wide variety of perils other than a traffic collision. The list of perils covered by comprehensive insurance is quite lengthy, including things like theft, fire, collisions with wild animals, falling objects, vandalism, riots, explosions, hail, wind, and much more. This coverage also provides you with free or heavily discounted service if you need to hire someone to repair a cracked or broken windshield. Like with collision coverage, there is no legal requirement in any state regarding comprehensive insurance. That said, if you purchased your car with a loan, your lender might require that you maintain comprehensive coverage until you finish paying off the loan. After all, until you make your last loan payment, your lender technically owns your vehicle.

Other Coverages

There are several other types of auto insurance coverage that are far less common than the ones we’ve already discussed. Of these, the two that are common enough to briefly discuss are emergency roadside coverage and gap insurance.

With emergency roadside coverage, you can access professional assistance if your car breaks down or gets a flat tire. Your insurer will send a tow truck or repair service to your location to assess the issues with your vehicle. If they can fix them on-site, they will do so. Otherwise, they will transport you and your vehicle to a service station or body shop where you can get the work done.

Gap insurance is available for people who still owe money on their car loans or leases when their vehicle is stolen or totaled. If you have gap insurance, your insurer will pay off the rest of your auto loan or lease if you still owe more than the vehicle’s depreciated value is worth. An important note with this type of coverage is that you can only purchase gap insurance if you originally took out the loan. If you take over someone else’s loan or lease, you cannot acquire gap coverage.

Deductibles, Coverage Levels, and Premiums

One of the most significant factors in the cost of your auto insurance coverage is how many of the above coverages you choose to purchase. However, that’s just the tip of the iceberg. Your deductibles and coverage levels will also have a significant impact on your car insurance expenses.

We mentioned briefly earlier that the higher your deductible, the lower your premium, and vice versa. To dig a bit deeper, we will also note that car insurance deductibles work quite differently from health insurance deductibles. With health insurance, your policy has an annual deductible that you must pay before receiving any payouts in that year. However, with auto insurance, your deductible applies to each incident. Therefore, it doesn’t matter if you crash your car 15 times in the same year — your deductible will be the same every time.

Another significant factor is the coverage levels you choose. Will you opt for the state’s minimum level of liability protection, with no other coverages? Will you choose a 50/100/50 policy with collision and comprehensive insurance that limits your payouts to $50,000 in bodily injury liability per person, $100,000 in bodily injury liability per accident, and $50,000 in property damage liability? Or perhaps you will opt for a higher level of coverage, such as the 100/300/100 option?

Obviously, the higher your coverage levels, the higher your premiums. The differences in cost can vary considerably from state to state. In some states, the difference between a minimum liability-only policy and a 100/300/100 package with collision and comprehensive insurance can be massive. In other states, there might be a much smaller gap between the two. It’s almost always advisable to purchase as much car insurance as you can reasonably afford, up to the 100/300/100 level, which most industry analysts say is sufficient for the vast majority of vehicles.

What Drives Auto Insurance Rates?

Finally, it’s also essential to understand the various factors that go into determining your car insurance premiums. Each company has its own criteria that they don’t share publicly, but for the most part, the factors are similar across all insurers.

Other than coverage levels, coverage types, and deductibles, your age is the most significant auto insurance pricing factor. Teen drivers pay extremely high insurance rates due to their lack of experience on the road. Their rates will decrease as they reach their twenties. Meanwhile, some senior drivers also need to pay high premiums because they’re both more likely to get in an accident and more likely to become injured in that accident.

The other most important factors are your car make and model and your driving history. Of course, if you have an expensive car with high repair costs, you’ll pay more than someone who drives a moderately priced vehicle. In addition, if you have high-risk traffic violations on your record — like a DUI or reckless driving conviction — insurers will charge you much higher rates than someone with a clean driving record.

The other factors that affect car insurance rates include how much you drive, along with your credit history, ZIP code, marital status, and gender.

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