A practical guide for understanding car insurance

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Whether you are a new or experienced driver, chances are you will have to file an auto insurance claim at some point. Spending a few minutes reviewing your car insurance policy before purchasing or renewing it will save you time, energy, and some frustration if you do have the misfortune of having to file a claim. This car insurance guide will offer you helpful insight and tips into your auto insurance policy.

What does car insurance cover?

An auto insurance policy is an agreement between a driver (the policyholder) and an insurance company where the policyholder pays the insurance company a fee (the premium) in exchange for the insurance company’s promise to pay a claim if there is an accident.

A basic auto insurance policy usually provides six types of coverage:

1. Bodily injury liability: this type of coverage pays for expenses for injuries sustained by the other vehicle’s driver and passengers if the policyholder is held responsible for an accident. The coverage also pays to defend the policyholder if there is a legal claim due to an auto accident. Liability insurance has no deductible.

2. Property damage liability: covers damages to another person’s property, usually the other vehicle in the accident, but may also include someone else’s property, such as a fence, lamp post, or other structure. This also provides coverage to defend the policyholder in the event that the policyholder is sued due to an auto accident. Liability coverage will appear as three figures. For example, if a policyholder has coverage showing as $20,000/$40,000/$10,000, then the policy covers $20,000 in bodily injury per person, $40,000 in bodily injury coverage per motor vehicle accident, and $10,000 in property damage coverage per accident. Be aware, if the damage amounts to $60,000 and the policy limit is $40,000, then you will be on the hook for the remaining $20,000. Liability insurance has no deductible.

3. Medical payments coverage: pays for the treatment of injuries sustained by the driver and the passengers of the policyholder’s car. In those states where personal injury protection (PIP or no-fault coverage) is used instead of or in addition to medical payments coverage, PIP may extend to medical expenses, funeral expenses, lost wages and other expenses related to injuries and death due to a motor vehicle accident.

4. Collision coverage: provides coverage for damage to the policyholder’s vehicle due to a collision with another vehicle, object, pothole, or due to the car flipping over. This is where a policyholder’s deductible comes into play. Depending on the predetermined amount of the deductible (usually ranging from $250 to $2,000), if the policyholder is found at fault, then the repairs that the policyholder will be responsible for will be the amount of the deductible. The insurance company will then be responsible for the amount over and above the deductible. If the policyholder is not at fault, then the carrier may seek payment from the other driver’s insurance company. If the policyholder’s insurance company prevails, then the deductible will be reimbursed to the policyholder. Although collision coverage is not required by state regulations, it may be required by a lender if the vehicle is financed.

5. Comprehensive coverage: coverage for theft of the vehicle or damage caused by something other than a car accident, examples are fire, theft, falling objects, earthquakes, vandalism, hail, flood, explosions, or contact with animals. Depending on your insurance company, the carrier may offer separate glass coverage if the policyholder’s windshield becomes cracked. This separate coverage may or may not come with a deductible. Although comprehensive coverage is not required by state regulations, it may be required by a lender if the vehicle is financed. Comprehensive insurance usually has a deductible.

6. Uninsured and underinsured motorist coverage: uninsured coverage is for bodily injuries to a policyholder and his passengers when an uninsured motorist (a driver who does not have auto insurance) causes an auto accident. Uninsured motorist coverage also extends to hit and run accidents. Underinsured motorist coverage kicks in if the at-fault driver fails to have adequate insurance to pay for the policyholder’s damages. Certain states combine these two coverages, while others maintain them as separate coverages. These will usually cover bills concerning rehabilitation, medical expenses, funeral costs, and pain and suffering.

Additional car insurance coverage options

In addition to the six basic coverages, a policyholder may want to consider additional coverages. However, if a policyholder takes advantage of these added coverages, the carrier will treat these as claims that go on your record.

Umbrella policy. An umbrella policy will protect you and your assets in case you are at fault for an accident that goes beyond the limit of your insurance. If you are found at fault for an accident and are forced to pay a high amount over and above your insurance limits, you may be on the hook for your current and future earnings. Umbrella insurance protects your finances from these types of lawsuits.

Rental coverage. Reimbursement for rental car payments for when your vehicle is damaged or stolen. The insurance company will set a per-day, dollar limit and maximum amount on the rental car. This will come in handy if you are in an accident, and it is your fault. If you depend on your vehicle to get you to and from work, or have kids and participate in the carpool circuit, this could save you considerable time and frustration.

Roadside assistance. Towing and roadside assistance covers those expenses associated with vehicle breakdowns.

GAP insurance. This coverage refers to the difference between the amount the policyholder owes on a car and the vehicle’s actual cash value (ACV). If a policyholder owes $12,000 on a car and the vehicle’s ACV is $10,000, then gap insurance would cover $2,000.

Tips to save money on car insurance

  1. Raise your deductible. The deductible is the amount of money that the policyholder is responsible for paying when filing a claim. The amount of the premium (the cost of the insurance policy) is partially based on the amount of the deductible. If a policyholder files a claim, he will be the first one responsible to pay out of pocket expenses up to the amount of the deductible, while the insurance company will pay the remainder of the claim. The higher the deductible amount, the less the insurance company will owe on the claim, and the less the policyholder’s premium should be.
  2. Before purchasing a car, check the rates. The difference in premiums between vehicles may vary greatly due to the cost of repairing certain vehicles and obtaining parts for different types of vehicles.
  3. Look for safety discounts. Certain safety equipment may warrant a discount. If the vehicle has air bags, antilock brakes, or an alarm system, alert the carrier.
  4. Bundle your policies. Many carriers will give you a price break if you purchase multiple insurance policies from them.
  5. Take a driving course. By taking certain defensive driving courses, you may be able to receive a discount on your premium.
  6. Take advantage of teen driver discounts. If your teenage driver gets good grades, or if your teenager doesn’t use the car and attends a school located more than 100 miles from home, then you may qualify for a discount.
  7. Inquire about specialty group discounts. Insurers may provide affinity discounts to those policyholders who are members of a specific employee group, company pension fund, auto club, or alumni association. This may be worth looking into if your carrier recognizes these discounts.

The content on this site is offered only as a public service to the web community and does not constitute solicitation or provision of legal advice. This site should not be used as a substitute for obtaining legal advice from an insurance company or an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter. The comments and opinions expressed on this site are of the individual author and may not reflect the opinions of the insurance company or any individual attorney.

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