Auto Insurance Basics

By Ryan Hurlbert on April 7th, 2010
Auto Insurance

The first step to shopping for the right auto insurance coverage is to know what you are buying and how it protects you. Car insurance policies are made up of three main parts:

  1. Liability protection
  2. Damage to your auto
  3. Medical protection or personal injury protection

Each facet of your policy plays a role in protecting you from catastrophic financial loss in the event of an accident.

Liability Protection

Liability coverage pays for damages to others when you are at-fault in an accident. There are two parts to your liability coverage: bodily injury and property damage.

Bodily Injury Liability

Bodily Injury coverage pays for any necessary expenses that a claimant faces due to injuries sustained in an accident, such as:

  • Medical bills
  • Lost wages
  • Domestic help during recovery
  • Permanent or partial disability
  • Required home modifications like wheelchair ramps

Property Damage Liability

Property damage liability pays for damage to other people's property when you are at-fault in an accident. Damages can add up quickly, especially if you are at-fault in a multi-vehicle accident. In such a case, you are responsible for all damages.

Property damage liability coverage pays for damage to:

  • Other vehicles (but not your vehicle)
  • Utility poles
  • Fire hydrants
  • Fences
  • Buildings
  • Cargo not owned by you

Medical Payments and Personal Injury Protection

Medical payments (MedPay) or personal injury protection (PIP) coverage pays for injuries sustained from the use, maintenance, or ownership of an automobile. Payments are limited, and are scheduled within your policy.

Most states require a minimum amount of either PIP or MedPay on an automobile policy, but allow you to purchase additional coverage. If you are at-fault in an accident, PIP or MedPay would be the only coverage your auto policy provides for your own injuries. Many states require MedPay or PIP to cover injuries when you are involved in an accident as a pedestrian or cyclist.

Uninsured/Underinsured Motorist

Despite nearly universal laws requiring drivers to carry liability insurance, many people don't have auto insurance. Uninsured motorist bodily injury (UMBI) coverage pays for your injuries when you are not at fault in an accident, and the at-fault driver is uninsured.

If the at-fault driver is insured, but your injuries exceed the liability limits of the driver's coverage, the UMBI coverage pays the difference between the coverage amount and your claim--up to your UMBI limit.

Uninsured motorist property damage (UMPD) coverage pays for damage to your car by an uninsured or hit-and-run driver, up to the UMPD limit on your policy.

Physical Damage to Your Auto

Collision coverage pays for damage to your auto when you are at-fault and hit another vehicle or object. Comprehensive coverage is literally defined as "damage to your auto caused by other than collision" and covers you for accidental damage caused by:

  • Theft
  • Fire
  • Flood
  • Vandalism
  • Falling objects
  • Airborne debris
  • Animals

Comprehensive and collision coverage require you to pay a deductible before your insurer pays the balance of the claim. A higher deductible can lead to a lower premium, but you should balance the savings against the increased financial risk for a claim.

Auto Insurance Requirements

If you own a vehicle, almost every state requires you to purchase an auto insurance policy with at least the state-mandated minimum level of liability coverage and either MedPay or PIP. If you have a loan on your car, the lender requires comprehensive and collision coverage and may place specific limits on how high your deductible may be.

State mandated minimum requirements offer adequate protection to very few people, so if you have any assets to protect (and future earnings are assets) you should consider purchasing additional coverage.

Additional Coverage

Many auto insurance companies offer roadside assistance and guaranteed auto protection (GAP) insurance with their policies. Roadside assistance pays for towing or roadside repairs in the event of a breakdown. Locksmith services are also provided should you lock your keys in your car. The added cost is typically very low, but many policies usually pay up to $75 per incident, which may not get you towed very far. Make sure the limits cover the basic services in your area.

GAP covers the difference between your loan balance and your comprehensive or collision settlement in the case of a total loss. If your loan balance is less than the actual cash value of your car, you don't need GAP coverage. GAP can be purchased through many sources, including car dealerships, banks, and direct to consumer companies, so compare rates before accepting this coverage.

Auto insurance is not as daunting as it may seem. Once you understand the protections each part of a car insurance policy provides, you can easily find the best coverage for your needs.

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