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UPDATED: Mar 13, 2020
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A typical car insurance policy consists of several component parts, each representing a different area of coverage. Unlike life insurance, which only pays off for one particular occurrence, the death of the insured, auto insurance may cover six or seven different kinds of events.
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Each portion of an auto policy provides the insured with coverage under one or more specific sets of circumstances. There are many different kinds of accidents and other mishaps that can befall the driver of a motor vehicle, as well as the vehicle being driven. In each occurrence, someone must bear financial responsibility, which is the primary reason for auto insurance.
Why Car Insurance
Most auto insurance policies cover the driver’s liability in the event of an accident causing injury to passengers or pedestrians or damage to someone’s property. The vehicle being driven is usually covered too; protected against damage or loss, even when it isn’t on the road.
While liability insurance is a requirement in mostly all of the United States, other auto coverage such as collision or comprehensive is not generally required, and is most often left to the discretion of the individual policyholder. Some coverage items can significantly increase insurance premiums, while other items may be quite inexpensive and yet provide valuable services.
Even minor damage to your vehicle can cost hundreds of dollars to repair. Accidents that are more serious can cause damage so extensive that repairs would be inadvisable; costing more than the car itself may be worth. In this case, you would consider your car to be a total loss. The only way to recoup your losses at this point would be through an insurance claim.
It is always advisable to carry auto insurance coverage sufficient to cover your out-of-pocket expenses in most eventualities. Next to a home, an automobile is usually the most expensive investment a person is likely to make in their lifetime.
Car insurance serves to protect that investment. Even more importantly, car insurance protects you and your family against potentially catastrophic losses that could result from a serious injury accident in which you and your car may be involved. It is crucial to remember that you may still be financially responsible for an accident whether or not you are at fault!
Seven Basic Types of Coverage
Deciding what kind of auto insurance and how much coverage will best suit your needs can be a daunting task. Online websites not only provide comparison pricing for insurance shoppers but also help educate consumers by clearly explaining possible choices.
There are many excellent online sources for information about car insurance. This information includes different types of coverage that are available, pricing and policy guidelines as well as buyer qualifications.
One of the sites that provides such comprehensive information is, Moneyning.com, a personal finance blog dedicated to consumers saving money. This link provides a convenient set of definitions for seven basic kinds of car insurance coverage.
Liability Insurance or Bodily Injury Coverage
Minimum liability coverage varies from state to state. This is the most common type of car insurance. If you are involved in an accident for which you are at fault, liability insurance covers medical expenses that result from any accident related injuries. It will also cover damages sustained by property, cars or buildings, etc.
While liability coverage is a requirement if you are going to legally drive a motor vehicle, the amounts that are required are generally not going to offer motorists sufficient financial protection in the event of an accident. Experts agree that coverage amounts should be based, at least in part, on how much you have to lose.
SmartMoney, a financial website sponsored by the Wall Street Journal, has several recommendations for consumers shopping for the right amounts of insurance coverage.
According to SmartMoney, homeowners, earning more than $75,000 annually, would certainly want to carry more liability insurance than an apartment dweller earning only $30,000 per year.
Most states in the U.S. require less than 25/50/10 in coverage.
To be safe, financial analysts would prefer to see coverage amounts of 100/300/100, or even more, depending on where you live. Those who might be at increased risk of having an accident for other reasons should also consider carrying increased liability coverage. Many homeowners have opted for umbrella policies of $1 million or more, thus tying together all possible liability claims.
If you only carry liability insurance, coverage to pay for others’ damages and expenses, you may find yourself without the funds to fix your own car should it be damaged in an accident where you are at fault. Collision coverage handily resolves that problem, by providing the resources to repair your own car, essentially protecting you from yourself!
Collision also covers hit-and-run incidents, where the responsible party is unknown and accidents where the responsible drivers had no coverage or were underinsured. Your auto insurance carrier will pay for needed repairs less a deductible amount, usually between $200 and $1,000 that you are expected to pay out-of-pocket.
Consumers with collision coverage should be aware that, should your car be damaged beyond repair, your carrier would not pay you to buy a new vehicle. They will only pay out the used value of the car, as it was before the crash. Any difference in the market value and the outstanding balance of a car loan would have to be covered by you, and not your insurer.
Vehicles that are leased or financed through a bank or other institution are usually required to have collision coverage. Similarly, older cars that are owned outright may not be worth covering. If the annual collision premiums amount to more than 10% of the car’s value, you should consider dropping this coverage.
Liability insurance and collision coverage apply to automobile accidents, caused by other motorists or yourself. If your vehicle is damaged in another way, by an act of vandalism, a storm, flood, fire, earthquake or if your car should be stolen, your insurance company will not cover the resulting damage or loss if you just have liability or collision insurance.
Comprehensive insurance however, as the name applies, will cover all of the above happenings and quite a few more. Comprehensive insurance covers everything from window breakage due to a stone thrown by a passing truck, to a late night collision with a deer standing in the middle of the roadway.
Comprehensive insurance will cover the theft of your vehicle, though you will pay far less in premiums for this coverage if your vehicle is equipped with an alarm and tracking system or other anti-theft devices.
Uninsured Motorist Coverage
Statistics released by the Automobile Club of America (AAA), indicate that nearly 14% of motorists are driving around without any car insurance. Aside from the legal implications, this leaves tens of thousands of motorists responsible for paying for accidents that other, uninsured motorists have caused.
Uninsured motorist’s coverage provides liability coverage where a responsible driver has no insurance or he has minimal insurance coverage, which is insufficient to cover all of the expenses resulting from an accident.
PIP or Personal Injury Protection
No matter who is responsible for an injury accident, PIP coverage will pay for medical costs beyond what your personal health insurance plan may cover. PIP will also cover such items as lost wages for those who are out of work due to their auto-related injuries.
No-fault coverage to date is available in only 12 states. No fault is designed to provide expedient payouts to cover medical expenses for injuries and other damages in the event that there is a prolonged dispute over which party is responsible.
Some no-fault insurance options can be expensive, so it is up to the insured to decide how to proceed in the event of an accident. While no-fault insurance is a good idea, it remains to be seen if the other 38 states will eventually jump on the bandwagon with no-fault provisions of their own.
If you still have a payment book on your vehicle, you may find gap insurance to be a useful tool. GAP insurance will cover the difference between an insurance payout, if your vehicle is totaled, and the outstanding balance on your car loan.
Since cars lose value so quickly when they are first driven out of the showroom, a vehicle owner may be underwater on their auto loan at the time their car is demolished in an insured accident. The insurance company will gladly pay the insured book value for the vehicle, but that may be substantially less than what is owed.
It’s important to remember that the initial payments on any auto loan are almost pure interest, so the principal value will remain high during the first year or two of the loan agreement.
This leaves the potential gap that GAP coverage can fill.
Periodically Review Your Auto Insurance Coverage
The NAIC, National Association of Insurance Commissioners reminds motorist to review their auto insurance policies at least once each year before renewal time. NAIC research has found that consumers often forget about updating their insurance policies, preferring to let existing policies remain as they are from year to year.
Their study found that between 20 and 35% of policyholders have not even reviewed, much less updated their car insurance policies in the most recent 12-month period. A full 20%of younger motorists admit that they would allow their car insurance coverage to lapse as a means of economizing and saving money.
The statistics shift when it comes to families with young children. Of this group, 77% reportedly has increased their liability coverage to amounts exceeding the minimum requirements in the states in which they reside.
The Insurance Information Institute (III), maintains that by understanding all possible coverage options, consumers can adequately protect their families and save money at the same time by comparison shopping.
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