Auto Insurance 101
Auto insurance provides protection against the possibility of accidents. Drivers pay a regular premium to the insurance company and, in exchange, the insurer agrees to pay for damage caused by agreed-upon perils. If a person never has an accident, the insurance company gets to keep all of the premiums and make a profit. On the other hand, if a driver causes multiple accidents that the insurer must pay for, the insurance company may lose money by insuring them. This might lead to an increase in rates or a policy cancellation.
Because insurance companies rely on premiums to make a profit, they prefer to provide coverage to the people who are least likely to be involved in a collision. In order to attract these low-risk drivers, insurance companies offer discounts and reduced rates to people without accidents and those who practice safe driving habits. They will increase the rates of high-risk drivers in order to counteract the possible cost of insuring them.
The more coverage you carry, the more your policy will cost but the more protection it provides. Balancing protection with cost is an important factor in determining the best policy for your needs. Taking the time to understand how car insurance works will help keep your rates low and provide you with the coverage that you need to protect yourself, your family and your vehicles.
Why Do You Need Car Insurance?
Auto liability insurance is required by law in all states. This type of coverage pays for damage that a driver causes to another person’s property. It also pays for injuries that a person may cause as a result of an accident. Drivers without the proper amount of liability insurance cannot register their vehicles, and they will be ticketed if caught driving without insurance; depending on the situation, they may also lose their licenses or even face jail time.
Drivers who have accidents without carrying the appropriate amount of liability insurance can be sued for the damage they cause. This can be extremely expensive and damaging to the driver’s credit if they are unable to pay off the judgment immediately.
In addition to liability, insurance companies provide coverage to protect the insured driver and his or her vehicle. Known as first-party coverages, these cover the cost of repairs when a vehicle is involved in a collision, damaged by weather, vandalized or otherwise sustains damage in a covered accident. First-party coverage can also pay for medical expenses for injuries sustained by an insured driver and their passengers. If you are leasing or financing a vehicle, you must purchase first-party coverages for it; otherwise it is not required, but it may be a very good idea.
Auto repairs can be very expensive, and many people are not prepared to pay for an accident out of pocket. Even minor damage can cost over $1,000 to repair, and if an accident is severe, the driver may be responsible for completely replacing a damaged vehicle. Additionally, medical expenses can quickly add up. In addition to the cost of doctor’s visits and medications, insurance will pay for lost time from work, pain and suffering and other expenses; without insurance as a buffer, a driver may need to pay all of these out of pocket.
What Does Car Insurance Cover?
Different coverages will pay for different types of damage, depending on the accident that caused them. A policy may not have all of the coverages available, so not all accidents will be covered by all policies. It’s a good idea to fully understand what each individual coverage does so that you know in advance what will be covered:
— Bodily Injury Liability
Insurance coverage for medical expenses of the other party in an accident; this includes the other vehicle’s driver and passengers, as well as pedestrians or bicyclists. It may also extend to your own passengers if they do not live with you.
— Property Damage Liability
Insurance coverage for damages you cause to another person’s car or other property. This does not extend to any property that you own.
— Collision Coverage
Insurance for damages to your vehicle caused by an accident between two vehicles, a vehicle and a fixed object, or a vehicle and a pedestrian or bicyclist.
— Comprehensive Coverage
Provides coverage for damage to your vehicle caused by vandalism, theft, attempted theft, acts of nature, animals, flying objects and other non-collision damages. Comprehensive coverage also always pays for glass damage regardless of what broke the glass.
— Personal Injury Protection and Medical Payments
Provides coverage for injuries you sustain when involved in an accident. In some states, these coverages are required for all policies, while they are optional in other states.
Some policies include other coverages, such as rental reimbursement, uninsured motorist coverage and towing. Whenever you purchase a policy, it’s a good idea to review your coverages carefully so that you know exactly what will or will not be covered by the insurance company. Some insurers provide exclusions that will limit how a coverage will be used, so you should be familiar with these before agreeing to the policy; this way you know that you really have the protection that you need.
What Isn’t Covered by Insurance?
Car insurance only pays for damage that is sudden and accidental. Damages caused by regular wear-and-tear are not covered, nor are maintenance issues. Insurance will not pay for mechanical failures or flat tires unless those situations cause an accident. If they do lead to an accident, the insurance company will only pay for the damage caused, not the mechanical failure itself.
For example, if a person’s tire blows out on the highway and the vehicle runs off the road, colliding with a guard rail, the insurance company will pay for the body damage to the vehicle under collision coverage and damage to the guard rail under liability coverage. The tire itself, however, will not be covered and the insured must pay to replace it.
It Pays to Know What You’re Buying
It’s important to understand your insurance coverage, the way rates are calculated and why you may need the coverages that you carry. This enables you to purchase exactly as much coverage as you need so that you neither pay too much nor risk having a claim denied due to lack of coverage. If you have any questions about your coverage, you should clarify them with your agent before agreeing to the policy; they should be happy to go over the information with you in detail until you are comfortable with it.