What is full coverage car insurance?
Full coverage car insurance refers to the condition of owning several separate policies that together “fully” cover you and your vehicle against any loss. The three policies most commonly required by lenders for “full coverage” are liability, collision and comprehensive. It is now also common to add uninsured motorist coverage as a sub-policy of your liability or as a separate policy altogether. While no group of policies can possibly protect you against every imaginable loss, full coverage is designed to be sure that you have adequate coverage in the most common types of accident situations.
Financed or Leased Vehicles
Many lenders require “full coverage” whenever a vehicle is financed. By requiring that the borrower pay for full coverage insurance, the lender is attempting to protect its investment. However, unless you have gap insurance coverage also, your lender may still not receive the total amount due for your car in a total loss accident even with a full coverage car insurance policy. In this case, it is your responsibility to pay the difference.
If a borrower fails to maintain full coverage insurance, the lender may take out its own full coverage policy and bill the borrower for the difference.
The first component of full coverage is liability insurance. All states have a minimum amount of liability insurance every vehicle owner must carry. Liability insurance pays up to the limits expressed in the policy for damages caused to other parties by the insured driver. Once the liability limits are exhausted, the driver must pay for the remaining damages out of pocket.
Many drivers choose to set liability limits higher than the state minimums to help protect their assets in the event of an at-fault crash. For example, a minimum liability policy might only require up to $25,000 per person and $50,000 per accident as well as up to $10,000 in property damage. Drivers who can afford just a little more often double or triple the state minimum liability limits to $50,000 per person, $100,000 per accident, and $20,000 in property damage or more. By raising liability limits, the driver is attempting to prevent a lawsuit from reaching his personal assets by having enough coverage to pay almost any required settlement.
Drivers also choose a deductible, or an amount that the driver is required to pay prior to the insurance company disbursing any funds. Some drivers choose the minimum deductible, which is often $250, but it may be much less expensive to raise your deductible to $1,000. While you will have to pay more if you have an accident, your insurance premiums may be cut in half.
The next part of full coverage insurance is a collision policy. Collision pays to repair the insured driver’s vehicle if he or she causes an accident that results in damage to the car, or in some cases if the insured driver has a one-car at-fault collision. Collision coverage has its own deductible apart from that of your liability policy, so you will have to pay both deductibles if you file claims against your insurance.
The final piece of the full coverage portfolio is the comprehensive policy. As the name implies, comprehensive covers almost everything not covered by liability and collision. Comprehensive policies pay damages for theft, burglary, vandalism, glass breakage, fire, flood, tornado, hurricane, ice, sleet, and any other situation not covered by the other two policies. Comprehensive coverage also has its own deductible that must be paid separately from the other two.
Uninsured Motorist Coverage
Uninsured motorist coverage may be added as a rider to the liability policy or written as a separate policy itself. UIM (industry acronym for uninsured motorist coverage) pays for damages if you are hit by an uninsured driver. In some states, uninsured motorist coverage also pays for hit-and-run accidents, while in other states your collision policy is responsible for this payment.
Although it is not required, you may also want to purchase some optional coverage policies on your vehicle such as towing or roadside assistance and rental car reimbursement. However, before you add these things to your policy, be sure you are not already covered for them under your cell phone plan or credit cards.
Whether you need a standard policy to meet state minimum car insurance requirements or a full coverage policy you will need to shop around. Car insurance rates vary greatly between providers depending on your risk profile, where you live, the type of vehicle insured and more. However, car insurance is also the greatest asset you can have in the event of an accident so make sure you find affordable rates and the level of coverage you need before committing to any particular policy.