Understanding how insurance works, and what the different coverage types mean, can be the difference between a quick recovery from an accident and getting stuck with bills and unanticipated expenses.
In this article, we’ll cover the basics of how insurance works, the different types of auto insurance coverage, how to decide on different types of coverage, and how to get a quote.
Auto insurance works just like other types of insurance. The idea is that, by spreading out the risk across the population, insurance companies can make money while also reducing the burden of life’s biggest expenses.
Insurance companies count on most people paying more into the system than they claim or take in insurance payments. The service is still valuable because having insurance means you’re protected if you have a big expense but don’t have the money to pay for it upfront.
Auto insurance is designed to help with the massive costs of car accidents, which almost no one can pay for out-of-pocket. Depending on your coverage, auto insurance can also cover other types of damage.
Insurance can also protect you if the other person in an accident doesn’t have enough insurance to cover the damages.
Most states require at least a minimum level of liability coverage for all drivers. Don’t worry if you aren’t sure what liability coverage is, we’ll talk about it in the next section. But the bare minimum coverage required in your state may be significantly less insurance than you want on your vehicle.
Type of Auto Insurance Coverage
There are many different types of coverage offered by most auto insurance companies. Their different plans combine different levels of coverage with different types of coverage. Many companies can also put together custom plans to cater to your specific car insurance needs.
When you’re looking for new car insurance, it’s important to understand the different types of coverage so you can pick a plan that meets your needs, without paying for features and benefits you don’t need.
As we mentioned earlier, liability coverage is usually the minimum level of car insurance required for all drivers. Check your state requirements for the amount of liability coverage you need. Most insurance companies won’t offer less than the state minimum in even their most bare-bones coverage options.
Liability coverage protects you if you’re in an accident, especially if you’re considered at fault for the accident, by paying the damages to other vehicles, people, and property up to a certain amount.
Liability coverage, unlike comprehensive coverage and collision coverage, doesn’t require you to pay a deductible if you file a claim. Your liability coverage will have limits, but will not have deductibles.
You might make a claim against someone else’s insurance company if you were not at fault in an accident, but your vehicle was damaged, or you needed medical care. Their liability insurance is what covers those costs. Just like your liability insurance would cover their costs if you were at fault.
Comprehensive coverage doesn’t mean that your insurance covers every type of damage to your vehicle. You still need liability coverage and may want to add other types of coverage, even if you have a comprehensive coverage plan.
That’s because comprehensive coverage refers to covering other, uncontrollable, types of damage that might occur whether you’re driving or not. For instance, hail, theft, and a falling tree branch might all be covered under a comprehensive plan.
Comprehensive coverage exists because unexpected and unpreventable types of damage happen, and gives you more options if your car is severely damaged, lost, or stolen, due to something other than an accident or moving violation.
If you choose to include comprehensive coverage in your auto insurance plan, it’s important that you read all the details. Different plans cover different types of covered damage, and even comprehensive coverage might have different levels of coverage.
It’s important to know what’s protected and to decide for yourself whether the coverage offered is worth the cost. If you live somewhere that very rarely gets hail, and you keep your car in the garage, you might not need a plan that covers hail damage.
But there might be a plan that covers more common types of damage in your area, and some things you don’t need. That plan might still be a good option.
Collision coverage pays for the damage to your vehicle in an accident or collision with another object. Collision coverage protects you from paying out-of-pocket for damages to your vehicle when you’re at fault for the damage.
Your liability insurance covers damages to other vehicles, property, and people, but doesn’t cover damage to you or your property.
Collision coverage is a particularly good idea if you have a new or high-value car that you could not easily repair or replace out of pocket if you were in an accident.
Personal Injury Protection
Personal injury protection may also be required, depending on your state regulations. This type of coverage kicks in any time you’re injured in an accident or moving violation and protects you regardless of fault.
Personal Injury Protection, or PIP, covers the costs of medical bills related to auto accidents and injuries. Like other types of insurance, it usually has a deductible, and you pay to meet your deductible before the insurance pays the rest of your medical costs.
Rental Car Insurance
Rental car insurance covers rental vehicles. Specifically, it covers the costs of damages to a rental vehicle. You can get this type of insurance through your primary insurance provider. You can also usually buy temporary rental insurance coverage from the car rental company when you rent one of their cars. Many credit card companies also offer complimentary rental car coverage.
Rental car insurance varies a little more than other types of car insurance. You may or may not have a deductible, and you will have a maximum coverage amount. If the damage exceeds your coverage amount, you are liable for the excess.
You should also read carefully what type of rental coverage your plan offers. Most offer a combination of Liability and Collision coverage, and many also have some form of PIP coverage. However, it’s important to check your coverage level, because all rental insurance plans are different, and some are less complete than others.
Uninsured Motorist Coverage
Even though almost all drivers are required to have and carry auto insurance, you may still be involved in an accident with someone who does not have auto insurance. A small minority of drivers don’t insure their vehicles, either because they don’t want to, or because they cannot afford insurance premiums.
When that happens, it can be difficult to get reimbursed for damages to your vehicle, especially when the other driver was at fault. Your insurance may not want to cover damages, even if you have collision coverage if the other driver was at fault.
You can pursue a court case to get the other person to reimburse you. But, depending on the settlement, you may not be fully reimbursed, and payments usually take longer to receive than they would through an insurance company.
With uninsured motorist coverage, you’re paying your insurance company to cover the costs of damages to your vehicle if the other driver isn’t insured.
A variant of this type of coverage, underinsured motorist coverage, also protects you if the other driver has insurance, but doesn’t have enough insurance to cover the full cost of damages.
Medical Payments Coverage
Medical payments coverage is essentially a more complete form of PIP insurance, although you may want both. Medical coverage will pay for medical costs for anyone involved in a car accident, while PIP protects only the driver.
Picking the Right Coverage for You
Picking coverage levels is a personal decision. You need to carry at least your state’s minimum required insurance, but adding additional protection is up to you.
Many people choose comprehensive coverage since storm damage and other types of unavoidable damage can be expensive, and having coverage reduces the financial burden.
But PIP insurance, if it isn’t required, may not be necessary if you already have good health insurance.
And, as a general rule, if your car is worth less than $2,000 or you could easily afford to replace it out of pocket, collision coverage may be more expensive than it’s worth.
If you’re unsure what level of coverage is best for you, talk with an insurance agent. They can help guide you to the best plan for you and can also work with you to bring costs down if you’re on a tight budget.
Getting a Quote
You should shop around a little before you settle on a specific plan or quote since prices vary quite a bit between companies and locations.
Talking about bundling together different types of insurance, or what types of coverage are most important for your situation, can also help you pick the best option.
You can also potentially bring down your monthly cost by raising your deductible, so try different deductible levels when you’re quote shopping or talking to an agent.