Car Insurance Coverage Basics: Explanations and Definitions
Learning about auto insurance basics can help you choose the right car insurance coverage for you and your family.
Car insurance, whether you want it or not, is a legal requirement in all states except for one. It protects drivers in the event of an accident by ensuring that repairs will be made to damaged vehicles. Car insurance also covers the medical costs of car accident victims. A basic knowledge of car insurance will keep you safe on the road and covered if anything happens.
This article covers the basic elements of a policy, how to pick an agent, and important insurance terms.
- Liability: Liability coverage pays for damages that you are responsible for in the event of an accident. It covers both property and medical damages that you cause and provides you legal protection in the case of a lawsuit.
- Collision: Collision coverage repairs your car even if the accident is your fault. There's a set dollar amount that you contribute to the repairs (called a deductible), and your insurance company pays the rest. If your car is totaled, your insurance company writes you a check for the actual cash value (ACV) of the vehicle. Collision coverage is optional.
- Comprehensive: Comprehensive coverage is for anything that happens to your car through something other than an accident. This includes theft (though only for the worth of your car, not your belongings inside the vehicle unless you add your belongings to the policy). Also, vandalism, damage from flood, fire, falling trees, and most other hazards. Comprehensive coverage is also optional.
- Personal Injury Protection (PIP): PIP is a type of medical protection that's required in no-fault states and optional in all others. It covers medical expenses for you and your passengers. If PIP isn't required in your state, your health insurance is probably sufficient.
- Uninsured Motorist: Uninsured motorist protection covers your expenses when you're involved in an accident with a driver that doesn't have insurance. You're also covered for injuries sustained as a pedestrian. Uninsured motorist protection isn't often required, but it could be worth the extra premium dollars.
- Underinsured Motorist: Underinsured motorist covers your costs when you're involved in an accident with a driver who isn't carrying the state required minimum liability limits. Most drivers ask agents for the minimum limits the carrier can provide, not the minimum liability requirements of their specific state. Since many drivers don't know their state’s minimum, they could be breaking the law without knowing it.
What happens if you cause a major car accident and your coverage limits are below the state minimum? After your insurance company pays up to your policy’s liability limits, it still won’t be enough to cover all the damage you caused. This means you are underinsured, and you're able to be sued. Typically, when you are sued for a covered car accident, your insurance company will provide a lawyer and cover court costs. But if your coverage limits are exhausted by then, you are on your own.
Car Insurance Glossary
This is you. It means the same thing as “policyholder.”
This is an insurance company.
A third-party person is anyone other than you and the insurance company. The insurance company is the first party, you're the second party, and if you crash into someone, they're the third party.
The insurance companies.
If you get into a car accident, your insurance carrier takes care of the injuries you and your passengers suffered. The person you hit, or that hit you, will have their injuries and those of their passengers covered by their carrier. However, a person who did not cause the accident will still have to file a car accident claim to the at-fault driver’s carrier to pay for damages to their car.
The out-of-pocket amount you will have to pay before your insurance carrier pays for your covered car repairs. Similar to how health insurance works with the 20/80 method. The patient pays 20 percent of the total medical procedure bill, and the insurer pays the remaining 80 percent of the procedure bill to cover it all.
A claim is when you call in to report an accident that your insurance covers. They will keep a record of this on file called a claim. If you file too many claims, the carrier can drop you from their coverage.
Special Note: If you're insured and you call in to your own insurance company’s claims center and ask about submitting a claim, it's marked as a “claims inquiry” on your claims record. That's tracked forever and can negatively affect your policy. Be careful what you say to the claims rep. about a potential claim. It might be better to speak with your agent about it before the claims call center.
This type of coverage protects your car from covered incidents that happen to your car aside from collision. These incidents include car theft, weather, vandalism, and personal items stolen from inside the car.
This coverage pays to repair your car when it collides with other vehicles or property.
This coverage takes care of injuries suffered by others because of something you did to them. It also covers you and your family if you are driving someone else’s vehicle.
How to Shop for Car Insurance
While looking for a new auto policy, it's important to compare quotes from different car insurance companies. This is because they all have their own methods for determining premiums. No one carrier has the lowest prices. Once you've gathered quotes from multiple insurance companies, you can compare rates to get the best deal.
Choosing an Agent
There are three ways to purchase insurance. One way is through a direct marketing sales call center. These are call centers filled with licensed insurance agents, not customer service representatives. If you’d like to get to know your agent, this might not be the way for you. These agents speak to hundreds of people per day and have tough sales goals to hit. Chances are, after you buy a policy from them, they may not be working there anymore or won’t remember your name.
Captive Insurance Agent. Captive or exclusive insurance agents are bound by contract to sell their employer's insurance products only. So, if you ask them for a quote, they'll only be able to bring one quote back to you for review. It might be a great quote, or it might be much higher than what you're already paying. Whatever the case, the agent won't be able to supply you with quotes from any other carriers.
Independent Insurance Agent. An independent insurance agent works with multiple insurance carriers. This allows these agents to give you insurance quotes from multiple companies. This is a good way to see if the policy you have is competitive.
Another thing that captive agents can't do, but independent and call center agents can, is mismatch insurance policies. Let’s say that you have auto, home, and life insurance with your captive agent. This means that all three of these lines of business are with the same insurance company. If you mismatched your insurance policies, you could have your auto, home, and life insurance with three different companies. You can save a lot of money by choosing the carrier with the lowest premiums for a given line of business. However, there's value in having all your lines of business with one company. You can get discounts when you “bundle” all your policies with one carrier.
Every state has unique requirements, and every insurer works a little bit differently. Still, these basic elements are part of nearly every car insurance policy. It is a good idea to speak to a local agent that's familiar with the insurance laws of your state. They can advise you on how much insurance to purchase to meet your needs.
It's also recommended that you compare quotes from different auto insurance companies before making a final decision. By doing this, you’ll help guarantee that the rate you’re paying is the best for your needed coverage and protection.
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