What is auto insurance?
Basic personal auto insurance is compulsory by most states and provides you with some financial protection in the event of an accident. But is this enough? what are the options? Learn how car insurance works and what type of coverage is available.
Understanding Auto Insurance – The Basics
Auto insurance is a contract between you and the insurance company that protects you from financial loss in the event of an accident or theft. In return for paying your premium, the insurance company agrees to pay your loss as stated in your policy.
Provides coverage for auto insurance:
Property – such as damage or theft of your car
Liability – Your legal responsibility to others for bodily injury or property damage
Medical – Cost of treatment of injuries, rehabilitation and sometimes wages and funeral expenses
Basic personal auto insurance is mandated by most US states, and laws vary. Auto insurance coverage is priced individually (a la carte) so that you can customize the amount of coverage to suit your exact needs and budget.
Policies are usually issued for a time frame of six months or a year and are renewable. The insurance company sends a notice when it is time to renew the policy and pay its premium.
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What and under what circumstances is covered under my auto insurance?
Your auto policy will cover you and other family members on your policy, whether your car or someone else’s car (with their permission). If someone on your policy is not driving your car with your consent, then your policy also provides coverage.
Your personal auto policy only includes personal driving, whether you are starting work, driving or traveling. If you use your car for commercial purposes it will not provide coverage – for example, if you deliver pizza.
Personal auto insurance also will not provide coverage if you use your car to provide transportation to others through a ride-sharing service like Uber or Lyft. However, some auto insurers are now offering supplemental insurance products (at an additional cost), extending coverage for vehicle owners providing ride sharing services.
Is auto insurance coverage mandatory?
Auto insurance requirements vary from one state to another. If you are financing the car, your lender may also have its own requirements. Almost every state requires car owners to carry:
Bodily injury liability – which covers the costs associated with injuries or death that you or another driver incurs while driving your car.
Property damage liability – which reimburses others for damage that is caused by you or any other vehicle or other property driving your vehicle, such as a fence, building or utility pole.
Additionally, many states require you to carry:
Medical Payment or Personal Injury Protection (PIP), which provides reimbursement of medical expenses for injuries to you or your passengers. It will also cover lost wages and other related expenses.
Motorist coverage reimburses you without a license when an accident does not occur to the auto driver, or in the case of a hit-and-run accident. You can also buy under the insured motorist coverage, which will be incurred if another driver lacks sufficient coverage to pay the costs of a serious accident.
Even if PIP and unlicensed motorist coverage are optional in your state, consider adding them to your policy for greater financial security.
What other types of auto insurance coverage are specific?
While most basic, legally mandated auto insurance covers the damage to your car, it does not harm your own car. To cover your car, you should consider these alternative coverage:
A collision reimburses you for damage to your car that results from a collision with another vehicle or other object, such as a tree or railing – when you are at fault. While collision coverage will not reimburse you for mechanical failure or general wear-and-tear on your car, it will cover damage from pits or from rolling your car.
Extensively provides coverage against theft and damage due to fire, floods, vandalism, hail, falling rocks or trees and an event in addition to other hazards – even the grip of an asteroid!
Glass coverage provides coverage from windshield damage, which is common. Some auto policies include glass coverage without reductions, including side windows, rear windows, and glass sunroofs. Or you can buy complementary glass coverage.
What is interval insurance and do I need it?
Collisions and sweeping only cover the market value of your car, not what you paid for it – and new cars depreciate quickly. If your car is completely gutted or stolen, there may be a “gap” between what is owed on the vehicle and your insurance coverage. To cover this, you can buy differential insurance to pay the difference. Note that for leased vehicles, differential coverage is typically rolled into your lease payments.
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