Auto Insurance Basics

Auto insurance is something that not everyone considers, however, if you find yourself in an automobile accident, suddenly, it is crucial. It’s essentially a contract between the policyholder and the insuring company to provide financial protection against damage or bodily injury, as well as liability resulting from vehicle collisions.

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What is Auto Insurance?

Auto insurance is essentially a contract between a person and a company. The person, known as the policyholder, agrees to pay a premium to the insurance company, and the company, by extension, will pay any losses as defined in the policy document.

Policies can vary greatly, but there are a few basics that various auto policies will cover.

For example, there is property coverage. This pays for damage to your car, or even the theft of the car if it is not recovered. If you owe money on your auto loan, the bank will typically require that you purchase what is known as ‘full coverage.’ This is property coverage for the vehicle, and also extends to damages done to other drivers.

Liability coverage is also possible. Liability coverage is included in full coverage, which is simply the part of the policy that pays for the policyholder’s legal responsibilities to other people in the form of bodily injury or property damage.

Medical coverage pays for the cost of treating injuries, rehabilitation, and sometimes will even cover lost wages or funeral expenses in the case of a catastrophic accident. Medical coverage is part of both liability and property coverage, but typically is written out as its own section as there will be specific limits as to how much the company will pay out.

Why You Simply Need Auto Insurance Even If You Are Not Required To

Let’s take a situation where you get into an automobile accident. You cost $17,000 worth of damage to the other driver’s car and cause significant bodily damage that needs rehabilitation treatment. Medical bills for this type of situation could easily reach $200,000. Suddenly, if you don’t have automobile insurance, you’re on the hook for $217,000!

Needless to say, most people cannot take that type of financial hit, and at the very least, you are looking at bankruptcy, if not jail time. This can be avoided if you simply pay a monthly, quarterly, biannually, or even annual premium for your automobile insurance. Automobile insurance is used for these types of situations and if you find yourself in a car accident, your auto insurance will become your best friend. Beyond this, if you have ‘full coverage’, it will cover your own expenses if the other driver isn’t insured.

Some Things to Be Aware Of

An insurance policy, typically, has some type of limit attached to how much the company will be willing to pay. This should be spelled out clearly in the contract, and you should look for the following limits:

Bodily Injury Liability - This covers injuries that the policyholder causes to someone else. These individuals are also covered if they are driving other people’s cars with the owner’s permission. Pay attention to how much the insurance policy covers, as if you feel you may possibly need more to protect your assets, by all means, you can typically buy more.

Medical Payments/Personal Injury Protection - This coverage will pay for the treatment of injuries to the driver or passengers of the policyholder’s car. It can cover medical payments, lost wages, and even the cost of some services normally performed in the auto accident, such as tow trucks. It can also cover funeral costs in the event of a fatal collision. Typically, this area will have a limit as well. Again though, all of this is customizable.

Property Damage Liability - This coverage will pay for damage to someone else’s property done by the policyholder or by somebody driving the car with permission. This typically means somebody else’s car but can also include damage to fixed structures, such as fences, buildings, or telephone poles.

Collision - Collision coverage will pay for damage to the policyholder’s car resulting from crashing into another car or object. It can also cover other damage, such as pothole damage, and other similar situations. As a general rule, there is a deductible attached to the collision part of the policy, anywhere from $250 to $2,000. The higher the deductible, the lower your premium will typically be.

Comprehensive - Comprehensive coverage can be thought of as “miscellaneous insurance”, as it will cover other things such as fire, falling objects, explosions, windstorms, hail, flood, vandalism, or a whole host of other things. Comprehensive insurance normally has a deductible anywhere between $100 and $300, although you can typically opt for a larger deductible as a way to lower your monthly premiums. Sometimes comprehensive insurance can also reimburse the driver if a windshield is cracked or shattered, however, some companies will cover glass in a separate portion of the policy.

Uninsured motorist coverageThis reimburses the policyholder if they are hit by an uninsured or a hit-and-run driver.

Final Thought

Keep in mind that auto insurance rates may vary greatly from one company to another. By all means shop around but don’t go without auto insurance.