Auto insurance is required in many states, but not all policies are equal. Understanding how a personal auto insurance policy works helps you figure out if your policy fits your needs. Being stuck without enough car insurance leaves you open to some expensive repairs or a lawsuit if an accident is your fault.
When you apply for an auto insurance policy, the company calculates your rates based on several factors. These include the model of your car, your driving record, age, marital status, credit and the use of the vehicle. Discounts are sometimes available for having multiple policies with the same company, safety features on the vehicle or taking driver safety courses. Filling out the application and paying the premium puts the policy in force, providing you with the coverages you selected in the policy.
The type and amount of coverages you choose also affects the premiums you pay on your insurance. In general, the higher the coverage, the higher your premium is. Liability coverage is the component required by states. This coverage pays for damage and injury you cause to other drivers if you are at fault in an accident. The minimum liability limits set forth by some states is low and might not cover all of the damage caused in a serious accident. Paying a little more in premiums for higher liability ensures that other drivers have enough money to cover all of the damages you caused in the accident.
Full coverages bumps up the cost of your auto insurance even more. Collision and comprehensive make up the full coverage, which also pays for damages to your own vehicle. Collision covers damage when your vehicle collides with something else, whether another vehicle or an object such as a fence or pole. It covers your vehicle regardless of who is at fault in the accident. Comprehensive pays for damage done to your vehicle during a burglary or damage caused by natural elements, such as the weather. These coverages typically have a deductible that you must pay first. The insurance company then pays for the rest of the damage costs. For example, if the repair bill is $1,500 and you have a $500 deductible, you pay the $500 and the insurance company pays the remaining $1,000 to repair the car. If you have a loan on your vehicle, you are required to carry full coverage to protect the interests of the lender. Once you own your vehicle outright, you decide if you want to pay for full coverage. Older vehicles with little value usually cost more to have full coverage on than you would receive in a claim, so it probably won't make sense to carry full coverage on them.
The medical payment coverage pays for medical bills for injuries you and others in your vehicle sustained in an accident. The uninsured and underinsured motorist coverage also covers medical bills, but it pays in an accident when another driver is at fault. The uninsured coverage covers an accident caused by someone who doesn't have insurance or if you are involved in a hit-and-run, with the driver at fault leaving the scene. The underinsured motorist coverage kicks in to pay your medical bills after the at-fault driver's liability insurance runs out. For example, if your medical bills total $50,000 but the other driver's liability limit is $20,000, your underinsured motorist coverage would pay the remaining bills, up to the limits on your policy.
Understanding Your Policy
When you take out an auto insurance policy, you receive a document that outlines all of the coverages. Review each of the coverages listed on the policy to make sure you have the necessary coverages. Check the limits to make sure they are in a range that makes you comfortable. While you want to keep your premium low, choosing low coverages could leave you without enough insurance, whether you or another driver causes an accident.
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