 The
Basics of Auto Insurance
An auto insurance policy is actually a package of different
coverages. Most states require you to purchase a minimum amount
of certain kinds of coverage. But if you’re interested in
protecting yourself from a lawsuit or from expensive repair
bills, then it makes sense to buy more than what’s required.
Liability Insurance
Liability coverage is the foundation of any auto insurance
policy, and is required in most states. If you are at fault
in an accident, your liability insurance will pay for the
bodily injury and property damage expenses caused to third
parties in the accident, including legal bills. Bodily injury
expenses include medical bills and lost wages. Property damage
expenses pay for the repair or replacement of things you wrecked.
The third party may also decide to sue you in order to collect
"pain and suffering" damages.
Remember,
if you cause a serious accident, minimum insurance may not
cover you adequately. That’s why it’s a good idea to buy more
than what your state requires.
Liability Info: Insurance types usually
refer to liability coverage limits as a series of three numbers.
For example, your agent might say that your policy carries
liability limits of 20/40/10. That stands for $20,000 in bodily
injury coverage per person, $40,000 in bodily injury coverage
per accident, and $10,000 in property damage coverage per
accident.
Collision
And Comprehensive Coverages
Collision
If you cause an accident, collision coverage will pay to repair
your vehicle. You usually can’t collect any more than the
actual cash value of your car, which is not the same as the
car’s replacement cost. Collision coverage is normally the
most expensive component of auto insurance. By choosing a
higher deductible, say $250 or even $500, you can keep your
premium costs down. However, keep in mind that you must pay
the amount of your deductible before the insurance company
kicks in any money after an acci dent.
Insurance
companies often will "total" your car if the repairs
the company must pay exceed what the car is worth.
Comprehensive
Comprehensive coverage will pay for damages to your car that
weren’t caused by an auto accident: Damages from theft, fire,
vandalism, natural disasters, or hitting a deer all qualify.
Comprehensive coverage also comes with a deductible and your
insurer wi ll only pay as much as the car was worth when it
got wrecked.
Because
insurance companies normally will not pay you more than your
car’s book value, it’s helpful if you have a rough idea of
this amount. Most insurance adjusters use the Kelley Blue
Book. The National Automobile Dealers Association also publ
ishes the Official Used Car Guide, which is updated each month.
If your car is worth less than what you’re paying for the
coverage, you’re better off not having it.
Replacement Cost vs. Actual Cash Value:
Replacement cost is the amount it would take to replace your
vehicle or repair damages with materials of similar kind and
quality, without deducting for depreciation. Depreciation
is the decrease in vehicle value because of age or wear and
tear.
Actual cash value (ACV) is the value of your property when
it is damaged or destroyed. Claims adjusters usually figure
ACV by taking the replacement cost and subtracting depreciation.
For example, an auto that costs $5,000 may have a reasonable
"life" of 5 years. If it is destroyed after 10 years,
its actual cash value will be substantially less than $5,000
because of depreciation.
Advice:
It’s usually better to go with replacement cost coverage.
Although the cost is higher, in most cases the extra protection
may be worth it. Make sure to ask your agent which kind of
coverage you have on your auto policy.
Medical
Payments, PIP, And No-Fault Coverages
MedPay will pay for your and your passengers’ medical expenses
after an accident. These expenses can arise from accidents
while you’re driving your car, someone else’s car (with their
permission), and injuries you or your family members incur
when you’re pedestrians. The coverage will pay regardless
of who is at fault, but if someone else is liable, your insurer
may seek to recoup the expenses from them.
Personal
injury protection (PIP) and broader "no-fault" coverages
are expanded forms of medical payments protection that may
be required in your state. Some states have optional PIP or
no fault. Expanded features include lost wages and payments
for child care.
Uninsured/Underinsured
Motorists Coverages
Uninsured motorists (UM) coverage pays for your injuries if
you’re struck by a hit-and-run driver or someone who doesn’t
have auto insurance. It is required in many states.
Underinsured
motorists (UIM) coverage will pay out if the driver who hit
you causes more damage than his or her liability coverage
can cover. In some states, UM or UIM coverage will also pay
for property damages.
Add-On
Features
Several supplemental auto coverages are available, either
as separate premium items or included in augmented policies.
- Rental
reimbursement, a common add-on, covers vehicle rentals required
because your car is damaged or stolen.
- Coverage
for towing and labor charges in case of a road breakdown
is also common.
- Auto
replacement coverage guarantees car will be completely repaired
or replaced, even if these costs exceed its depreciated
value.
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