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What does car insurance cover?

The lowdown...
  • Car insurance is a financial product that’s designed to help protect vehicle owners against financial loss
  • If you buy a basic low-cost policy, it will only provide you with the coverage that’s required under state law
  • A basic policy will provide you with third-party coverage that pays for claims made against you after a crash
  • Your third-party liability coverage also covers the cost for legal defense if you’re sued for damages after a loss
  • You can select other first-party coverage to pay for medical bills, vehicle repairs, and roadside assistance

Most people know they need car insurance when they buy a car, but many of the consumers who buy insurance aren’t really familiar with what the product pays for.

Auto insurance is a financial product that you don’t want to use but that you need to be familiar with. If you don’t know what your policy covers, it’s impossible to be secure in knowing that you have adequate protection.

The purpose of auto insurance is to indemnify the policyholder from loss. The term, “indemnify,” can be confusing to the average person.

In layman’s terms, insurance protects the person who buys the policy from damages or loss.

Auto insurance will also make the policyholder exempt from liability for damages.

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Here’s what you need to know about auto coverage:

Do all policies cover the same things?

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Insurance isn’t like a product that you buy off of the shelf. It’d be nice if there was a one-stop shop where you could peruse aisles and compare the price tags on the fixtures.

Unfortunately, since auto insurance is a personalized product with personalized rates, you have to build a policy and get quotes to determine how much you’ll pay.

Car insurance doesn’t provide you with one-size-fits-all coverage. Some drivers have older cars and low budgets so they need a basic policy. Other drivers need coverage for their financed vehicle and higher limits of liability.

You can ask and agent to help you build your policy for you, but ultimately you need to know what type of coverage you need.

Do all policies include coverage to pay for third-party claims?

All insurance policies include a basic set of coverage options. If you’re planning to buy a basic insurance policy on your car, your policy will more than likely include only what’s required under state law. In most cases, what’s required by your state legislature is solely third-party coverage.

Third-party coverage will pay when the policyholder or other designated drivers on the policy are responsible for damaging property or injuring others.

Almost all states have a compulsory requirement saying that you must have coverage for third-party claims. There are, however, some states with a no-fault system that require drivers to buy their own coverage to pay for their own medical bills no matter who’s liable for the accident.

What type of third-party coverage will you be offered?

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There are two different types of coverage that will pay protect you from claims made by others. If you’re in a tort state or your car is registered in a state with a modified no-fault system, you’ll need to carry both types of liability coverage for as long as you own a car.

Here’s how each coverage works:

  • Bodily Injury Liability (BI) – pays for the bills that follow when you or any other covered driver injure someone else while driving your car or another covered auto
  • Property Damage Liability (PD)pays for repair or replacement expenses when you or a covered driver damage property owned by others in an auto-related accident

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How do you choose liability limits?

Choosing liability limits isn’t easy.

Many consumers are influenced by price and that’s why they select the lowest possible limits. That’s not a wise choice because the state minimums in most states aren’t sufficient enough to pay for damages after even a minor fender bender.

Doubling your limits typically doesn’t cost you much more.

You’ll have to take a look at the limits that your insurer offers before you make a decision. Most of the times, the limits are written in a sequence of numbers that not everyone gets.

If you carry a policy with liability limits of 25/50/10, it means that your policy will pay up to $25,000 in medical bills for a single person, $50,000 in medical bills for a group’s injuries, and $10,000 to pay for property repairs.

As you can imagine, these limits aren’t enough to pay for medical bills or repairs when multiple people are injured and several cars are damaged.

If you’re liable for the loss and your liability doesn’t cover all of the reasonable claims presented, you could be left settling claims with your own money. This is why most experts recommend at least 100/300/100.

What type of coverage do you need in a no-fault state?

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If you’re in one of the 12 states with some type of no-fault system in place, you’re required to carry a specific type of no-fault coverage called Personal Injury Protection or PIP.

PIP is a form of medical coverage that pays for your own bills. It will also help your family members and covered drivers cover the cost of care for treatment.

No-fault coverage is only available in states where it’s mandatory. When you’re in an accident and you have PIP, you won’t have to wait to get treatment until after the claim has been investigated because you file a claim for the benefits against your own coverage.

Some of the things that PIP will cover includes:

  • Reasonable medical expenses for each person in your home injured in the accident
  • Funeral expenses
  • Money to pay for loss of services (daycare, housekeeping, etc.)
  • Income replacement while you’re recovering from your injuries
  • Expenses for rehabilitation services

Do you automatically have coverage for your car?

Auto insurance is a Property and Casualty product. Liability coverage falls into the Casualty classification but it doesn’t protect your property.

Many people are surprised to learn that not all auto policies pay to repair the property being insured. You don’t automatically have coverage for your car unless you add optional coverage to the coverage package.

Do you need coverage for your property?

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You don’t always need to buy coverage for your car. Insuring your property isn’t ever going to be required by the legislature, but you do need it if you don’t yet hold the title to your car. When your car is financed or leased, the contract says you need property insurance.

You should also buy property insurance if the car has retained some value and you can’t afford to repair it on your own. Most experts say that you shouldn’t buy property insurance if the premiums are more than 10 percent of the car’s value.

At the end of the day, it’s your decision if you want to pay higher premiums.

What type of coverage do you need for property protection?

There are two types of property insurance that can be purchased on an auto insurance plan. These coverage options are called comprehensive and collision.

As long as your car is in good condition and you submit to an inspection to look for pre-existing damage, you shouldn’t have a problem buying comprehensive and collision. Here’s what each type of coverage pays for:

  • Comprehensive – pays for repairs you need after your car is damaged in a fire, storm, or it’s stolen (coverage is subject to a deductible)
  • Collision – pays for repairs that you need after your car collides with an object (coverage is subject to a deductible)

You don’t have to carry both comprehensive and collision if you don’t want to. It’s possible to buy a policy with only comprehensive coverage so that you have coverage when your car is damaged while it’s parked.

You can’t buy collision unless you have comprehensive.

Are there any other types of coverage that you can purchase?

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There are other types of first-party coverage that can be added to your policy. You don’t have to purchase anything that’s not required but electing to carry the optional coverage will give you more protection. Here are some options:

  • Medical Payments Coverage
  • Uninsured Motorist Coverage
  • Towing and Roadside Assistance
  • Accidental Death and Dismemberment
  • Rental Car

Make sure you price the cost of all of the coverage options you’re interested in. To price the cost of insurance, get comparison quotes online.

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