Auto Insurance 101

Shopping for your own auto insurance policy for the first time? The list of words and numbers can be overwhelming – and even more so when all those companies want to talk to you about those free quotes you asked for (which you really should ask for, because different companies can have wildly different premiums for the same coverage based on a ton of information). Here’s a simple guide to help avoid any collisions on the road to purchasing auto insurance.

Types of auto insurance

First things first: an auto insurance policy have a premium, which is the amount you pay the insurance company in exchange for your selected coverage. Coverage falls into three broad categories based on what is insured:

1. Liability insurance, which pays for the legal responsibility to others for damage to their body or property

2. Property insurance, which covers theft and damage to your car

3. Medical insurance, which covers your cost of injury, rehab, and possibly lost wages or funeral expenses

Most states require drivers to have liability insurance before they can drive a car – think of it as mandatory insurance to cover other people and their property in case you cause an accident.

Types of coverage

Most auto policies attach maximum numbers to six different kinds of potential coverage:

1. Bodily Injury Liability

This is just what it sounds like – this kind of coverage pays for injury to bodies that the policyholder and listed family members cause to other people. This is the mandatory kind of insurance but you can also choose coverage for an amount greater than the state-required minimum.

2. Medical Payments of Personal Injury Protection (PIP)

This covers medical treatment of injuries to the policyholder or passengers in their car.

3. Property Damage Liability

This pays for damage that you cause to somebody else’s property, usually meaning their vehicle but can also include things on or near the street like lamp posts, telephone poles, fences, buildings, or other structures.

This covers damage to your car if you have a collision with something – a car, object, or even the street if you roll your car. Collision coverage usually comes with a deductible, which is the amount that you have to pay out-of-pocket before your coverage kicks in to pay additional expenses. Higher deductible options have lower premiums, which is the annual amount you pay for coverage.

1. This is a fancy word for “everything,” and covers theft, loss, and damage from everything else that isn’t a collision: fire, missiles, earthquakes, weather, vandalism, etc. This usually comes with a deductible from $100-300, though you can sometimes opt for a higher deductible. Some companies include glass coverage in their comprehensive plan, or list glass as a separate coverage item. While comprehensive coverage isn’t legally mandatory, many lenders might make you have comprehensive insurance until you finish paying your car loan.

2. Uninsured and Underinsured Motorist Coverage. This coverage reimburses the policyholder if they are in an accident with an uninsured or a hit-and-run driver where the other driver is at fault but doesn’t have enough insurance to pay for your loss.

Considerations before purchasing auto insurance

When you’re selecting your insurance policy, keep in mind that things can vary widely by state and by company, so you’ll need to do some research to get the policy that best fits you and your driving habits.  Some things to keep in mind:

1. How much money do you make, and how much money do you have?

Generally, the more assets you have, the more is at stake if you’re found liable for an accident and somebody sues you.

2. How old is your car, how much is it worth, and do you really own it?

A low-value car that you own outright, meaning that it isn’t leased and you don’t have a loan for it, may not need comprehensive or collision coverage. But if you don’t own the car, many leasing or financing companies will require you to have one or both.

3. How much can you pay out-of-pocket?

You’ll want a policy with a deductible that you could pay if you ever had to, but lower deductibles usually have higher premiums, which are usually paid in monthly installments.  You’ll have to balance how much money you make with your ideal deductible and monthly payment.

4. Do you have health insurance?

Some medical coverage can pay for the same things as your health insurance. Check these options against your health benefits to avoid paying for the same thing twice. Alternatively, if you don’t have health insurance, you may want your policy to cover any necessary medical payments.

5. Do you have kids who drive?

The policyholder can also add eligible drivers from their immediate family to their existing auto policy. Young drivers can often be inexperienced and be a greater driving risk. Because of this, you may want to have greater liability coverage for policies with young drivers. Many insurance companies also offer discounts for young drivers with good grades, so make sure you ask about possible discounts when you set up or make changes to your policy.