Demystifying Auto Insurance Policies: Understanding Coverage Types and Benefits
Auto insurance is an insurance policy that no driver on the road wants to live without. Having an auto insurance policy can save your financial health from getting into serious trouble, should you ever get into an accident. The only problem is, learning about the different types of auto insurance can be a little complicated. And once you know about them, there is a distinct risk that you will get lost in the myriad of details that make each policy different from the other. This article was born out of the mission to give an overview of all those types of auto insurance policies and the main differences between them. By understanding what coverage each policy provides when it gets taken out, it is a lot easier to pick the best option for your particular circumstances.
Liability insurance: You’ll almost always be required to carry this type of auto insurance, as it’s provided by all auto insurance companies in most states. Liability insurance comes into play when you’re at fault in causing an accident and get sued by the other driver for injuries and/or property damage. It offers both bodily injury liability and property damage liability, divided into two parts: • Bodily injury liability coverage pays for medical bills, lost wages and legal fees of the party injured by the accident. • Property damage liability covers the expenses of fixing the other party’s vehicle or other property.
Collision: Collision is optional, but you should seriously consider this type of coverage if your vehicle is relatively new or has high value. Collision covers your vehicle in the event of a collision, regardless of fault, repairing or replacing it accordingly. If your vehicle is a total loss in the event of an accident, collision will reimburse you for the actual cash value of your vehicle.
Collision Coverage: Collision coverage – a required auto policy – is an optional policy that covers damages to your vehicle resulting from collisions with other vehicles or objects. It does not cover bodily injury liability or death claims. Collision helps to pay for damage to your vehicle if you’re deemed at fault for the accident. This insurance policy provides broad coverage for losses to your vehicle resulting from events other than collisions. Collision coverage is typically available in three types of policies: • Split limit: pays for repairs up to the first coverage limit, then switch to comprehensive coverage • Combined single limit: covers both collision and comprehensive damages up to the first dollar for either type of damage • Basic: provides collision coverage only up to the coverage limit. Most states require an insurance policy to include collision coverage if you have a lienholder for an auto loan, which means the financial institution that loans you the funds for buying your car is named as the lienholder on the title of your vehicle. Collision insurance helps pay for the cost of repairs or a replacement vehicle when your car is at fault in an auto accident. It can also come in handy when you’re driving whilst uninsured.
Personal Injury Protection: Available in some states, this type of coverage, known as No-Fault, will pay up to a certain amount for you and your passengers’ medical expenses, lost wages, and other expenses related when you are involved in an accident, regardless of fault. Since PIP coverage pays out regardless of fault, it means that you will get benefits much faster than you would if you had to wait to file an injury claim and receive reimbursement with a settlement that ultimately finds another driver was at-fault.
Uninsured/Underinsured Motorist Coverage: Uninsured/Underinsured Motorist Coverage is similar to Bodily Injury Liability but protects you if you are in an accident with a driver who is uninsured or underinsured. If you are hurt in an accident, your UM/UIM coverage will cover your medical bills and wages that you lose because you cannot work, up to the policy limits, when the driver at fault in the crash does not have enough insurance coverage to fully compensate you.
Medical Payments (MedPay) Coverage: This additional optional coverage pays medical expenses incurred by you and your passengers after an accident, regardless of who was at fault. It can help you pay the difference between your health insurance coverage and the medical bills you actually incur.
Gap Insurance: If you lease or finance your vehicle, gap insurance will help cover you if you get in an accident and total your car. If your car has depreciated considerably and is worth even less than the outstanding amount that you owe on the loan or lease, you would be in a terrible position. Gap insurance covers the difference, so you're not obligated to pay on a vehicle that you don't own.
It’s easy to purchase auto insurance without understanding each of the policy types, but learning the differences is an important first step to getting the coverage you need at a price you can afford. While the minimum amount of auto insurance you are required to carry is known as liability insurance, the optional auto insurance coverages include collision, comprehensive and additional coverages. Determining how well each policy matches the extent of your coverage needs and fits your budget depends on your driving habits, the value of your automobile and your risk tolerance. The peace of mind associated with purchasing the right auto insurance coverage will help take away the anxiety that accompanies driving.
