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Car insurance basics

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Besides protecting you financially, car insurance is a social responsibility. Driving without insurance or the ability to pay for the damages you cause in an accident puts others at financial risk.

All states except New Hampshire require car owners to prove they have the financial ability to cover liability costs if they cause an accident, and most require they do so by carrying auto insurance. New Hampshire requires drivers to prove financial responsibility after an accident.

An auto insurance policy contains six main types of coverage. Depending on where you live, some are required and some are optional.

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  1. Bodily injury liability
  2. Property damage liability
  3. Medical payments (MedPay) or Personal Injury Protection (PIP)
  4. Collision
  5. Comprehensive
  6. Uninsured/Underinsured motorists coverage (UM/UIM)
  7. Extras, like roadside assistance

When people talk about having full coverage they generally mean having liability, collision and comprehensive.

Let s look at each coverage type and help you figure out if you need them.

Liability insurance

Liability coverage pays for the damage you do to others. It s written as three numbers, such as 20/40/10. That translates to $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.

It also pays for your legal bills if you cause an accident.

Bodily-injury liability will pay for others medical bills and lost wages when an accident is your fault, except in no-fault states, where your own Personal Injury Protection (PIP) coverage would pay for your injuries.

Property-damage liability pays to repair or replace property that you destroy. This includes other cars or property, such as fences.

States have set minimum limits of car insurance you must buy, but you may find them woefully inadequate. If you cause a major accident you ll quickly exhaust your limits and be personally on the hook for the rest.

If you cause $65,000 worth of damage and have an insurance limit of $40,000, you’re responsible for the remaining $25,000 and could be sued for it.

Liability insurance has no deductible.

Collision and comprehensive insurance

Unlike property-damage liability, collision coverage pays to repair your own vehicle in the event of an accident. Your collision claim check will be reduced by the amount of your collision deductible.

Your car is considered “totaled” when the repair costs exceed a certain threshold of the car’s value, such as 70 percent. At that point, the insurance company will tow away the car to the salvage yard and offer you the actual cash value of your car, minus the deductible.

To keep your premium costs down when you buy collision coverage, you can raise your deductible. The higher your deductible, the lower your premium. But remember, you’ll have to pay that amount out of your pocket.

Comprehensive coverage pays for damage to your car that isn’t due to car accidents. That includes theft, fire, vandalism, natural disasters and collisions with animals (such as hitting a deer). Damage to your windshield may be covered under your comprehensive coverage as well. In some states, comprehensive coverage includes glass repair and replacement with no deductible, but it varies from state to state. Ask your agent about the specifics when you purchase your policy.

While neither collision nor comprehensive coverage is required by any state, your lender (if you are financing your car) may require that you carry this coverage until you have paid for your car in full. After your car is paid off, you can drop collision and comprehensive, although you may want to maintain the coverage to protect your own investment in the vehicle.

Medical Payments and Personal Injury Protection

Medical payments (called MedPay) coverage pays for the medical expenses suffered by you and your passengers after an accident. You’re also covered for injuries if you’re driving someone else’s car or from injuries suffered if a car hits you. MedPay will pay no matter who caused the accident, although if someone else is at fault your insurer may seek damages from the other party.

States that require PIP coverage

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