What Does Auto Insurance Cover | Explained

Auto insurance has two main categories: compulsory and voluntary, covering different expenses. State law and lender or lessor requirements include liability insurance, which covers expenses like bodily injury or vehicle damage.

Collision and comprehensive insurance, which repairs your own car, are optional. National Insurance Commissioners Association. What You Should Know About Auto Insurance Coverage.

Learn how auto insurance policies must meet certain requirements and can be adapted to your specific needs.

What Does Auto Insurance Cover?

An auto insurance coverage consists of numerous types of safeguards. State laws compel drivers to acquire minimum insurance coverage, and lenders and leasing businesses typically require additional coverage for financed and leased vehicles.

Liability Coverage

A typical car insurance policy covers physical injury and property damage. When you cause an accident, bodily injury liability coverage might pay the other driver’s and passengers’ medical fees. Property damage responsibility can cover the other driver’s vehicle and damaged fences or buildings. Different states mandate minimum bodily injury and property damage coverage for drivers. Three examples:

Your state’s minimum liability auto insurance may not be enough if an accident costs more. A professional insurance agent can advise you on liability coverage. In no-fault states, each driver’s insurance company pays for injuries, regardless of blame.

Collision and Comprehensive Coverages

Collision coverage pays to repair or replace your car in a covered traffic collision. Comprehensive insurance repairs or replaces vehicles destroyed by fire, theft, or other non-collision events. This insurance can also replace a stolen car or repair a windshield.

State laws don’t necessitate these coverages. Until you pay off a car loan or lease, you must have collision and comprehensive coverages. Dropping these coverages may result in your lender purchasing and charging you for insurance.

Personal Injury Protection and Medical Payments Coverages

Depending on your state, your optional or mandated personal injury protection (PIP) may pay these costs regardless of who’s at blame.

• Medical and hospital expenses: Often up to a percentage or a limit
• Wage loss: Income replacement
• Loss of services: Paying nonfamily members to do work such as household chores
• Funeral expenses: Covering a portion of your funeral costs

No-fault insurance laws may mandate you to carry a minimum PIP coverage amount, such as $50,000 in New York. Medical payments coverage, often known as med pay, can help cover medical and/or funeral expenses for you and your passengers, as well as deductibles and co-payments not covered by your health insurance plan.

Uninsured and Underinsured Motorist Coverage

If your automobile is damaged by a hit-and-run driver or a driver who does not have auto insurance, your uninsured motorist coverage may pay the damage. This insurance covers medical bills for you and your passengers, as well as the cost of repairing your vehicle.

If the at-fault driver does not have enough insurance to cover your injuries or vehicle damage, your underinsured motorist policy might assist make up the difference. This insurance is typically packaged and referred to as UM/UIM (uninsured/underinsured motorist) coverage. Some states require drivers to have minimum uninsured motorist coverage.

What Does Auto Insurance Not Cover?

A regular automobile insurance policy does not cover every form of loss. Even a comprehensive coverage policy may not always give you with the necessary protection. National Association of Insurance Commissioners. “What You Should Know About Auto Insurance Coverage.” Standard personal car insurance policies typically exclude the following:

• Any difference between an insurance settlement and the car loan amount still owed
• A rental car while your car is being repaired following a covered accident, although in some states, you’re entitled to a rental car for a limited period if your vehicle was declared a total loss
• Mechanical breakdowns, roadside assistance, towing costs, and general wear and tear
• All-terrain, commercial, motorcycle, off-road, and recreational vehicles
• Cars driven for ride-sharing services such as Uber or Lyft or other business purposes
  Intentional damage
• Accidents while driving in Mexico or racing your car

Additional Car Insurance Coverage Options

Including optional coverages in your policy can improve your protection. Some insurers provide a vast choice of optional coverages, while others only offer a handful. Common optional auto insurance coverages include:

• Guaranteed auto protection (GAP) insurance: If you total your vehicle, the insurance company will provide you a settlement based on its real monetary value. This value may be less than the amount still owed to the lender. For example, the insurance company may offer a $15,000 settlement if you still owe the lender $18,000. Gap insurance can pay the $3,000 difference. Consumer Financial Protection Bureau. “What Is Guaranteed Auto Protection (GAP) Insurance?”
• Classic car insurance: Although new cars depreciate quickly, antique, classic, and exotic vehicles can gain value over time. Classic car insurance allows you to negotiate the value of an automobile with the insurer. Following a covered loss, this sort of insurance might assist with the high cost of specialized repairs or restoration.
• Rental car reimbursement: If your automobile is damaged in a covered accident, rental car reimbursement coverage can help you pay for a rental car while your car is being repaired. If the other driver is at fault, they may offer you rental car coverage.
• Custom parts and equipment: Standard auto insurance policies typically exclude coverage for cosmetic changes or equipment, such as custom wheels or a navigation system. Custom parts and equipment coverage can assist cover the cost of recovering your customizations after a covered loss.
• Rideshare or delivery driver coverage: If you work for a transportation or delivery firm, this coverage can assist protect you and your vehicle while the company’s insurance does not cover you, such as while you wait for your next passenger or shipment.
• Roadside assistance: When you break down, roadside assistance coverage can help pay for flat tire repairs, fuel delivery, locksmith services, and towing.

What Type of Auto Insurance Do You Need?

State regulations, lenders, and your needs determine your auto insurance. State and lender requirements include coverage kinds and levels If accident costs surpass your basic bodily and property liability coverage, most states don’t provide enough financial protection. Increasing limits protects assets.

Comprehensive and collision insurance provides repairs and replacements for damaged or stolen cars, especially if you’re at fault. If your car’s value decreases below a few thousand dollars, drop collision and comprehensive coverage. You can also drop collision and comprehensive after paying off a car loan.

Delivery and ridesharing drivers can buy a standalone policy or add an endorsement to their auto insurance. Find out if your workplace offers nonowner auto insurance if you drive for work often. Your insurance agent may recommend commercial car insurance if your employer does not carry nonowner coverage.

Which Type of Insurance Is Required by Law?

Most states require drivers to have minimum levels of bodily injury and property damage liability coverage. Some policies demand supplementary coverages, including as medical expenses, personal injury protection (PIP), and uninsured/underinsured motorist protection. If you’re not sure how much coverage you need, check with your state’s insurance or motor vehicle department.

How Is Auto Insurance Priced

Insurance companies calculate your insurance premium depending on specific criteria, such as:

• Personal characteristics: Age, marital status, gender, location
• History: Claims, coverage, and credit history, as well as your driving experience and record
• Vehicle: Annual mileage and vehicle type
• Coverages: Amounts, types, and deductibles

What Is an Auto Insurance Premium?

According to the vehicle insurance policy contract, a car insurance premium is the amount you pay for a policy in exchange for coverage—for example, a $500 premium for a six-month policy term. Some insurers accept monthly premium payments or provide reductions if you pay the complete cost upfront.

What Is an Auto Insurance Deductible?

The deductible is the amount of money you must pay out of pocket before the insurance company will cover your claim. For example, if you file a $2,000 collision insurance claim with a $500 deductible, the insurer will only pay up to $1,500.

What Is GAP Insurance?

Guaranteed auto protection (GAP) insurance pays the difference between an insurance settlement and the remaining balance on a car loan. For example, if you total your car and receive a $20,000 insurance settlement but still owe $25,000, a gap insurance coverage can help pay the remaining $5,000.

The Bottom Line

An auto insurance coverage protects you in various ways. Without insurance, if you are at fault in an accident, the other driver may sue you for medical and property damage charges. When shopping for auto insurance, consider state and lender regulations, vehicle usage, and your budget. The financial benefits of car insurance surpass the cost of a policy premium.

Source: Investopedia