What Is Car Insurance?

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Understand your insurance policy, and what it covers.

Standard personal car insurance is provided by most states and provides you with some financial cover in case of an accident. But is it enough? What are the options? Learn how car insurance works, and what coverage types are available.

Understanding car insurance-the basics

In case of an accident or theft, auto insurance is a contract between you and the insurance company that protects you against financial loss. The insurance provider offers to cover your damages as set out in the contract, in return for the payment of a premium.

Auto insurance offers coverage to:

Property-such as damage to your car or theft
Liability-Your legal responsibility to others for damage to your body or property
Medical – the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses

Basic personal auto insurance is mandated by most U.S. states, and laws vary. Auto insurance coverages are priced individually (a la carte) to let you customize coverage amounts to suit your exact needs and budget.

Policies are generally issued for six-month or one-year timeframes and are renewable. The insurance company sends a notice when it’s time to renew the policy and pay your premium.

Who does my car insurance cover — and under what circumstances?

Your auto policy will cover you and other members of your family on your policy, whether you drive your car or someone else’s car (with their permission). Your policy also provides coverage if, with your consent, someone who isn’t on your policy drives your car.

Your personal auto policy covers only personal driving, whether you are traveling to work, making errands or going on a trip. It will not provide coverage if you use your car for commercial purposes — for instance, if you deliver pizzas.

Personal auto insurance will also not provide cover if you use your car to transport others through a ride-sharing service like Uber or Lyft. However, some auto insurers now offer additional insurance products (at additional cost) that extend coverage for vehicle owners who provide ride-sharing services.

Is auto insurance cover compulsory?

Requirements for auto insurance vary from State to State. If you finance a car, your lender may have its own requirements, too. Nearly every state demands that car owners carry:

Liability for bodily injury – which covers costs associated with injury or death caused by you or by another driver while driving your car.

Property damage liability-which reimburses others for damage to another vehicle or other property, such as a fence, building or utility pole, caused by you or another driver operating your car.

Plus, many states require you to carry:

Medical payments or protection against personal injury (PIP) which offers you or your passengers reimbursement of medical expenses for injury. It will also cover lost salaries and other associated expenses.
Uninsured motorist coverage reimburses you when an accident is caused by a driver who does not have auto insurance — or in the case of a hit-and-run. You can also purchase under insured motorist coverage which will cover costs if another driver lacks adequate coverage to pay the cost of a serious accident.
Even if PIP and uninsured motorist benefits in your state are optional, consider adding them to your financial security program.

What other types of covers are typical of auto insurance?

Although the most simple, legally enforced auto insurance cover the damage caused by your vehicle, it does not cover your own car’s harm. To cover your own car, you should consider these optional coverages:

Collision will reimburse you for damage to your car that occurs when you are at fault because of a collision with another vehicle or other object, e.g. a tree or a guardrail. While collision coverage will not reimburse you for mechanical failure or normal wear-and – tear on your car, damage from potholes or rolling of your car will be covered.
Comprehensive provides coverage against theft and damage caused by an accident other than a crash, including fire , flood, vandalism, debris, falling rocks or trees and other hazards — even being hit by an asteroid!
Glass Coverage provides coverage from windshield damage, which is common. Some auto policies include no-deductible glass coverage, which also includes side windows, rear windows and glass sunroofs. Or you can buy supplemental glass coverage.
Collision and comprehensive just cover your car’s market value, not what you’ve paid for it — and new vehicles easily depreciate. There may be a “gap” between what you owe on the vehicle and your insurance coverage if your vehicle is totaled or stolen. To cover this, you may want to look into purchasing gap insurance to pay the difference. Note that usually distance coverage is integrated into the lease payments for leased vehicles.