Author: Mandy Sleight, Bankrate
Car insurance: what you need to know
An auto insurance policy may not be easy to understand, especially if you are a new driver or just getting your own policy. There are various terms to know and understand, different coverage levels to consider and other things to look out for when buying car insurance. When armed with the right information, you can make the best decisions for your budget and the right choices in car insurance coverage and providers.
There are six main types of car insurance coverage
Liability
Liability insurance coverage pays for the other party’s injuries or property damage you cause in an accident. Bodily injury liability covers others’ injuries, while property damage liability covers the other driver’s vehicle, as well as damage to other objects such as signs, guardrails, fences and more. The coverage is usually expressed as a set of numbers, like 100/300/100. These are the maximum limits the insurance will pay per covered claim. In the example above, your policy would cover up to:
- $100,000 per person for injuries
- $300,000 per accident for injuries
- $100,000 property damage per accident
Uninsured/Underinsured Motorist
Uninsured motorist coverage helps pay for your injuries if another driver injures you or your passengers and the at-fault driver doesn’t have insurance or fled the scene. In some cases, it can also pay for damage to your car or private property caused by a driver without insurance or if you are the victim of a hit-and-run. Your selected coverage limits will look similar to your liability coverage, set at per person and per accident limits. Underinsured motorist offers the same coverage limits as what you selected for uninsured motorist coverage and pays if the responsible party does not have enough liability coverage on their own policy to pay for your injuries or damaged property. Not every state has underinsured motorist coverage and some states have different criteria on when it’s available.
Personal Injury Protection
Often called PIP insurance, personal injury protection provides coverage if you are injured as a driver, passenger, pedestrian or bicyclist, regardless of fault. This coverage may be required in no-fault states and is occasionally optional in at-fault states. It can help pay for medical costs, lost wages and may cover childcare and household services if your injuries from a covered accident prevent you from completing these tasks. PIP coverage requirements vary by state, and even within each state, there may be different coverage limits. PIP may also have a deductible that applies to your claim in certain cases.
Medical Payments
Similar to PIP, medical payments offer coverage if you or your passengers are injured in an accident. Medical payments are limited to only paying for medical costs, though. Most companies offer different levels, which are the maximum limit the company will pay per person in a covered claim. Medical payments coverage is generally optional, but a few states require it. You will find medical payments coverage available in states that do not require PIP coverage.
Collision
If you cause an accident and your car is damaged, collision coverage will help pay to repair or replace your car. This coverage has a deductible, which you are responsible for paying to the shop fixing your vehicle. Collision coverage will help cover your vehicle’s repairs if you hit another vehicle or piece of property, a stationary object like a tree or utility pole or something in the road, including a pothole. If your vehicle is totaled, the deductible amount will be reduced from your total payout.
Comprehensive
Considered other-than-collision coverage, comprehensive coverage helps pay for physical damage to your car not covered by collision. Comprehensive usually covers hitting an animal, theft of the vehicle, vandalism, weather-related damage and broken windows or windshields. Like collision, there is usually a deductible that applies. In some cases, you may not have to pay a deductible for glass breakage, though.
Full coverage vs. minimum coverage
Minimum coverage is the least amount of coverage that you are required to carry by your state to drive a vehicle legally. Not all states require you to obtain insurance, but all states have at least a minimum amount you have to carry if you do. Minimum coverage requirements typically include liability coverage, and some states also require PIP and uninsured motorist coverage as part of their minimum limit requirements. With minimum coverage, there is no physical damage insurance for your car.
Full coverage is a term used to refer to carrying state-required coverage types plus physical damage coverage for your vehicle. Unless you finance or lease your car, comprehensive and collision are optional. While it costs more to add comprehensive and collision coverage to your policy, these coverage types can provide financial protection if you cannot afford to buy another car entirely on your own if yours is totaled. When choosing deductibles, be aware that you can save on your premium with a higher deductible, but you have to pay that amount out-of-pocket if you file a claim.
Your premium depends on a lot of factors
When it comes to how much you pay for car insurance, there are a number of factors used to determine your premium. Each auto insurer sets its own rates and weighs these rating factors differently, which is why you can almost always get a different quote, even when you compare the same coverage.
In most states, the most impactful factors on your premium are your:
- Age: The more experience you have behind the wheel, the better your rates.
- Driving record: Moving violations can increase premiums for years.
- Claims history: Accidents, especially at-fault accidents, can drive up rates significantly.
- ZIP code: Population density, crime statistics and weather events in your area help shape premiums.
- Car make and model: The initial price, cost to repair and safety features are key factors that determine a car’s rate.
However, rating factors vary by state. For example, some states prohibit the use of credit-based insurance scores as rating factors, and other states prohibit gender or ZIP codes as rating factors.
A cheaper premium isn’t always a good thing
Most consumers choose a policy based on the cheapest cost or the most robust coverage for their needs. When you choose the lowest premium, you can save on the cost of car insurance, but you might have to go without certain coverage to get the cheapest rate. You also might not always get the best service or claims experience with the cheapest option.
Choosing the most coverage can be expensive but offers the most protection. However, if you cannot afford the monthly premiums, your policy might lapse, which could increase future insurance costs.
Your premium terms matter
The premium is how much you pay for your car insurance coverage throughout the policy term. A term is usually six months but can also be annual. Most insurance companies automatically renew your auto policy at the end of each term unless something happened to cause the company to not renew your policy, like if the policyholder was convicted of repeat moving violations. No matter which policy term you have, auto insurers typically offer payment options to pay monthly, quarterly or in full for the term. Many insurers offer a discount for paying in full.
Autopay is another discount that may help you save on car insurance and also helps prevent you from missing a payment. Missed payments can cause the policy to lapse, which means you will not have coverage if you get into an accident.
The bottom line
While there is a lot of information to take in when buying auto insurance, you can use these tips to help you get more comfortable with the process. Knowing the terms and what they mean, the factors that affect your premium and the types of coverages available can help you compare quotes from different carriers to get the best deal on car insurance.
Bio: Mandy Sleight has been a licensed insurance agent since 2005. She has three years of experience writing for insurance websites such as Bankrate.com, MoneyGeek and The Simple Dollar. Mandy writes about auto, homeowners, renters, life insurance, disability and supplemental insurance products.