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Investing, Taxes, and Insurance
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Understanding Your Auto
Insurance Policy
You can not legally drive a car in the United States without an auto insurance policy. But if you look at
any insurance application you will see all sorts of different coverages. Some are mandatory, while some are
optional. It is very important that you understand your automobile insurance policy so that you can save money
by eliminating coverage you do not need, while making sure you are still adequately insured.
Let's take a look at the key terms on a standard auto insurance policy and explain what they mean.
Liability coverage pays others for damages from an accident in which you are at fault.
There are two types of liability coverage. Bodily injury liability coverage pays for claims
by people who are injured or die as a result of an accident that you cause. Property damage
liability coverage pays for damage that is caused to others' property as the result of an accident
that you cause.
To illustrate, say you cause an accident and the driver of the other car suffers a concussion and his car
needs $5,000 in repairs. Bodily injury coverage will pay for his medical bills while property damage
coverage pays for the repairs to his car.
Uninsured motorist coverage pays you for damages from an accident caused by an uninsured motorist.
Underinsured motorist coverage pays you for damages if you are in an accident caused by a driver who
has insurance, but not enough to pay for all of the damages.
Collision coverage pays for damage to your car resulting from an accident with another vehicle or object.
Comprehensive coverage pays for damage to your car caused by something other than a collision, such as theft,
fire, flooding, vandalism, or a broken windshield. Most insurance companies also consider damage caused by hitting
an animal, such as a deer, to be covered under collision.
Your deductible is the amount you are responsible for paying for damage to your car. You should set it at a level
that you would be able to pay in the event of an accident. Once you pay the deductible (usually anywhere from $250-$1000)
the insurance kicks in and pays the rest. The higher you set your deductible, the lower your premium will be.
Personal injury protection covers your medical bills for any injuries that you or your passengers suffer as the
result of an accident. It does not matter who is found at fault for the accident.
Some insurance carriers also offer additional coverage options that you may find useful. Examples include replacement of wages,
towing and labor costs, rental car expenses, funeral expenses, and death benefits.
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