What is car insurance?
Basic personal auto insurance is a requirement in most states and provides financial protection in the event of an accident. However, is that enough? What options are available? Learn how auto insurance works and the types of coverage available.
Understanding auto insurance - the basics
Auto insurance is an agreement between you and an insurance company that protects you against financial loss in the event of an accident or theft. In return for paying the premium, the insurance company agrees to pay for your loss according to the provisions of your policy.
Car insurance provides protection for:
Property - such as damage to or theft of your car
Legal liability - your legal liability to another person for bodily injury or property damage
Medical - costs of treating injuries, rehabilitation, and sometimes lost income and funeral expenses
Basic personal auto insurance is required by most states in the United States, and regulations vary. Auto insurance coverage is priced individually (ala carte) to allow you to customize the amount of coverage according to your needs and budget.
Policies are usually issued for a period of six months or a year and can be extended. The insurance company will send a notification when it is time to renew the policy and pay the premium.
Who does my car insurance cover - and under what circumstances?
Your car policy will cover you and other family members in your policy, whether driving your own car or someone else's car (with their permission). Your policy also provides protection if someone not listed in your policy drives your car with your consent.
Personal auto insurance policies only cover personal use, whether that's commuting to work, running errands, or commuting. The policy provides no protection if you use your car for commercial purposes, for example to deliver pizza.
Personal car insurance also doesn't provide coverage if you use your car to provide transportation to others via ride-sharing services such as Uber or Lyft. However, some auto insurance companies are now offering additional insurance products (for an additional fee) that extend coverage to owners of vehicles providing ride-sharing services.
Is auto insurance coverage mandatory?
Auto insurance requirements vary from state to state. If you are financing a car, your lender may also have their own terms
Nearly every state requires car owners to have:
Bodily injury liability - which covers costs related to injury or death caused to you or another driver while driving your car.
Property damage liability - which compensates for damage you or another driver causes to other vehicles or other property, such as fences, buildings or utility poles.
Additionally, many states require you to have:
Medical payment or personal injury protection (PIP), which provides reimbursement of medical expenses for injuries to you or your passengers. PIP also covers lost wages and other related costs.
Uninsured driver coverage reimburses you when an accident is caused by a driver who does not have car insurance, or in the case of a running accident. You can also purchase uninsured driver coverage, which will cover costs when other drivers do not have sufficient coverage to pay for serious accidents.
While PIP and uninsured driver coverage are optional in your state, consider adding them to your policy for greater financial protection.
Other common types of auto insurance coverage?
While legally required basic auto insurance covers damage caused to your car, it does not cover damage to your own car. To protect your own car, you need to consider the following optional coverages:
Collision coverage provides reimbursement for damage to your car that occurs as a result of a collision with another vehicle or other object, such as a tree or road divider, when you are at fault. While collision coverage will not provide reimbursement for mechanical failure or normal wear and tear on your car, it will cover damage from potholes or if your car is rolled over.
Comprehensive insurance provides protection against theft and damage caused by events other than a crash, such as fire, flood, vandalism, hail, falling rocks or trees, and other hazards—even an asteroid impact!
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