What is car insurance?
Basic personal car insurance is a must in most states and provides financial protection in the event of an accident. However, is that enough? What are the options? Learn how car insurance works and the types of protection available.
Understanding car insurance - the basics
Car insurance is a contract between you and an insurance company that protects you from financial loss in the event of an accident or theft. In exchange for premium payments, the insurance company agrees to pay for your losses as described in your policy.
Car insurance provides protection for:
Property-such as damage to or theft of your car
Legal liability-your legal liability to others for bodily injury or property damage
Medical - the cost of injury treatment, rehabilitation, and sometimes lost salaries and funeral expenses
Basic personal car insurance is required by most states in the United States, and laws vary. Car insurance coverage is priced individually (a la carte) so you can adjust the amount of coverage according to your needs and budget.
Policies are generally issued for a period of six months or one year and can be extended. The insurance company will send you a notification when it's time to renew the policy and pay your premium.
Who is covered by my car insurance - and under what circumstances?
Your car policy will protect you and other family members enrolled 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 on your policy drives your car with your permission.
Personal car insurance policies only cover personal use, be it when commuting to work, shopping, or traveling. This policy will not provide protection if you use your car for commercial purposes - for example, if you deliver pizza.
Private car insurance also won't provide coverage if you use your car to transport other people through ride-sharing services like Uber or Lyft. However, some car insurance companies now offer additional insurance products (at an additional cost) that extend coverage to vehicle owners who provide ride-sharing services.
Is car insurance coverage mandatory?
Car insurance requirements vary from state to state. If you finance a car, your lender may also have their requirements
alone. Almost every state requires car owners to have:
Bodily injury liability-which covers costs related to injury or death that you or another driver caused while driving your car.
Property damage liability-which compensates for damage you or another driver caused to another vehicle or other property, such as fences, buildings, or utility poles.
In addition, many states also require you to have:
Medical reimbursement or Personal Injury Protection (PIP), which provides reimbursement of medical expenses for injuries to you or your passengers. This will also include lost salaries and other related expenses.
Uninsured motorist protection reimburses you when an accident is caused by a driver who does not have car insurance - or in the case of a collision and escape. You can also purchase guaranteed rider coverage that is not adequately insured, which will cover costs when other drivers do not have enough coverage to pay for serious accident costs.
While PIP and uninsured driver protection are optional in your state, consider adding them to your policy for greater financial protection.
What other types of car insurance cover are common?
While most basic, legally required car insurance covers damage caused to your car, it does not cover damage to your own car. To protect your own car, you should consider the following optional protections
Collision reimburses damage to your car that occurs as a result of a collision with another vehicle or another object, such as a tree or a safety fence, when you are at fault. While collision protection will not replace damage from mechanical failure or normal wear and tear on your car, it will protect against damage from potholes or rolled cars.
Comprehensive provides protection against theft and damage caused by Events Other than collisions, such as fire, flood, vandalism, hail, falling rocks or trees, and other hazards—even if hit by a meteor!
Glass protection provides protection from windshield damage, which is common. Some car policies include No-Cut Glass protection, which also includes side glass, rear glass, and open roof glass. Or you can purchase additional glass protection.
What is gap insurance and do I need it?
Collision and comprehensive protection only covers the market value of your car, not the price you pay—and new cars depreciate quickly. If your car is completely damaged or stolen, there may be a "gap" between the amount you still have to pay for the vehicle and your insurance coverage. To combat this, you may want to consider purchasing GAP insurance to pay the difference. Note that for leased vehicles, gap protection is usually incorporated into your lease payments.
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