Most states mandate basic personal auto insurance and provide you with some financial protection in the event of an accident. But is that enough? What are the options? Learn how auto insurance works and what types of coverage are available.
Understanding Auto Insurance - Know Your Auto Insurance and What It Covers
Auto insurance is a contract between you and an insurance company designed to protect you from financial loss in the event of an accident or theft. In exchange for your premium payment, the insurance company agrees to pay your losses as stated in your policy.
Car insurance provides coverage for:
- Property - such as your car being damaged or stolen
- Liability – your legal liability for personal injury or property damage to others
- Medical—the cost of treating injuries, rehabilitation, and sometimes lost wages and funeral expenses
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Basic personal auto insurance is mandatory in most U.S. states, and the laws vary. Auto insurance is priced individually (a la carte), allowing you to customize coverage amounts to meet your specific needs and budget.
Policies are usually published on a six-month or one-year time frame and can be renewed. The insurance company will send a notification when the policy is renewed and the premium paid.
Who is covered by my auto insurance -- and under what circumstances?
Your car policy will cover you and other family members covered by the policy, whether driving your car or someone else's car (with their permission). Your policy will also cover if someone not covered by your policy drives your car with your consent.
Your personal auto policy only covers personal driving, whether you're commuting, running errands, or traveling. It doesn't provide insurance if you're using your car for business purposes -- for example, if you're delivering pizza.
Personal auto insurance also doesn't cover if you use your own car to provide transportation for others through ride-sharing services like Uber or Lyft. However, some auto insurers now offer supplemental insurance products (for an additional fee) to expand coverage for car owners offering ride-sharing services.
Is car insurance compulsory?
Auto insurance requirements vary by state. If you're financing a car, your lender may have requirements of their own as well. Almost every state requires car owners to bring:
- Personal Injury Liability – Covers costs related to injury or death caused by you or another driver while driving your car.
- Liability for property damage – compensates someone for damage caused to another vehicle or other property, such as a fence, building, or utility pole, by you or another driver of your car.
- Additionally, many states require you to bring:
- Medical payments, or Personal Injury Protection (PIP), provide reimbursement for medical expenses for injuries to you or your passengers. It will also cover lost wages and other related costs.
- Uninsured motorist insurance will reimburse you if the accident is caused by a driver without auto insurance, or in the case of a hit-and-run. You can also buy insured motorists insurance, which will pay for the cost of a serious accident when the other driver doesn't have enough insurance to cover the cost of a serious accident.
Even though PIP and uninsured motorist coverage are optional in your state, consider adding them to your policy for greater financial protection.
What are some typical other types of car insurance?
While most basic, statutory car insurance covers damage caused by your car, it does not cover damage to your own car. To insure your own car, you should consider the following optional coverages:
Collision coverage will pay for damages to your car if, at your fault, a collision with another vehicle or other object (such as a tree or guardrail) results in damage to your car. While collision insurance won't pay for mechanical failure or normal wear and tear on your car, it will cover damage from potholes or rollovers.
Comprehensive covers theft and damage caused by events other than collisions, such as fire, flood, vandalism, hail, falling rocks or trees, and other hazards - even being hit by an asteroid!
Glass Coverage provides coverage for windshield damage, which is common. Some auto policies include non-deductible glass coverage, which also covers side windows, rear windows, and glass sunroofs. Or you can buy supplemental glass coverings.
What is gap insurance and do I need it?
Collision and comprehensive coverage only covers your car's market value, not the price you paid for it -- and new cars depreciate quickly. If your car is wrecked or stolen, there may be a "gap" between what you owe on your vehicle and your insurance coverage. To combat this, you may want to consider purchasing gap insurance to cover the difference. Note that for leased vehicles, gap insurance is usually built into your lease payment.
