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Auto
Insurance Basics
What is Auto Insurance?
Auto insurance protects you against financial loss
if you have an accident. It is a contract between
you and the insurance company. You agree to pay
the premium and the insurance company agrees to
pay your losses as defined in your policy.
Auto insurance provides property, liability and
medical coverage:
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Property coverage pays for damage
to or theft of your car. |
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Liability coverage pays for your
legal responsibility to others for bodily injury
or property damage. |
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Medical coverage pays for the cost
of treating injuries, rehabilitation and sometimes
lost wages and funeral expenses.
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An auto insurance policy
is comprised of six different kinds of coverage.
Most states require you to buy some, but not all,
of these coverages. If you're financing a car, your
lender may also have requirements.
Most auto policies are for six months to a year.
Your insurance company should notify you by mail
when it’s time to renew the policy and to
pay your premium. |
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What
is Covered by a Basic Auto Insurance Policy?
Your auto policy may include six coverages. Each
coverage is priced separately.
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Bodily Injury
Liability
This coverage applies to injuries that you, the
designated driver or policyholder, cause to someone
else. You and family members listed on the policy
are also covered when driving someone else’s
car with their permission.
It’s very important to have enough liability
insurance, because if you are involved in a serious
accident, you may be sued for a large sum of money.
Definitely consider buying more than the state-required
minimum to protect assets such as your home and
savings.
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Medical Payments
or Personal Injury Protection (PIP)
This coverage pays for the treatment of injuries
to the driver and passengers of the policyholder's
car. At its broadest, PIP can cover medical payments,
lost wages and the cost of replacing services normally
performed by someone injured in an auto accident.
It may also cover funeral costs. |
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Property Damage
Liability
This coverage pays for damage you (or someone driving
the car with your permission) may cause to someone
else's property. Usually, this means damage to someone
else’s car, but it also includes damage to
lamp posts, telephone poles, fences, buildings or
other structures your car hit. |
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Collision
This coverage pays for damage to your car resulting
from a collision with another car, object or as
a result of flipping over. It also covers damage
caused by potholes. Collision coverage is generally
sold with a deductible of $250 to $1,000—the
higher your deductible, the lower your premium.
Even if you are at fault for the accident, your
collision coverage will reimburse you for the costs
of repairing your car, minus the deductible. If
you're not at fault, your insurance company may
try to recover the amount they paid you from the
other driver’s insurance company. If they
are successful, you'll also be reimbursed for the
deductible. |
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Comprehensive
This coverage reimburses you for loss due to theft
or damage caused by something other than a collision
with another car or object, such as fire, falling
objects, missiles, explosion, earthquake, windstorm,
hail, flood, vandalism, riot, or contact with animals
such as birds or deer.
Comprehensive insurance is usually sold with a $100
to $300 deductible, though you may want to opt for
a higher deductible as a way of lowering your premium.
Comprehensive insurance will also reimburse you
if your windshield is cracked or shattered. Some
companies offer glass coverage with or without a
deductible.States do not require that you purchase
collision or comprehensive coverage, but if you
have a car loan, your lender may insist you carry
it until your loan is paid off. |
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Uninsured
and Underinsured Motorist Coverage
This coverage will reimburse you, a member of your
family, or a designated driver if one of you is
hit by an uninsured or hit-and-run driver.
Underinsured motorist coverage comes into play when
an at-fault driver has insufficient insurance to
pay for your total loss. This coverage will also
protect you if you are hit as a pedestrian. |
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Can
I drive legally without insurance?
NO! Almost every state requires you to have auto
liability insurance. All states also have financial
responsibility laws. This means that even in a state
that does not require liability insurance, you need
to have sufficient assets to pay claims if you cause
an accident. If you don’t have enough assets,
you must purchase at least the state minimum amount
of insurance. But insurance exists to protect your
assets. Trying to see how little you can get by
with can be very shortsighted and dangerous.
If you've financed your car, your lender may require
comprehensive and collision insurance as part of
the loan agreement.
Below is an example of the state minimum limits
for auto liability insurance. The first number refers
to liability limits for bodily injury for any one
person, the second to limits for all persons injured,
and the third refers to property damage liability
limits. For example, 20/40/10 means coverage up
to $40,000 for all persons injured in an accident,
subject to a limit of $20,000 for one individual
and $10,000 coverage for property damage. |
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What
if I lease a car?
If you lease a car, you still need to buy your own
auto insurance policy. The auto dealer or bank that
is financing the car will require you to buy collision
and comprehensive coverage. You'll need to buy these
coverages in addition to the others that may be
mandatory in your state, such as auto liability
insurance.
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Collision covers the damage to the
car from an accident with another automobile or
object. |
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Comprehensive covers a loss that
is caused by something other than a collision with
another car or object, such as a fire or theft or
collision with a deer.
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The leasing company may
also require "gap" insurance. This refers
to the fact that if you have an accident and your
leased car is damaged beyond repair or "totaled,"
there's likely to be a difference between the amount
that you still owe the auto dealer and the check
you'll get from your insurance company. That's because
the insurance company's check is based on the car's
actual cash value which takes into account depreciation.
The difference between the two amounts is known
as the "gap."
On a leased car, the cost of gap insurance is generally
rolled into the lease payments. You don't actually
buy a gap policy. Generally, the auto dealer buys
a master policy from an insurance company to cover
all the cars it leases and charges you for a "gap
waiver." This means that if your leased car
is totaled, you won't have to pay the dealer the
gap amount. Check with the auto dealer when leasing
your car.
If you have an auto loan rather than a lease, you
may want to buy gap insurance to protect yourself
from having to come up with the gap amount if your
car is totaled before you've finished paying for
it. Ask your insurance agent about gap insurance
or search the Internet. Gap insurance may not be
available in some states. |
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Do
I need insurance to rent a car?
When renting a car, you need insurance. If you have
adequate insurance on your own car, including collision
and comprehensive, this may be enough.
Before you rent a car:
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Contact your
insurance company.
Find out how much coverage you have on your own
car. In most cases, the coverage and deductibles
you have on your personal auto policy would apply
to a rental car, providing it's used for pleasure
and not business. If you don't have comprehensive
and collision coverage on your own car, you will
not be covered if your rental car is stolen or if
it is damaged in an accident. |
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Call your
credit card company.
Find out what insurance your card provides. Levels
of coverage vary.
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insurance, you have two choices: you can buy coverage
at the car rental counter; or you can purchase a
a non-owner auto liability insurance policy . |
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Rental
car counter insurance
Rental car counter insurance can provide the following
coverage:
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Collision
Damage Waiver (CDW).
Sometimes called a Loss Damage Waiver (LDW), this
coverage relieves you of financial responsibility
if your rental car is damaged or stolen. The CDW
may be void, however, if you cause an accident by
speeding, driving on unpaved roads or driving while
intoxicated. This coverage generally costs between
$9 and $19 a day. If you have comprehensive and
collision on your own car, you may not need to purchase
this coverage. |
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Liability
Insurance.
This provides excess liability coverage of up to
$1 million for the time you rent a car. Rental companies
are required by law to provide the minimum level
of liability insurance required by your state. Generally,
this does not offer enough protection in a serious
accident. If you have adequate liability coverage
on your car or an umbrella policy on your home/auto,
you may consider forgoing this additional insurance.
It generally costs about $9 to $14 a day. If you
don't own a car, and rent cars often, consider purchasing
a non-owner liability policy. This costs approximately
$200 - $300 per year. Frequent car renters sometimes
find this more cost-effective than constantly paying
for the extra liability coverage. |
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Personal Accident
Insurance.
This provides coverage to you and your passengers
for medical/ambulance bills. This type of insurance,
usually costs about $1 to $5 per day, but may be
unnecessary if you are covered by health insurance
or have adequate medical coverage under your auto
policy. |
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Personal Effects
Coverage.
This provides coverage for the theft of personal
items in your car. However, if you have homeowners
or renters insurance, you may be covered for items
stolen from the car, minus your deductible. You
need to have receipts or other proof of ownership.
This type of insurance usually costs about $1 to
$4 per day.
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Some rental car companies
combine personal accident and personal effects coverage
together as one type of insurance, while others
sell it individually.
The cost of insurance at the rental car counter
will vary depending on the rental car company, state,
and location of the dealer and the type of car you
rent.
Some rental car companies may check your credit
and driving history and may deny coverage. Check
with the rental car company to find out its policy.
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Non-owned
auto liability insurance
Instead of buying liability coverage from the car
rental company each time you rent a car, you can
purchase a non-owner auto liability insurance policy
from an insurance company for about $300 a year
which might be cheaper if you rent frequently.
In addition, if you're thinking of buying an umbrella
liability policy, a non-owner auto policy may meet
the underlying auto insurance policy requirements.
Umbrella liability insurance provides high limits
of liability coverage above basic policies. Most
insurers will not issue an umbrella liability policy
unless the basic policies meet certain dollar limits
of coverage.
A non-owned auto insurance policy covers you for
damage you may cause to some else’s car and
liability for injuries to its occupants, or to pedestrian,
in the event of an accident. The policy will also
provide medical payments coverage for you and your
passengers, and under-insured and uninsured coverage.
This pays for the cost of an accident involving
a hit-and-run driver or a driver who has little
or no insurance.
However, non-owned auto insurance does not provide
collision coverage. Collision coverage pays for
damage to the car you’re driving if you crash
into another car or object or the car rolls over.
You have to buy this from the car rental company.
However, some credit cards provide collision coverage
if the rental car is paid for with the card—so
check with your credit card company first.
Note: If you're renting a car abroad, you may need
an international drivers license. |
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