Auto insurance is a contract that is constantly misunderstood and truthfully it can be complicated to a point that reading stereo instructions in another language make more sense than reading an Auto Policy. Looking over some of the other explanations that is provided here at this site basically doesn’t help with the explanation of the coverage’s except that it is more confusing and, you’re left not getting the purpose of the insurance in the first place.
An auto policy consists of two main parts, liability and physical damages.
Liability was created to protect your wallet from another person(s) suing for your assets in the case of an auto accident in medical and pain and suffering issues; the short story is that the coverage is protecting your hard earned money. Every state in the union has a minimum requirement for liability insurance, for a good majority of people, these minimums are inadequate to cover a serious accident if you have a paying job with savings and retirement in mind. If you were in the situation of being at fault for an accident, you have to understand that a person that is in the receiving end is going to want to get all the money that is required to bring them back to were they were before the accident happened. If you were that person in the accident, and you lost hours of work because of a broken leg, had bills to pay to the hospital( that can be easily be in the thousands), and to top it off, none of it was your fault; I do not think you would you like to pay for it either.
Insurance was created to make the situation easier to handle when an accident is involved, the most popular is to have a company that shares the distribution of loss among all the insureds. Lets say there is a person who suffers a 10 thousand dollar loss, by himself he would pay 10 thousand dollars, however; if he was apart of a group of one hundred people that were paying together on the accident, he would pay 10 dollars as well as all the other people that are apart of that group. This is an over-simplified view but I am hoping that you get the point; your premium that is charged to you is based on the possible loss that could happen based on the amount of coverage that you have.
I mentioned before that every state has its own requirement for insurance, and let me tell you that no two contracts are really the same when it comes to coverage’s. There are some similarities when it comes to bodily injury, property damage, comprehensive and collision, but truthfully you should ask an agent on the specifics on how they are different. The agent is a specialist that I promise you goes through a lot of training since insurance is a highly regulated product and knows how to answer questions on these matters.
The information below I am going to provide about coverage’s in a typical Auto contract are generalized to make them easy to understand.
Bodily injury – By far he most important product in an insurance contract, this coverage is what the insurance company will provide to the other party in an accident to the limit set by you to protect you from the others pain and suffering as well as medical needs. So the other person gets a broken arm from the accident, this coverage basically pays for the visits to the doctor, the medical needs to repair the arm, and the time lost because of the arm being broken. Bodily injury should always be set higher than what your worth, but not so high that your paying too much premium for coverage the other person cannot be able to attain. In other words, if you have 300 thousand dollars in total assets you do not need one million dollars in coverage. Bodily injury is usually split per person and per accident on the declarations page, so if you see 100/300, that means in an accident your policy will pay 100 thousand per person and 300 thousand per accident.
Property Damage- People mistaken this coverage as only a coverage for the other persons vehicle. It is true that in most cases of car accidents that only the other persons vehicle could be damaged, but do not forget that anything at the time of an accident can be property lost. You hit a persons car, because of this, that car speeds into a light pole which then falls and hits a fence of a home, and as the fence shatters with one of the wood pieces flies toward a window and breaks it. All of this would be paid by property damage of your policy, so consider the area that your in before choosing the right coverage.
Un-insured and Under-insured insurances are usually matched with you liability when you are starting a new policy, this coverage is important when the other person is at fault and does not have any or enough coverage to handle your needs for pain and suffering or medical. Many people get into their heads that if they have great health insurance or because of their great driving prowess with a long clean record they can get rid or lower these coverage’s to the the minimum. This is a very wrong way to think to save a few dollars, you have to understand that you being a great driver has nothing to do when someone else hits you. An accident is still going to be a major problem and especially if that person doesn’t have insurance or not enough. As for health insurance, it is in the name of the coverage that should make you think twice; granted that a great health policy will coverage sickness and broken bones, but thats really just it. Health insurance covers ailments that can happen to your body, and most policies do not consider issues involved with auto accidents unless you have the endorsements for dental and vision on the policy.
This leads to a product that varies widely across the country, Medical Payments or Personal Injury Protection. Medical payments and PIP is offered to cover the expense of immediate medical attention for people within your vehicle. It pays regardless of fault, and seems similar to Un-insured and Under-insured but you have to consider one of many possibilities. What if you lose control of your car and hit a tree, it is not the tree’s fault for being there, so no other coverage on an insurance policy can help you except Medical Payments or PIP to pay for medical issues. People again tend to think health insurance will be available but what I have explained before applies to this coverage too. PIP unlike medical payments is a state sanctioned requirement, and it differs so much from state to state that I am going to tell you that its best to ask you agent on this particular product. PIP is basically a required part of your liability, (states that have medical payments instead are not required on the insurance Auto Policy), some states give the option to delete the coverage, but most do not, and its important to mention that PIP can be cumbersome in its provisions. The states that have PIP actually tailor made this coverage to try an reduce the number of litigation’s for non-serious accidents. The idea is that you claim on your own insurance for the PIP limit first, and if it does not complete the task then you can request liability from the other in a typical accident. Most PIP and Medical Payment polices include options for other services provided that help with loss of wages, death benefits, and even include money to get a maid to clean up house while you cannot move.
Comprehensive and Collision – These coverage’s are only designed to do one thing, protect your vehicle up to its actual cash value, less depreciation. Have you ever heard the old adage that when you drive off the lot with a new car you loose on average 3 thousand dollars? Well that true to a point, what people forget when they buy a car is that they had to pay taxes fees, title, and license; add those up from average car to average car and you will get 3 thousand dollars. Insurance policies are explicit in that they pay to the value of the car with no tax, title, and fees. Epiphany . Comprehensive and Collision are the only non-state mandated products on an insurance policy. The reason why they exist is to protect your cars value. Almost everytime you finance a new vehicle, these coverage’s are requested as a part of the finance contract, and typically with deductibles written at $500 or less. Deductibles are placed on these coverage for two reasons, the first is to reduce premium and the second to prevent low value claims from occurring to the insurance company. Most deductibles range from $50 to $1000, if you choose a lower deductible lets say $50, then the premium goes up, and if you choose a higher one obviously the premium goes down.
Comprehensive is also called Other-Than-Collision in some states, but does not differ in coverage for your vehicle from state to state except in a few that have glass waivers. Comprehensive is basically an insurance that was designed to consider everything that can happen to you car that honestly you cannot control. You cannot tell an animal to not get in front of your vehicle, you can not tell a hurricane to not flood your car, and you cannot tell that rock to not hit your window. It covers for theft, vandalism, fire, and anything that honestly is done by nature. A lesser known option of Comprehensive is Glass Coverage, some states offer a product called a Glass Waiver, if it is chosen, then it doesn’t matter what your deductible is your deductible is always zero in a glass claim. If it is not offered in your state, consider having a lower deductible if you know you live in an area where glass issues exist. Claims made on comprehensive do not charge or increase on your insurance unless its a constant claim like multiple thefts; also when the human factor is involved, nine out of ten times it will be a collision regardless if nature was involved in it or not.
Collision is exactly what it sounds like, when you collide with anything, it’s a collision. No – ands, ifs, or buts about it, if you are in the car or another human is involved that hits your car, it is a collision. Collision is the coverage that people fear to claim because it usually has a high deductible(chosen by you), and when a claim is made under the coverage, it results in a premium increase. Premium increases occur on these claims due to the law of large numbers, it states that when one accident occurs in a certain time frame another will occur within a certain period of time. Good insurance companies offer many options on this issue, and most of the time when an accident occurs and then nothing after happens these same companies usually reduce the surcharges as time progresses.
I know that this was long, but what I hope is that I kept it informative and useful in explaining how these policies work in laments terms so you can have a an idea of you have. Nothing is better than an agent to actually talk to you about these coverage’s especially from state to state. Please remember that in the end the whole purpose of the contract of insurance to prevent financial loss to you because of an accident, so consider that paying whatever you do pay is nothing considered if you actually had to deal with an accident and its payoffs.