Purchasing your first car is always a happy occasion. Unfortunately, with getting your own car comes a long list of responsibilities, including getting the correct type of car insurance.
Almost every state has laws that require car insurance. But even outside of the laws, auto insurance is your best protection from hardship when driving. Driving without insurance of any type is a financial risk. One slight accident could wipe out your finances and one major accident could bankrupt you. Despite this, many drivers opt out of insurance. Part of the reason for this is that the world of auto insurance seems extremely complicated. Some terms, like deductibles and premiums, can be extremely confusing and there seems to be a never-ending list of policies.
These policies will help to give you the peace of mind you deserve, whether this is your first vehicle purchase, or you are switching insurance providers, these policies are the first place you should look.
The Importance of Car Insurance
In order to understand the various kinds of car insurance coverage options available to you, you must first understand the "why" as to why you would need car insurance in the first place. Car insurance is, first and foremost, a means of risk management. When you drive, you take on risks, such as damage to your car, injury to yourself and other passengers in your car, and damage to other vehicles and injury to other people in their vehicles.
A car insurance policy is a contract in which you agree to pay a insurance premium, and the insurance agent in return pays you for losses over a specific time frame.
The risk management coverage addresses the following concerns:
Legal Requirements: Most states in the United States require vehicle drivers to own a minimum coverage insurance policy. Not carrying insurance can lead to fines, loss of your drivers license, and in some cases, even jail time.
Liability: When you are responsible for the accident, you are liable for the cost of damages yourself. Insurance stops your house, savings, and future wages from being garnished to pay for damages.
Cars are expensive. If your car is stolen, vandalized, or is in an accident, insurance can help you to repair or replace your car.
Types of Coverage
Most types of auto insurance are a combination of several types of coverage that you can mix and match according to your needs and preferences. However, some are required by law.
1. Liability Coverage
This is a part of almost every insurance policy and is required by most states. Liability insurance is the part of your coverage that does not cover you and your car, but rather the other persons involved when an accident is your fault.
Liability insurance has two components:
Bodily Injury Liability (BI): This coverage pays for injury and/or death that you or an additional driver on your policy are responsible for. This includes medical expenses, lost income due to injury, and even legal fees if you are sued.
Property Damage Liability (PD): This covers damage that you inflict upon other people's property. In most cases it is their car, but also includes damage to lamp posts, telephone poles, fences, and buildings.
Understanding Limits: This coverage is not unlimited and each of them has their own limits. These limits are often showed by 3 numbers (ex. 25/50/25).
For instance, the first number ($25,000) is the limit for bodily injury per person, meaning that...
The second limit is bodily injury per accident ($50,000)
The third limit is bodily injury per accident ($25,000).
For instance, maybe you cause a crash and the other driver has $40,000 in medical bills. You have a per-person limit of $25,000. You would have to pay out of pocket the remaining $15,000. This is the reason insurance experts recommend carrying more than state minimum.
2. Collision Insurance
While liability is only for the other party, collision coverage is for your own vehicle. If you get into a crash with another vehicle or object, like a fence or tree, it covers the cost to either repair or replace your vehicle. If your vehicle flips over or hits a deep pothole, it covers the damage.
Key Characteristics:
Fault does not matter: Collision coverage pays out, regard of who caused the accident.
Deductibles apply: You have to pay a deductible before the insurance coverage pays out. (For example $500 or $1,000).
Current Cash Value. This payment would be limited to the current cash value of the vehicle in question. If the value of the automobile in question is $5,000, and it costs $7,000 in repairs, the insurer will likely consider it a "total loss", and then issue payment in the amount of $5,000, minus a deductible of course.
If your car is on the older side and has depreciated in value, then collision coverage may end up costing more in premiums than the car is even worth. But, if there is a loan or lease on the car, then the lender will in most cases mandate that this insurance coverage be in place.
3. Comprehensive Insurance
Comprehensive insurance is, in essence, coverage for “bad luck” events. It covers damage to your car that occurs without a collision. This is the insurance coverage that is for those times in life when things do not go as planned.
Some of the things that comprehensive insurance covers are the following:
- Theft.
- Vandalism.
- Fire and or explosions.
- Natural disasters including floods, hurricanes, tornadoes, and earthquakes.
- Falling objects, like a tree that gets blown down in a storm.
- Civil disturbances such as violence or riots.
- Animal strikes, like when a deer gets hit.
Like collision insurance, comprehensive coverage typically has a deductible and the payout is limited to the actual cash value of the vehicle. It is usually sold together with collision insurance, as banks normally require both coverages.
What separates MedPay to other coverage offered by the insurance company is MedPay is that is has less coverage. MedPay has limitations. does not cover things with lost wages or lost services. It is offered at a cheaper rate than PIP. However, Medpay can offer some support if your plan is to purchase a health insurance plan with a high deductible.
Finally, There is Uninsured or Underinsured Motorist Coverage.
Without a doubt, insurance is a legal requirement. But there exists a large segment of the population that operate vehicles without any insurance themselves. A similar, but not technically illegal situation exists, where other drivers carry only the minimum level of insurance that is required by the state. This means that if they are in an accident with you, they do not have enough coverage to pay your medical expenses or repair your car, if you have to pay for those things out of your own pocket.
That's where Uninsured Motorist Coverage or Underinsured Motorist Coverage comes in.
Uninsured Motorist Bodily Injury (UMBI) pays for medical expenses that arise if a person hits you is a (uninsured) and if you are a victim of a hit and run.
Uninsured Motorist Property Damage (UMPD) pays for damages to your car if you are hit by a person who does not have insurance. (Note: In some states, though, this is covered by collision coverage, and UMPD is not available).
Underinsured Motorist Coverage (UIM) is where there is an at-fault driver who has insurance. However, in this case, the coverage that they have which is meant to cover your expenses in such an accident is not enough to cover all of your expenses.
Your medical expenses total $50,000 as a result of an accident, and the at-fault driver has $25,000 in liability coverage. In this case, your UIM coverage would cover the $25,000 liability gap as UIM coverages are designed to cover the liability your own driver did not have.
Because so many people drive without any form of liability coverage, UIM coverage is recommended as at least a basic form of insurance and is often not very expensive.
Extensions of UIM coverage along with other liability insurances tend to be even more affordable than the core insurances required.
Roadside assistance is one of those add-on coverages and is often considered a must.
Roadside assistance can cover all of the following services to get you help when you are stranded on the road:
- Towing to the nearest repair shop
- Jump starting dead batteries
- Changing flat tires
- Unlocking cars (during a car insurance lockout, as a cheaper alternative to a new car key)
- Delivering gas when you run out
Roadside assistance can often be purchased at a discounted rate when bundled with your policy instead of bringing in a third-party agency like AAA.
Rental car reimbursement can be highly beneficial after any car accident as you can be provided a rental car at the insurance companies expense (limited to $900 total and $30 a day as a rental) when your car is in the shop after an accident coverage has been purchased. This is especially good if your current car is crucial for day-to-day tasks like going to work.
Gap Insurance
This is very important if you plan to buy new vehicles. Once you drive off the lot with a new vehicle, that vehicle is already depreciating, in some cases by thousands. A few months down the road if you total the vehicle, standard insurance policies will pay a fraction of the current market value, not what you originally purchased for it.
If you have financed the vehicle, you might have a $30,000 loan with the bank, but the vehicle is now worth $25,000. You will owe $5,000 out of pocket to the bank. Gap Insurance, as the name suggests, fills that insurance gap so you not bucked with a vehicle payment for a vehicle that you have already lost.
New Car Replacement
This is the same as gap Insurance but a little better. This insurance ensures that if you total a car, the insurance company will pay to replace with a brand new vehicle of the same make, and model, not the depreciated value. This, however, is for vehicles that are not older than one to two years.
Rideshare Coverage
In general, personal car insurance policies will not cover driving for Uber or Lyft, threatening you with loss exposure to the rideshare companies for long periods of time. Rideshare companies will cover you once you pick up a passenger, but there is a dangerous loss exposure gap while you are waiting for a ride request. Rideshare endorsements fill this gap for gig workers.
Custom Equipment Coverage
Standard policies will cover the car as the, “OEM Original Equipment Manufacturer,” not as the aftermarket. If you have added anything beyond what the manufacturer designed, including wheels, stereo, custom paint, or performance variations, you need to obtain aftermarket coverage to ensure those investments are not left unprotected.
Factors to consider when choosing a policy
When buying insurance, simply basing the decision on cost is not ideal. There are many other things to keep in mind when planning for an insurance policy. It is all about finding an affordable balance.
1. Your Vehicle’s Value
For example, if you drive an inexpensive, older car with nothing but collision and comprehensive coverage, that coverage probably doesn't make sense. Paying a $1,000 premium on comprehensive coverage doesn't make sense if the car is worth $2,000, so it'd probably be a better investment to save that money for a new car. On the other hand, if you drive an expensive luxury SUV, you'll need that coverage to protect a valuable asset.
2. Your Daily Commute and Location
How long is your commute? 50 miles a day in heavy traffic will be worse than working from home. The longer your drive, the higher your risk of being in an accident. You vandalized or stolen your car vandalized or stolen does affect whether comprehensive coverage is a must. Overall, urban drivers have higher congestion and crime rates, so comprehensive coverage will be a must.
3. Your Financial Assets
This point is often overlooked as well. If you have significant savings, own a home, or have any other valuable assets, you are a target for lawsuits. If you get into a really bad accident and your liability limits are low, you could be court-ordered to pay the victim by liquidating your assets. Wealthy folks should consider high liability limits, or possibly an Umbrella Policy, which is a policy that auto insurance doesn’t cover after the limits are exhausted, and that adds liability coverage (usually $1 million or more) after your auto limits are exhausted.
4. Your Health Insurance
Before you purchase MedPay or PIP, look into your own health insurance policy. If you have really good health coverage, low deductibles, and that covers car accidents, you may be able to just get the minimum required PIP/MedPay limits on your car insurance. Just keep in mind that your health insurance is not going to cover your passengers’ injuries or lost wages.
5. Who Else Drives the Car?
If you have a teen driver in the household, your risk profile is going to change a lot. You are going to likely need increased liability limits because young, inexperienced drivers are much more likely to get into an accident.
Practical Tips for Saving Money on Car Insurance
Not all Insurance plans are equally expensive and especially insurance is necessary for peace of mind. There are ways to see whether and which of your coverage is essential to your financial needs and see if you can stretch your coverage to lower your premiums.
Bundle Your Policies
Usually Insurance plans for car and home are available under the same provider. Getting insurance from the same provider is the simplest approach for those multi-policy discounts. You can receive discounts of 5\% to 25\% on both home and car insurance policies.
Raise Your Deductible
When you purchase insurance, you agree to pay your insurance some amount of claim amount and this amount is deductible. Higher the deductible, lower is the amount you have to pay your insurance monthly. The rule can apply to changing your deductible from $500 to $1,000. Just ensure you have that $1,000 sitting in an emergency fund in case you need it.
Maintain a Good Credit Score
It is a common opinion, that in some states when you purchase insurance, the provider will look into your credit, which can have an impact on the amount of your premium. Improving your credit score can eventually lead to lower insurance rates, however the impact will also depend on the score.
Look for Discounts
When it comes to giving discounts, insurance providers all have a long list for you to look at. Make sure to ask your provider if you belong to vip discounts which are unfortunately not given automatically.
Discounts for Good Students: Applicable for students in highschool and college who have a B average and above.
Discounts for Defensive Driving: Applicable for finishing a safety class and getting your certificate.
Discounts for Vehicle Safety Features: Applicable if your vehicle contains anti-lock brakes, airbags, and anti-theft devices.
Discounts for Low Mileage: Applicable if you drive below the average number of miles per year, typically below 7,500 or 10,000.
Discounts for Pay-in-Full: Applicable if you pay your entire 6-months or 12-months premium in one payment.
It Should Be Noted annually that in Insurance, Loyalty Often Does Not Pay Off.
Essence of your Insuring Habit should be getting differents quotes from 3 to 4 companies annually or every 2 years as rates change frequently. this is in order to maintain a competitive rate.
Telematics Discounts are offered based on a driver’s behaviors, braking, speeding habits, and overall driving style.
Many vehicle insurers are implementing tracking devices which can be installed on a vehicle or through a smart phone applications and which may offer attractive discount for safe driving, however, high risk drivers may be penalized.
Conclusion: Driving with Confidence
Knowing your car insurance options does not just help you meet the legal requirements, it can also help protect your financial future. Getting your insurance covered properly helps you with the peace of mind that can help you navigate the worst financial complexities of life. To summarize, liability insurance is the best starting point as it covers the lawsuits anyone can file against you. Determining the value of your current car is necessary to know whether any of the other coverages like collision, comprehensive, and uninsured/underinsured motorist coverage is worth it. Finally, evaluate your situation and decide if you want add-ons like roadside assistance. The best insurance policy is the one that keeps you sleeping at night. Review your insurance policy, and have your coverage always be adapt to your current situation. Safe driving is your first defense, a solid insurance policy your backup plan.
