Basic personal auto insurance is mandatory in most states and provides you with some financial protection in the event of an accident. But is it enough? What are the options? Learn how auto insurance works and the types of coverage available.
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Understanding Car Insurance - The Basics
{tocify} $title={}Auto 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 your premium payment, the insurance company agrees to pay your loss as stated in your policy.
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Car insurance provides the following coverage:
- Property - such as a damaged or stolen car
- 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
Basic personal auto insurance is mandatory in most states in the US, and laws vary. Auto insurance coverage is priced separately (single point), allowing you to customize coverage to meet your exact needs and budget.
Policies are usually issued for a period of six months or a year and can be updated. The insurance company sends a notification when it is time to renew the policy and pay the premium.
Who is covered by my car insurance - and under what circumstances?
Your car policy will cover you and other family members on your policy, whether driving your car or someone else's car (with their permission). Your policy also provides coverage if someone your policy does not cover drives your car with your consent.
Your personal car policy only covers personal driving, whether you commute to work, travel or travel. If you use the car for business purposes (for example, if you serve pizza), it will not provide coverage.
Personal auto insurance doesn't cover you if you use your car to provide transportation for others through a ride-sharing service like Uber or Lyft. However, some auto insurers now offer supplemental insurance products (for an additional fee) to expand coverage for car owners who offer ride-sharing services.
Is car insurance mandatory?
Auto insurance requirements vary by state. If you're financing a car, your lender may also have its own requirements. Almost every state requires car owners to bring:
Personal Injury Liability - Covers expenses related to injury or death caused by you or other drivers while driving the car.
Property Damage Liability - Compensate for damage caused by you or your other driver to another vehicle or other property such as a fence, building or utility pole.
Additionally, many states require you to bring:
Medical Expenses or Personal Injury Protection (PIP), which provides reimbursement for medical expenses for injuries to you or your passengers. It will also cover lost wages and other related expenses.
Uninsured drivers insurance will reimburse you if the accident was caused by an uninsured driver or a hit-and-run driver. You can also purchase insured driver insurance, which will pay if the other driver doesn't have enough coverage to cover the cost of a serious accident.
Although PIP and uninsured driver coverage are optional in your state, consider adding them to your policy for greater financial protection.
What other types of auto insurance are typical?
While the most basic legally mandated car insurance covers damage to your car, it does not cover damage to your own car. To insure your own car, you should consider the following optional coverages:
When you are at fault, collision pays you for damage to your car caused by a collision with another car or other objects, such as trees or guardrails. While collision insurance won't cover your car's mechanical failure or normal wear and tear, it will cover damage from potholes or car rolling.
Comprehensive insurance covers theft and damage due to events other than collisions, such as fire, flood, vandalism, hail, rockfalls or trees and other hazards - even being struck by an asteroid!
Glass covers can cover windshield damage, which is common. Some auto policies include non-deductible glass insurance, which also includes side windows, rear windows, and glass sunroofs. Or you can buy supplemental glass coverings.
What is gap insurance and do I need it?
Crash and mergers only cover the market value of your car, not the price you paid for it - new cars quickly depreciate in value. If your car is emptied or stolen, there may be a "gap" between what you owe on your vehicle and your insurance coverage. To address this, you may want to consider purchasing gap insurance to cover the difference. Note that for rental vehicles, the difference coverage is usually included in your rental payment.