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Auto insurance coverage types - Growella

How Does Car Insurance Work?

By Dan Green

Auto insurance protects people from the costs of an automobile accident. It defrays the fees associated with injury, damage, theft, and repair. Auto insurance policies can be customized to meet your specific needs as a driver.

What Is Auto Insurance?

Auto insurance is an insurance policy which sends cash payments in the event of a car accident, or a car theft.

Auto insurance is required for drivers in nearly every state.

The reason why car insurance is mandatory is because car accidents often involve two or more people. States don’t care if you choose to leave yourself or your own car uninsured, but they won’t allow you to harm other people without a plan to pay for another person’s damages, injuries, or expenses.

Covering other people’s losses is a key component of auto insurance. Even cheaper car insurance makes sure you’ve got this included.

Auto insurance is protection.

With auto insurance in place, you don’t have to worry that a car accident will push you into bankruptcy, or rob you of your nest egg. You don’t even have to mess with post-accident paperwork.

When you’re properly insured, damage claims are handled fairly and quickly; and, your insurance company works with the repair shop and other driver’s insurer to help get things settled, so you don’t have to.

The 6 Ways Your Auto Insurance Covers You

Auto insurance protects you from the costs of a car accident or the theft of your car. However, coverage isn’t automatic, or limitless.

You have to choose how much coverage you actually want.

Get too much coverage, you’ll balk at the cost of being insured. Get too little coverage, and you risk getting wiped out financially should anything ever go wrong.

There are six broad coverages for which you can be insured. Each is priced separately. Your final auto insurance policy rate is the combined cost of each of the coverages below.

1. Coverage for injuries to other people from an accident

When you are responsible for a car accident and cause injuries to other people, the Bodily Injury Liability portion of your auto insurance policy kicks in to pay for the expenses.

Bodily Injury Liability covers medical expenses and doctor’s bills; legal fees in case you’re sued; loss of income because the other person can’t work; pain and suffering awards; and, the cost of a proper funeral.

All states require some form of Bodily Injury Liability. You’re welcome to request the minimum allowable amount for the least expensive coverage available.

Many people request at least a small increase over the minimum Bodily Injury Liability coverage, though, for extra safety and protection.

2. Coverage for large medical bills from an accident

If you’re ever in a car accident, regardless of who’s at fault, your auto insurance policy can cover the initial medical expenses related to the accident.

Using Medical Payments coverage, your insurance can pay for ambulance rides, an initial hospital stay, and whatever emergency medical care might be needed for you and your passengers.

Medical Payments coverage covers payments that your health insurance will not. It’s an optional coverage for drivers, and often an inexpensive addition to your auto insurance policy.

Drivers with a reliable health insurance policy can usually get by with little or no Medical Payments coverage. With less coverage comes a lower cost.

3. Coverage for damage to someone else’s car, and structures

Car accidents happen when your car hits some other thing — either another car on the road, or a fixed structure such as a light post, or a fence, or a house.

For coverage against damage to other people’s property, add Property Damage Liability coverage to your auto insurance policy.

Property Damage Liability does not cover damage to your own car. It’s only for insurance against damage to others.

Most states require drivers to keep a minimum amount of protection against damage to other people’s property, and to public structures.

Using the minimum amount of protection will keep your insurance costs low. However, it’s a risk to be underinsured in this category. Public structures are expensive to repair, and it’s just as easy to hit a $100,000 car as it is to hit a $10,000 one.

More coverage keeps you safe.

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4. Coverage for damage to your car in an accident

When you’re in an auto accident, your car will be damaged.

The damage from an accident could be minor, such as with a broken rear-view mirror or busted bumper. Or, it could be major, leaving your car unable to be driven.

With Collision Coverage added to your auto insurance policy, your insurer will reimburse you for the costs of your car repair. It doesn’t matter whether you were at-fault for the accident, or somebody else was.

Collision Coverage also pays out when the damage from an accident is higher than what your car is worth. When this happens, your insurer just sends a check for the value of your car, which you can use for whatever you want.

As a driver, you can actively manage your Collision Coverage in order to keep insurance rates down. This is because cars lose value over time.

Every six months, then, when your policy renews, check the new, updated value of your car and reduce your coverage to that exact amount.

This way, you’re never insuring your car for more than it’s worth. Less coverage means lower costs.

5. Coverage for random-event damage caused to your car

Sometimes, your car gets damaged from something other than an accident. For example, your car might be damaged in a fire, or by weather, or by falling objects from a tree or building.

For protection against random events like this, you’ll want Comprehensive Coverage .

Comprehensive Coverage on your auto policy is typically inexpensive, and it protects against theft of a vehicle, too.

Comprehensive Coverage is optional for drivers with auto insurance, and it’s a good idea to add it to your policy — especially if you use your car regularly and don’t have emergency funds available for replacing a stolen or damaged car.

Remember to be active with your coverage.

Cars lose their value over time, which means that you can reduce the amount of Comprehensive Coverage you’re carrying every six months when you renew your latest auto insurance policy.

With less coverage required, your auto insurance rates can drop.

6. Coverage against drivers with not enough insurance

Auto insurance coverage is required by law, but drivers often insure themselves as cheaply as they can. Usually, this means skimping on extended coverage options in order to save some cash.

If you are unlucky and get hit by a driver whose auto insurance coverage is too little, your damages will go unpaid. Your bills will be your responsibility. Your car repairs fall to you.

This is why Uninsured and Underinsured Motorist Coverage exists. It’s a special coverage option in your auto insurance policy.

Uninsured and Underinsured Motorist Coverage protects you from runaway medical bills in case you get hit by an inadequately insured motorist; and, pays for your car repairs as well. Although the coverage is optional in most states, it’s a good idea to take it.

Uninsured and Underinsured Motorist Coverage isn’t cheap, but it’s way less expensive than having to pay for your own medical bills and repairs after an accident or hit-and-run.

Even a little bit of Uninsured and Underinsured Motorist Coverage is better than none at all.

How Much Does Auto Insurance Cost?

Chart: Average Car Insurance Costs By State, Age, and Gender

Your age, your gender, and where you live affects how much you pay for car insurance.

Five Other (Optional) Auto Insurance Coverages

Auto insurance can be customized to meet your needs and your budget.

By mixing and matching the six main coverage types, you can get a policy that gives you exactly the amount of insurance protection that you want, for a price you’re happy to pay.

The six main auto insurance coverages types are:

  1. Bodily Injury Liability Coverage
  2. Medical Payments Coverage
  3. Property Damage Liability Coverage
  4. Collision Coverage
  5. Comprehensive Coverage
  6. Uninsured and Underinsured Motorist Coverage

Beyond these six types, supplemental auto insurance is available to fill in the gaps of coverage.

For example, you may want your insurance company to pay for a rental while your car is in the shop. Or, you may want insurance against lawsuits in case you cause more accidental damage than you have coverage for.

Each of the five supplemental insurance choices below will raise your basic auto insurance costs. You may think it’s worth it, however — especially for protection against lawsuits.

1. Get access to a rental car when your car is in the shop

Add Rental Reimbursement Coverage to your auto insurance policy, and your insurer will pay for you to have a rental car while your car is under repair from a covered accident.

There is no co-pay with Rental Reimbursement Coverage and coverage is usually cheap.

2. Get free tow truck and locksmith services

It’s rare for a car to breakdown in traffic, but it can happen. When it does, you’ll be glad to have Roadside Assistance Coverage.

Roadside Assistance Coverage is an auto insurance add-on that can cover sending gas when you’ve run out; replacing a flat tire with your spare; sending a locksmith for when you’re locked out; and towing your car, unrelated to an accident.

It’s a backup plan for when things go wrong.

Roadside Assistance Coverage is inexpensive. However, credit card companies sometimes offer similar coverage to cardholders, so before you pay for Roadside Assistance Coverage from your auto insurer, make sure you’re not already getting it for free.

3. Get replacements for cracked or broken windshields

Full Glass Coverage is not available in all states, or with all insurers. However, if you do a lot of highway driving, it could make sense to add this optional coverage to your auto insurance plan.

Replacing a windshield usually costs drivers a few hundred dollars. Drivers of newer, luxury cars, however, could pay several times that.

If you’re concerned about cracks in your windshield and want to minimize your windshield replacement costs, consider Full Glass Coverage for your car. The cost is low, and the payback could be big.

4. Get covered for wrecking a car immediately after buying it

When you buy a new car, it’s only new until you drive off the dealer’s lot. Once you turn into traffic, the car becomes a used car. Its value decreases immediately.

This truth is problematic for drivers of newer cars who are involved in an accident; and, for drivers whose situation made it better to lease a car than to buy one.

Auto insurers will only pay for repairs up to the value of the car and the value of a used car is far less than a new one. Many cars lose thirty percent of their value in the first 12 months after purchase.

If your car is stolen or damaged so badly that repairs exceed its value, the insurance company will send you a check to replace it. That check, however, will be for less than what you owe on the car.

For situations like this, there’s Guaranteed Auto Protection insurance.

Also known as Gap insurance , Guaranteed Auto Protection gets you cash for the difference between your car’s value and the amount owed on your car to the finance company.

Gap insurance is a good idea for newer, high-value cars; or, if you’re buying a car without making a significant down payment. It’s not necessary for cars paid for with cash.

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5. Get protected against million-dollar injury lawsuits

Your basic auto insurance coverage won’t always be enough to protect you. There are certain instances when you’ll cause more damage than your insurance policy is meant to handle.

Causing a person’s death with your automobile, for example. Or, being the cause of an accident so devastating that the other driver is no longer able to work.

In both of these scenarios, you would be subject to lawsuit for death, lost wages, and more.

Basic auto insurance coverage can’t protect against this. The monies a jury awards would come from your estate, wherever those assets could be found. It could bankrupt you.

This is why Personal Umbrella Insurance exists. It’s a supplement for your auto insurance policy, offering coverage of $1 million, $2 million, or more; usually for a few hundred dollars per year. It’s meant to protect your assets from unexpected events and lawsuits.

The more assets you hold, and the higher your future potential for income, the larger your Personal Umbrella Insurance policy should be.

You don’t need to own a car to keep a Personal Umbrella policy.

Common Questions About Car Insurance

Does car insurance cover the car or the driver?

Auto insurance covers both the car and the driver of the car, but there are stipulations.

The Liability portion of your auto insurance policy follows you, as the driver, no matter which car you’re driving. It could be your car, or a rental car, or a friend’s car, or a moving truck — it doesn’t matter.

The Comprehensive and Collision part of your insurance does not follow you to other vehicles. That portion of your policy is linked to your specific car, and to the list of people who are named as potential drivers.

This makes sense when you think about the value of your car and the value of somebody else’s — they’re not identical so your insurance policy can’t cover both cars. And, it won’t cover random drivers of your car, either, whose driving records aren’t built-in to your policy and its premium.

Can someone else drive my car under my insurance?

Generally, another person can’t drive your vehicle and get the benefits of your insurance.

This is because your car’s insurance premium is based on your driving record, and the record of all of your named drivers.

It’s a bad idea to let a friend drive your car because, in the event of an accident, your friend might not be covered for damage in a collision. This might include the value of your car, plus whatever damage is done to other cars and public property.

Can I drive any car under my insurance?

In general, your auto insurance policy doesn’t cover damage from accidents you cause while driving another person’s car. It covers injuries, hospital bills, and coverage against drivers with no coverage whatsoever; but, not the cost of repairs of the cars involved.

One exception: rented and loaner vehicles. You can drive a rented or loaner vehicle and expect your insurance to carry-over in many cases.

To be sure, though, make a call to your insurer before getting behind the wheel.

Is car insurance required in every state?

Every state requires that drivers pay auto insurance except for New Hampshire. New Hampshire does not require auto insurance. It does, however, require all drivers to pay for the costs of bodily injury and whatever property damage costs occur in an accident situation.

What is the minimum car insurance a driver needs?

The minimum amount of car insurance varies by state. Some states require a lot of coverage, an some require none. Costs vary between insurers so get two or more quotes.

Does car insurance cover the car or the driver?

So long as a driver has permission to operate another person’s car, that other person’s auto insurance policy will protect against collision damages to the car, other cars, and property; and the driver’s auto insurance policy will protect against liability claims and lawsuits.

There are exceptions, though, so call to your insurer before getting behind the wheel.

What is “proof of car insurance”?

Car insurance companies send identification cards to policyholders twice annually. The identification card lists the driver’s name, the vehicle make and model, a valid policy number, and some basics of the coverage. Many drivers leave this paper card in their automobile for when it might be needed.

How Much Car Insurance Is Required In My State?

How To Get Car Insurance?

The cost of auto insurance varies based on your age, your gender, your driving history, where you live, and the types of coverage you elect for your policy.

Your credit score affects your car insurance, too.

Policies are renewed every six months and your renewal period is an excellent time to check whether you’re currently paying too much for auto insurance.

Rates are different among auto insurers so make sure you shop around.

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Written by Dan Green

Dan Green is a mortgage lending expert and the founder of Growella. Prior to Growella, Dan was a six-time, top-producing loan officer; and, ranked repeatedly among the top 1% of loan officers nationwide. Dan's home buying expertise has been in print and on TV with The Wall Street Journal, NPR, Forbes, CNBC, and others.

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