Car insurance is an absolute necessity for drivers, even very good ones. Auto insurance protects a person's economic assets and prevents an accident (whether it's their fault or someone else's) from becoming a financial disaster.
Components of a Basic Car Insurance Policy
Choosing the types and amounts of coverages in an auto insurance policy, however, can be difficult. Understanding the different kinds of car coverages is the first step. The three main types of coverage included in a car insurance policy are:
- Liability
- Collision
- Comprehensive
Most car insurance companies allow customers to personalize their policies by choosing whether they want each type of coverage, and if so, how much they want to carry. People can check their state's requirements for car insurance, but most people choose to buy more than the minimum amount of required coverage in each area.
Liability Coverage
In case of an accident, liability covers damage to other people that the policy holder has caused. This includes injuries to other people and damage to others' cars or property. It also provides for legal defense if the policy holder is sued. It does not, however, cover any damages to them or their car.
Liability coverage comes with limits to how much it will pay for damages. When choosing a policy, people are asked to select from a set of limits that specify the maximum amount the car insurance company will pay per person and per incident. A good rule of thumb is to buy the most coverage you can afford.
Choosing low limits will mean a lower premium, but in the event of a serious accident the driver will be personally responsible for most of the expenses--even if it means liquidating personal assets and forking over money for decades to come.
Collision Coverage
Collision coverage pays for an individual's medical bills and any damages to their car in the event of a collision, even if they are at fault or if they collide with a stationery object like a tree or run off the road.
When buying collision insurance, policy holders select a deductible. This is the amount they will have to pay out-of-pocket before insurance kicks in. Deductible amounts range from $250 to over $1,000. A higher deductible means lower premiums, and a lower deductible means higher premiums.
Collision coverage is usually a good idea, but if the car being insured is an older car in poor condition it may not be worth paying the premiums. Since collision coverage only pays the cash value of the car, it may be a better idea to save the money in an emergency collision fund.
Comprehensive Coverage
Comprehensive coverage covers a person's car in events not caused by collision. These events include vandalism, fire, theft, or weather damage like hail or falling branches. In general, what insurance companies call "acts of God" - natural disasters like hurricanes and floods - are sometimes not covered. And in the case of theft, personal items left inside the car are not covered with the cost of the vehicle itself.
Like collision coverage, comprehensive coverage comes with a deductible. The higher the deductible, the lower the car insurance premium.
Comprehensive coverage is limited to the cash value of the car insured, so for an older car that isn't worth much you might want to think twice about getting this type of coverage.
Buying car insurance can be a confusing process, but understanding the three most basic kinds of auto insurance coverages is a step in the right direction. No one policy is right for everyone, so the right types and deductibles/limits will be based on the individual, their car, and their financial situation.
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