Most car insurance policies are a collection of different types of coverage, offering different protections. Everyone’s policy can be customized to suit their situation, so there’s a lot of variation, which can be confusing.
In general, car insurance protects your vehicle, you, and others in your vehicle. It’s also there to protect other people and their property from damage or injuries you cause with your car. Having car insurance can’t guarantee you won’t have an accident or auto damage, but your insurance policy will step in and cover some of the expenses associated with the accident.
Understanding how your auto insurance works and what it costs requires a look at your monthly payments or premiums, the amount of your deductible, and the type of coverage you select. One key factor to remember is that you might be required to have certain kinds of insurance based on what state you live in and if you have a loan on your vehicle. Let’s look at basic car insurance and see if it’s enough protection.
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What Does Basic Car Insurance Cover?
Basic car insurance describes a policy that gives you minimum coverage in a few areas, so you comply with most state requirements. Each state handles car insurance requirements differently, so knowing what’s required is critical.
There is no set standard for basic car insurance, so there’s a lot of variation, but many policies offer the following types of coverage.
- Bodily injury liability: This coverage steps in if you cause an injury to someone else while driving. This coverage is critical because medical expenses can quickly add up. If you don’t have enough insurance, you can be sued, putting your savings and the value of your home at risk. Almost all states require this coverage.
- Property damage liability: If you or someone driving your vehicle damages another person’s property, this is the coverage that pays for their damages. In many accidents, this refers to damage to their vehicle, but it can also cover damage to their mailbox, tree, fence, etc. All states and Washington D.C require property damage.
- Medical payments or personal injury protection (PIP): This coverage pays for medical bills for the driver and passengers in the driver’s vehicle. Many policies also cover lost wages, funeral expenses, and other associated fees.
- Uninsured and underinsurance motorist coverage: If someone hits your vehicle without insurance or without enough insurance to pay for the damage, this policy is beneficial. If there’s a hit-and-run, this is the insurance you will use. This coverage is required by about half of the states.
Having enough insurance to comply with state requirements still might not be enough to satisfy your auto loan lender. Basic coverage also might not be enough to give you peace of mind and adequately protect your four-wheeled investment.
What Is Not Covered by Basic Car Insurance?
There is no set basic universal policy; it’s all customizable, so reviewing your options is critical. Customizing can include raising coverage levels and adding some additional protection. The following are critical components of a comprehensive auto policy, yet any state does not require them.
- Collision: Collision coverage pays for damage to your car when another vehicle, an object hits it, or there’s a rollover.
- Comprehensive: Collision covers your vehicle if an object hits it; comprehensive is there if it’s hit by an animal – like a deer or even a flock of birds. It also pays for damage from theft, vandalism, fire, hail, falling objects, floods, etc.
- Gap insurance. This type of policy covers the difference between what you owe on your vehicle and the vehicle’s market value. If you don’t have a loan, you don’t need to worry about this.
A lender might require these policies. Even if they’re not required, they’re a sound investment if you’re serious about protecting your vehicle.
Some aspects of owning a vehicle are not covered by auto insurance, including general wear and tear expenses, mechanical breakdowns and repairs, intentional damage, and personal items stolen from your vehicle.
Additional Types of Car Insurance and What They Cover
The first step is checking your state requirements and comparing car insurance policies.
Basic Car Insurance
Depends on the insurance company and is customized
Bodily injury and property liability are standard in most policies
Collision and Comprehensive Insurance
Typically, add-on policies to basic car insurance
Personal Injury and Medical Payments
Depending on the state’s requirements – may be included in a basic policy or seen as a separate coverage
Uninsured and Underinsured Motorist Insurance
Required in many states and will be part of basic insurance there; in other places, this is an add-on policy
Not a part of basic insurance and only required by some lenders
Liability insurance comes in two forms; bodily injury liability and property damage liability. Both types cover the expenses of others when you or the authorized driver of your vehicle is at fault.
Let’s say you run a red light and hit another car, causing the other driver some back pain. Both types of liability will be helpful here to pay for his car’s damages and to cover his medical expenses. The liability insurance will not pay for your auto damages or any injuries you incur.
Collision and Comprehensive Insurance
Collision and comprehensive are two different types of insurance, covering similar but different events. No states require them, but they’re essential if you want to protect the value of your vehicle.
Collision is helpful if you’re in an accident with another vehicle or hit an object. For instance, this is the insurance coverage you need to pay for your car damages if you run a red light. If you hit the stoplight instead of hitting another vehicle, this is also the insurance that pays for your vehicle’s damages.
Comprehensive also pays for damages to your vehicle, but it’s not for accidents with other cars or inanimate objects. Comprehensive is very useful if you have an accident with any animal and it causes damage to your vehicle; this is the coverage that pays the repair bills. It will also pay if your vehicle is damaged in a storm, fire, vandalism, or your windshield cracks.
Personal Injury Protection and Medical Payments
Personal Injury Protection (PIP) and MedPay are two different types of coverage designed to pay your medical expenses no matter who is at fault. They also cover your passengers’ medical costs if you were at fault as the driver. MedPay is sold in small amounts and not offered in all states.
PIP is a broader coverage that not only pays for medical bills but can step in for other expenses such as lost wages, funeral expenses, and survivor benefits. It will even help pay for childcare and a housecleaner if you cannot perform these tasks while recovering. PIP is required in some states, optional in others, and not offered in others.
Uninsured and Underinsured Motorist Coverage
Uninsured Motorist (UM) and Underinsurance Motorist coverage (UIM) are very useful, but all states do not require them. The policies are similar and often rolled into one.
UM coverage pays if someone hits you and doesn’t have insurance to pay for your vehicle damage and/or injuries. You can try to sue them for the expenses, but that’s not a guarantee of payment. Having UM coverage gives you guaranteed payment up to the policy limit.
UIM coverage works exactly like UM, except in this situation, the at-fault driver has some insurance; it’s just not enough to cover all of your damages or medical bills. Once their insurance pays their portion, your insurance will cover the remaining expenses.
Gap insurance is only necessary if you have an auto loan and the amount of your loan exceeds the vehicle’s value. Your lender may require this type of insurance, so you’ll need to research if it’s required.
Gap insurance covers the difference between your vehicle’s worth and the loan amount if your car is totaled or stolen. For instance, your loan on your vehicle is $10,000, but your car is only worth $7,000. If it’s totaled in an accident, the insurance company will pay you $7,000 for the car’s value, but you still owe $10,000 to the lender. If you have gap insurance, that gap of $3,000 is covered.
What Types of Car Insurance Are Required?
Two entities can require auto insurance: the state where you’re licensed to drive and your auto loan lender.
The state is looking out for the best interests of others on the road. Remember, a driver’s license is a privilege, and to earn and maintain this privilege, they expect you to comply with their rules. It gets confusing because each state has different car insurance requirements, but, in general, bodily injury liability and personal property liability are required. Some states also require PIP, UM, and UIM.
If you have an auto loan, your lender will want to protect their investment or the risk they took lending you money. Your lender will require that you have state-mandated insurance coverage to meet legal requirements. They will also usually require comprehensive and collision insurance.
If your state or lender doesn’t require a type of auto insurance, that doesn’t mean you don’t need it. You’ll quickly discover that the best way to protect your vehicle, your physical health and well-being, the physical health of others, and your financial assets are to get more insurance than is required.