Car Insurance for Beginners: What Does It All Mean?

Fact: one of the most important things you’ll ever buy is car insurance. It’s not exciting, it’s yet another expense, but it covers you, your passengers, and others in the event of an accident. So it’s no understatement that it’s absolutely essential that you buy the right type of insurance.

But, with so many types of car insurance available, trying to work out what is legally required, what would be a good idea to have, and what you probably don’t need, can seem like a minefield. We’ve cut through the jargon to make this aspect of car ownership easier, helping you get off the insurance website and out onto the road in your new car!

Liability insurance coverage covers damage you (and sometimes other people who have been allowed to drive your car) cause to others and their property. This is the most basic type of auto insurance. There are two types of liability insurance, which will be explained next.

 

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Bodily insurance liability coverage is a type of liability insurance. It is mandatory in most states. Your state will probably have a minimum limit of coverage that you should take out, so check this first. This pays for the medical bills, pain and suffering judgments, loss of income and funeral expenses for anyone injured or killed in an accident you caused. It will also pay for your legal expenses if you are sued for causing an accident. Your passengers will be covered, but it’s important to understand that you (or any drivers on your policy) won’t be.

$50,000/$100,000 bodily injury liability coverage: This is an example of how much bodily injury liability coverage that you might be asked to select. Knowing how much of this type of coverage to select can be confusing, especially given the format that insurers use to express it. The numbers show the maximum thousands of dollars the insurance company will pay per person and per accident. So, in the example shown here, if you were deemed to have caused the accident, your insurance company would cover a maximum of $50,000 for one person and a maximum of $100,000 for more than one person.

It’s important to understand that if the medical or funeral expenses exceed the amounts you have taken out coverage for, you have to pay the rest. You could lose your house, car, and a portion of your future earnings if your coverage doesn’t meet these costs. Taking out a low level of bodily injury liability coverage is a false economy.

Property damage liability coverage is another type of liability insurance. It covers damage you (or sometimes someone else driving your car) caused to someone else’s property. This could be their car, home, or yard. Your legal expenses are also covered if they sue you. Your own car is not covered (but it you hit your own house, it should be covered).

$10,000 property damage liability coverage: This is an example of the amount of property damage liability coverage you might be asked to select. Knowing how much to choose means thinking about what it might have to be used for in the event of an accident. $10,000 wouldn’t cover the price of a brand new car if it had to be replaced. You’d have to pay for the rest using your own assets. Again, opting for the minimum level of coverage could mean that you will be faced with significant bills if there was an accident.

Physical damage coverage protects your own property if there was to be an accident. There are two types of physical damage coverage, which will be discussed next. This isn’t required by law, but if you leased your car or have a car loan, you do need to take out both types of physical damage coverage.

Collision coverage is a type of physical damage coverage. It covers damage to your car in an accident. If you have this, then you can get your car fixed or replaced. You will be asked to set a deductible. This means the amount of money you will pay out of your own pocket, then the insurance company will pay for the rest. For example, say you opted for a $1,000 deductible and were in an accident where $3,000 damages were caused to your car. This means you would pay $1,000 and your insurance company would pay for the remaining $2,000 of repairs. The higher the deductible you choose, the lower your insurance premiums will be.

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Comprehensive coverage is another type of physical damage coverage. It covers your vehicle in instances other than collision, for example, theft, vandalism, or nature. By ‘nature’ we mean fire, a tree falling on it, or flooding. Every insurance company will have a list of instances that they will cover for those who take out this type of coverage.

Uninsured and underinsured motorist coverage is, as the name suggests, designed to protect you against drivers who are either driving illegally without auto insurance, or those who have taken out the state’s minimum required limit. If they cause an accident and are unable to pay for the damages and bills, this insurance will ensure you won’t be out of pocket.  You aren’t legally required to have this type of coverage, but it’s a good idea to be prepared for the reality of an imperfect world. There are two types of uninsured and underinsured motorist coverage.

Uninsured motorist bodily injury coverage means that if your car is hit by a driver with no or insufficient insurance, expenses will be paid for you and your passengers.

Uninsured motorist property damage works just like uninsured motorist bodily injury coverage except that it covers your property (including your car) rather than people. In some states, if you have collision coverage, then uninsured motorist property damage will only cover your deductible so it’s not worth taking it out. Similarly, if your car is paid off and not worth a lot, you can probably skip this insurance.

 

No-fault insurance is a type of insurance where your provider will cover damages, regardless of who is at fault. It is available in 12 states and Puerto Rico (see here for details). It covers medical bills for your passengers and for you (remember, you aren’t covered in bodily insurance liability coverage). Another benefit of no-fault insurance is that you don’t have to wait for a lawsuit before you can pay medical expenses: money will be made available quickly by your provider. In states that require drivers to have no fault insurance, damages to the other person’s car are generally also covered. If you want your own car to be protected, then you need collision coverage. No fault insurance could be required in your state, so if you are uncertain about this, it’s best to seek expert advice from a qualified insurance agent.

Personal injury protection coverage tends to not be available in states which have no fault car insurance. This covers medical and funeral expenses for you, your passengers and pedestrians in the event of a collision (you aren’t covered in bodily insurance liability coverage). It can also include income continuation, loss of services and child-care expenses.

Phew, what a list! If you have any questions that our car experts could help you with, you can chat online with us here (look at the top, right-hand side of the page for the ‘Contact tab’) or message us here.

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