What auto insurance policy terms and concepts mean
When looking for a new auto insurance policy there are various things to consider. It is important to understand what exactly you are “shopping” for and the key to doing this is understanding the terms and conditions. It can not only lead to potential savings, but after all having a robust insurance policy for your vehicle will help fully protect your family. Learn more below on what are the keys terms, conditions, and even types of auto insurance policies.
From “comprehensive coverage” to “bodily injury liability” and “deductibles,” the insurance industry is full of technical terms, jargon and legalese that confuse many (most?) people. But understanding these terms is crucial if you want to choose a policy that protects you and your families finances.
Definitions of auto policies and what all that terminology means
Nearly every state requires liability coverage, and it’s the backbone of most auto insurance policies. This form of coverage doesn’t protect your car from damages (that is what “collision” is for), but the liability coverage protects you financially if you cause an accident that injures someone or damages their property.
- Bodily Injury Liability (BI) covers medical costs including hospital needs, lost wages, and legal fees if you’re at fault for injuries to another person.
- Property Damage Liability (PD) pays for damage you cause to someone else’s car, fence, building, or other personal property.
You’ll usually see liability limits listed in the form of three number, such as 100/300/50. That means $100,000 coverage per person for injuries, $300,000 per accident total for injuries, and $50,000 for property damage. That sequence of the three numbers is always the case. Those are maximums and higher limits give you more protection against lawsuits.
If liability protects others from you, collision and comprehensive coverage protect your own vehicle. This coverage helps pay for various types of damages that a vehicle will sustain. . They will both have different amounts of coverage as well as annual premiums.
- Collision covers repairs or replacement if your vehicle is damaged, no matter the cause. That insurance concept will be in place whether you hit another car, back into a building or a crash into tree. So it addresses physical damages.
- Comprehensive insurance on your car or truck pays for non-collision damage, like theft, fire, hail, vandalism, or hitting a deer. This also covers acts of nature like floods and fires, tornadoes, hurricanes, acts of vandalism, etc.
Deductibles on a car insurance policy are in effect your share of the cost. A deductible is the maximum amount you pay out of pocket before your insurance kicks in. For example, if your deductible is $500 and your repair costs $3,000, you will pay $500 and the auto insurance company pays $2,500. A couple key things to consider here are the following:
- Higher deductible = lower monthly premium (which is your monthly cost on the policy), but more out-of-pocket risk.
- Lower deductible = higher monthly premiums (cost of the policy), but less financial exposure if you file a claim.
Uninsured and Underinsured Motorist Coverage is another way to protect yourself. Not everyone on the road has adequate insurance or they may not have any auto insurance at all. They are technically either driving at their own risk and may even fact be breaking the law in some states. If you’re hit by someone who’s uninsured, or whose policy doesn’t cover your costs, this coverage can save you.
- Uninsured Motorist (UM) coverage helps with medical bills and, sometimes, vehicle damage.
- Underinsured Motorist (UIM) fills the gap when the other driver’s insurance isn’t enough.
This type of coverage for uninsured/underinsured is required in some states. It’s a key safeguard against irresponsible drivers.
Medical cost assistance is part of Personal Injury Protection (PIP) and Medical Payments (MedPay). These two coverages help you and your passengers with medical costs, regardless of who caused the accident. Even if you have health insurance, or are on a government policy like Medicaid, these additional auto insurance coverages can help reduce your out-of-pocket costs after an accident.
- PIP, also known as no-fault insurance, is required in some states and covers medical costs, lost wages from being treated / in the hospital, and even pays for funeral costs.
- MedPay is similar, though usually more limited in scope and payout.
Your premiums for all those area listed above is the cost of the policy, usually paid monthly or every six months. Insurers calculate it based on factors like your age and gender, driving history, where you live, the type of vehicle and even your credit score.
The National Association of Insurance Commissioners also has an online "guide" of what insurance terms means. It covers auto and other policies, with details here. Though it can be a little overwhelming to use. https://content.naic.org/glossary-insurance-terms.
Some other important auto insurance concepts to know when shopping for a policy
Your annual automobile insurance rate is determined by many deciding factors like driving history and what type of car or truck you drive. Good rules to follow include being a safe, defensive and conscientious driver. Do not text, talk on the phone or engage in other distracting behaviors while on the road. Being safe, with no tickets or accidents, can really help a family cut down on their premiums.
Using your car for business purposes is not covered by your personal auto insurance. There is a big difference between “work” and “pleasure”, as the conditions of your policy documents will clearly state. Therefore a separate policy is required for things like driving for a ridesharing company or commercial purposes.
Auto insurance does not necessarily cover the driver of the car if you let someone borrow your vehicle. It’s worth consideration when loaning your automobile out to someone. Always closely review the terms and conditions of your policy before allowing someone to borrow your auto. If it is unclear, call your provider for a clearer definition of your coverage.
- The driver’s insurance may not comprehensively cover an accident (if the the person who borrowed the car caused it), which would lead to you having to file a claim with your own insurance company. There are exceptions (if the driver did not cause the accident, etc.), however, it’s important to check state regulations and make sure you trust whoever you lend your car out to.
Motorcycle insurance is different than auto insurance. has various subsets including protection options that cover custom parts, riding gear and helmets. It is really completely different coverage than what a car owner needs. There is also insurance for specific types of bikes like dirt bikes, ATVs and scooters. It’s good practice to have the most appropriate and comprehensive coverage when owning these types of vehicles.
Conclusion
Insurance is needed in many areas of your life, and maybe the most important is for a car as that is where accidents all too commonly occur. It is important to know what all that jargon means when signing up for / comparing auto policy rates. It protects you and your family from financial ruin or devastating emotional consequences. As with an policy or contract, always read the policy carefully of your car insurance quotations, especially the exclusions.
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