Auto Insurance Coverage Explained: Complete Guide to Policies and Terms

Shopping for auto insurance? It is helpful to have auto insurance coverage explained so you can make sense of the many insurance terms and options to choose from when shopping at the best auto insurance companies. 

That’s where auto insurance coverage explanations are helpful, so we can make sense of all the options and jargon. In this article, we will outline the basics of coverage and what terms you should be aware of before you purchase your next policy.

Auto Insurance Explained 

At its heart, automobile insurance is financial protection for drivers. Almost all states require drivers to carry a minimum amount of insurance in case they cause damage to someone else or their property with their vehicle. Without adequate auto insurance coverage, you risk financial devastation if you are responsible for paying for damages out of your own pocket.

When you’re purchasing a policy, you need to know the different types of coverage available and what each type provides. The goal is to get the protection that’s best suited for your driving needs without overpaying for something you don’t need.

What is the definition of a liability insurance policy?

At a bare minimum, almost every state requires drivers to carry liability insurance. A liability insurance policy covers damage to another driver or their property, such as their vehicle, when you cause an accident. For example, if you’re at fault in an accident that leads to injuries to the other driver, the liability policy will cover the medical expenses up to the amount listed on your policy.

Learn more: Understanding Liability Auto Insurance: What You Need to Know

Liability is divided into two categories:

• Bodily injury liability. This covers injuries or death of the other drivers and their passengers, as well as cyclists, and pedestrians.
• Property damage liability. This covers damage to the other vehicle or surrounding property.

The amount of liability coverage states require is typically low, and you will be advised of your state’s minimum requirements when you purchase a policy. However, keep in mind the minimum liability coverage may not be enough to cover extensive injuries or damage, and you could be left paying the difference out of pocket.

What are the different types of insurance coverages you can get for your car?

Typically, several types of insurance coverages are mentioned when car insurance is explained. These coverages offer a greater amount of financial protection, in addition to liability coverage. The terms and requirements may vary from state to state, but the car insurance breakdown usually includes the following:

• Uninsured and underinsured motorist coverage. This covers your medical expenses if you are hit by another driver who doesn’t have liability coverage (or enough of it) to pay for your injuries. It may be required by law in some states.
• Collision. Collision coverage pays for repairs or replacement of your car if it was damaged in an accident that was your fault. This would apply whether you hit another car, a pole, tree, or another stationary object. Although not legally required, most lenders require this coverage if you lease or finance your car.
• Comprehensive. This coverage pays for damage to your own vehicle caused by something other than a collision. These are typically the result of incidents out of your control, such as fire, earthquakes, theft, animals, or falling objects. This coverage may also be required by lenders.
• Personal injury protection (PIP). PIP is required by law in some states but it covers both your and your passenger’s injuries no matter who was at fault for the accident. It goes even further and generally provides payments toward rehabilitation, lost wages, and funeral expenses, too.
• Medical payments. This coverage pays for medical expenses related to injuries from an accident. However, the difference between this and PIP is that it only covers medical payments. Other expenses, such as rehabilitation and lost wages are typically not included.
• GAP insurance. GAP insurance covers the difference in cost between the value of your car (determined by the insurance company) and the amount you owe on your lease or loan. 

The type of coverage you choose will also affect your auto insurance rates.

Are there any pros or cons when it comes to having a full-coverage vs. liability-only policy?

When you purchase insurance, you should know there’s not a “full-coverage” policy selection. Instead, full coverage is a generic term that typically means you have coverage for damage to others (liability) and damage to yourself and your own vehicles (comprehensive and collision).

Read more: Understanding Full Coverage Car Insurance: What You Need to Know

Pros of Full Coverage Policies

• Required if you lease or finance your vehicle because it covers damage to your own vehicle and passengers if there’s an accident
• Offers greater financial protection for you and your passengers
• Limits the amount you pay out of pocket in the event of an accident, no matter who is at fault

Cons of Full Coverage Policies

• More expensive to purchase higher coverage amounts
• Subject to a deductible, which is your out-of-pocket cost before your coverage kicks in

As your vehicle ages and you no longer have to finance it, you may want to consider updating your policy, such as adjusting the level of comprehensive and collision coverage. 

Auto Insurance Coverage Explained

Automobile car insurance isn’t just important for drivers, it’s important for anyone out on the road. A liability policy may protect other drivers and their passengers, but you need to make sure you have coverage for yourself and your vehicle, too.

While understanding the various types of coverages may get confusing, taking the time to review will ensure you have the right policy in place.