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Auto Insurance Overview

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As you add up the cost of owning a vehicle, don't forget to factor in auto insurance. While car insurance is not mandatory in all states, you are still liable for any accidents caused. Here, we'll discuss the value of auto insurance and what could happen if you don't have a policy.

Why do you need auto insurance?

Auto insurance is the only thing standing between many drivers and financial ruin. The average motor vehicle accident costs $7,500 in property damage. If someone is injured, that amount jumps to more than $61,000. And if someone is killed in a motor vehicle accident, you're looking at more than $1.1 million. It takes a split second to change your life, and if you're not adequately insured, you could spend years paying damages. Auto insurance is a relatively inexpensive way to guard against financial ruin due to an accident.

What are the basic components of an auto insurance policy?

Coverage varies by state, but here are the six basic components that go into an auto insurance policy:

1. Liability coverage

This includes bodily injury liability and property damage liability. Bodily injury can help cover the costs of injuries to another person if a driver causes an accident. Property damage can help pay for damage a driver causes to another person's property. Each state requires some level of liability coverage.

2. Uninsured and underinsured motorist

This covers the policyholder, their medical bills, and repairs to the vehicle (in some states) if the policyholder is hit by a driver who carries too little insurance or none at all. Some states require this coverage, while others don't.

3. Comprehensive

Comprehensive coverage can help repair or replace a vehicle if it's damaged by things like vandalism, theft, hail, or fire. A person may need comprehensive coverage if they're still making payments on their car or leasing the vehicle.

4. Collision

Car collision coverage can help repair or replace a policyholder's vehicle if they are hit by another car or an object like a fence or tree. Again, it may be required if there's still a lender or leaseholder on the title.

5. Medical payments

As the name implies, medical payment coverage may help pay the costs associated with injuries resulting from an accident. Medical coverage is required as part of an auto insurance policy in some states.

6. Personal injury protection (PIP)

PIP takes medical payments one step further by covering other costs associated with auto injuries, like loss of income, house cleaning, or childcare expenses. Some states require PIP coverage.

What are typical coverage amounts?

There is no "typical" coverage amount as each state sets its own minimum standards. And each state has the right to require additional coverage. The state where the policyholder lives makes all the difference.

For example, the state of Missouri requires a minimum of $25,000 coverage for bodily injury, with $50,000 per accident. That state also requires drivers to carry $10,000 in property damage coverage.

On the other hand, Maine requires drivers to carry $50,000 coverage for bodily injuries, and $100,000 per accident. They must also have $25,000 in property damage coverage.

Rather than focus on typical coverage amounts, a driver should consider the most comprehensive coverage they can afford. According to an estimate from the Insurance Research Council, about 1 of every 8 drivers on U.S. roads has no auto insurance. That means if one of those millions of drivers hits someone, there will be no auto insurance on their side to cover the other driver's losses.

Getting car insurance quotes from several auto insurance companies may not be anyone's idea of a fun way to spend time. Still, prices vary wildly, depending on age, driving history, and credit score. Shopping around can save money.

Optional coverage options within most policies

As we've mentioned, nearly every state requires drivers to carry, at minimum, liability insurance. And comprehensive coverage is a good bet to protect a vehicle. Beyond that, optional add-ons could also save drivers financially in the event of an accident. These include:

Medical payment coverage: This coverage is not available in every state, but here's what this coverage can pay for:

  • Health insurance deductibles and copays for anyone in the vehicle who is hurt
  • Doctor or hospital visits
  • X-rays, surgery, and other medical needs
  • The cost of ambulance services, including EMT fees
  • Professional nursing services as needed

Personal injury protection: PIP is only available in states that don't offer medical payment coverage in their auto insurance policies. While it's required in some states, others make it optional. PIP may help pay for medical expenses if a driver or their passengers are hurt in an accident. It also covers things like lost wages and childcare if a person can't work following an injury.

Gap insurance: This covers the difference between what a car is worth and how much the driver still owes. Let's say someone borrows $30,000 to buy a vehicle. A week later, they're in an accident, and the car is totaled. The value of the car now that they've driven off the lot (and it's no longer new) is $25,000. That means the most an insurance company will pay the driver for the totaled vehicle is $25,000. Gap insurance pays the difference. The policyholder would get $25,000 from their auto insurance company and $5,000 from the company providing gap insurance. And they'd have enough to pay the $30,000 loan off in full.

Towing and labor coverage: If a person has a comprehensive auto insurance policy, they likely already have this coverage. If not, they can add it to their policy. As the name implies, towing and labor coverage reimburses the policyholder for the cost of towing the vehicle and having it repaired.

Rental reimbursement: This coverage helps pay for a rental car if a person can't drive their car following an accident.

Classic car insurance: This coverage will help people who collect or restore classic cars protect their investment. Many classic cars are worth far more than their Kelley Blue Book value due to customization and upgrades. Classic auto insurance makes it possible to insure a vehicle for what it's really worth.

Auto insurance best of

Before you commit to an auto insurance policy, take a look at our lists of some of the best options out there:

Auto insurance general knowledge

If you're looking to learn more about auto insurance, read more about the ins and outs of this important coverage:

Auto insurance company reviews

We're continually on the lookout for breakout companies, insurers going the extra mile to provide top-notch coverage at a fair price. Once you land on a company that goes above and beyond and offers a premium you can afford, you know it's worth a second look.

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