Car Insurance is an agreement between you and an insurance company that, for a monthly fee (or quarterly), the insurance company will cover the costs of any damage or injuries to you, your passengers, your car, and anyone else involved in the accident. It can also provide you with (usually limited) reimbursement for your vehicle if it’s damaged or stolen, or if your car was broken into, and may even provide coverage when you’re moving items inside your car. It also usually can provide coverage if you are the victim of a hit-and-run driver. Some of these incidents will cause your policy to change, others will not, and your options for coverage may vary by state and by company. Let’s break everything down and see what all these terms mean in your policy.
|If you are confused about any coverage on your policy, your best bet is to contact your insurance company. They will know the policy inside and out and they’ll be able to tell you what exactly is and is not covered by your policy.|
Liability coverages are paying for damages for anything you might hit. Note that this is an accident that you are found At-Fault. This includes both medical expenses and damage to either cars or property (if you happen to hit a bicycle or building). These tend to be fairly high, compared to the rest of your coverages; for example, your insurance policy might read: $100,000 / $300,000 (we will be using these numbers as examples further on). The first number is generally Bodily Injury (BI), and the second is Property Damage (PD). Many people have the “state minimums” for their liability coverages, meaning that they have chosen to hold the least amount of coverage allowed by law in their state; this is often the “cheapest” option. We will visit reasons why this might be a bad idea later.
Liability coverages are paid directly to the person you have hit. You cannot collect these coverages.
|Liability coverages are required by almost all states.|
Bodily Injury (BI)
This is the amount allotted for an accident that you are At-Fault for, in which you have injured someone else, and they want you to pay for their medical bills. This amount is usually set on a “per accident” basis, meaning if you get into an accident on Friday, then again on Saturday, and injure someone both times, you allotted one set of $100k for one accident and one set of $100k for the second accident. However, for each accident, only $100k is allotted, meaning, if you hit one person, and they skid forward and hit another, in most states, your $100k coverage needs to spread out to cover passengers in both vehicles. $100k may seem like a lot of money, but it doesn’t go that far when it comes to medical bills. The cost of just a CT scan without any other treatment can run more than $5k in the US.
Property Damage (PD)
This is the amount allotted for an accident that you are At-Fault for, in which you have caused damage to someone else’s property, such as a vehicle, building, or animal. Often this amount is set higher than the bodily injury because brand new cars can cost upwards of $40k today, and a 18-wheeler’s cab alone can cost upwards of $150k. Again, this coverage is on a per-accident basis.
|Why wouldn’t I want the cheapest option?
Many states carry a minimum of $25k for BI and $50k for PD. Now, imagine if you had this coverage and T-boned a little old lady in a her brand new Porche with her grandkids in the back. The impact could throw out her back, while one of her three kids breaks an arm. Then, what happens if she skids out of control and into an intersection? She could get hit again, by someone else, but you would be considered At Fault for the accident. Everything would need to come from your policy, but you only have $25k for your bodily damage. You’d also be responsible for the other vehicles that hit her car.
What happens when your insurance can’t cover the full cost of the damages?
The victims of the accident get to sue you for the remainder of the damages. If something like this happened, I wouldn’t be surprised if medical costs got up to $150k, and property damage came up to $75k. That means they will sue you for $175,000. For most families, this is everything. This is house and home, savings, and usually winds up in bankruptcy, which can cost you your job.
There was a young 18-year-old woman (let’s call her Amy) who was coming up to a traffic light when she lost control of her car due to ice. Amy had never driven on ice before since she’d moved north from Florida only recently. She skidded into the person in front of her, and they bumped into the person in front of them, and they bumped into the person in front of them, just like a domino rally. The total came to a 12-vehicle pileup. No one was particularly hurt, but among the cars damaged, there was a brand new Mercedes-Benz, and a semi. She was only insured at her state’s minimums: $10k/$25k. The damages totaled over $420,000. Amy wound up having to file bankruptcy because she didn’t have enough to cover the damages, even with selling her home. This in turn ruined her job prospects and the amount she could borrow to go to college. (See more about how bankruptcy affects your credit and job options here).
Medical Coverages / Personal Injury Protection
Medical coverages and PIP coverages tend to work the same way – they are coverages to provide you and your loved ones with medical care in the case of any accident. Typically, medical coverage covers you whether you are At Fault, and PIP covers you for any accident if you live in a No-Fault state (see below for more information). This also applies for Hit-And-Run accidents, and applies to any person inside your car who needs medical attention because of the accident. Depending on the state, it might be a per-person coverage, or a net total coverage for the accident (similar to how Bodily Injury Liability works).
|Take a close look at your insurance policy. If someone hits you and you wind up in the hospital for a month recuperating, this coverage pays for your stay. It also would cover your elderly father if he were in the car with you. If you have any reason to think that a health issue may become exacerbated because of an accident, I would urge you to revise this section of your policy, that it might cover you effectively if (Heavens forbid) you wind up needing this coverage.|
Comprehensive and Collision Coverage
This is what people typically think of when they say “I have car insurance.” These are the coverages where if you hit someone, your car can get fixed.
Remember: if you get hit, you’re covered by the other party’s liability insurance.
|Worried they won’t have any insurance or that it’ll be a hit-and-run? See Uninsured Motorists Coverage below.|
This is the amount allotted to you in the case you hit someone/something else and you need your car repaired. This amount is specifically used for repairs to your car for collision with a vehicle or a static object, such as a building, tree, or light post. Collision with an animal is covered under Comprehensive.
This is almost anything and everything else that can happen to your car. If a tree branch falls on it, if you hit a deer, if someone steals your car, if someone breaks into it, or your windshield gets a crack from a pebble on the highway… all of that falls under comprehensive coverage.
|You may have an additional coverage here specifically for windshield damage. This means you likely have a different deductible in case a rock kicks up from the highway, and many insurance companies waive this fee anyway.|
|You can typically decline both of these coverages, unless you are required to carry “full insurance” by a third party (such as, having a car for work, or you have a loan or a lease on your vehicle). You can also choose to decline Collision coverage if you are certain you won’t hit any other vehicles, but you want to make sure you’re covered if a tree falls on it (often called “Comprehensive Only”), but if you want Collision coverage, you typically have to take Comprehensive as well. Full coverage is standard.|
A deductible is fixed the amount you have to pay to your insurance company before you can get your car fixed. Since you’re paying your insurance company when you cause an accident, the more you promise to pay at the time of the accident (on your deductible), the less the policy will cost you overall. This leads to many people taking the $1,000 or even $1,500 deductible, since it lowers the cost per month for your insurance (which deductibles are offered tends to vary among insurance companies). On the other hand, this is the cost you pay out if something happens to your car. Just like with the Liability Coverages, you don’t want to dig yourself into a hole – many people can’t just come up with $1,000 in the case of an accident. Setting the deductible where you can pay it if you wind up needing to, but not so low as to drive the price up will be where your sweet spot is. That said, if you can afford the monthly cost for a $0 deductible, go for it. Often, it’s not more than $45 to go to a lower deductible.
|Remember: you have to pay your deductible in full before your insurance company will pay for you to take your vehicle to a shop.|
Uninsured / Under-Insured Motorists
In some states, it is completely legal to drive around without any insurance policy whatsoever. In Tennessee, for example, you are not legally required to have insurance until the point of an accident or of being pulled over by a cop. That means that there are thousands of people driving around without insurance to repair your car if they hit you. If they do, they’ll be facing charges for not having insurance, but that didn’t matter until the second their car hit yours. Others just don’t have enough to afford a policy.
This is where Uninsured Motorists comes in. You’ll notice it looks a lot like the Liability Coverages; that’s because it’s basic liability for your car and your medical expenses if the other person doesn’t have insurance. Often, by default, this is set equal to your Liability Coverages. Some people over-shoot in this area for coverage. If you know that your car is an older vehicle and you won’t need $300,000 to repair your vehicle, you can set it lower. Just remember that often, you’re changing how much medical expenses are covered at the exact same time. Give it some thought and talk to your insurance company if you’re unsure.
Often, this is the same exact coverage as Uninsured, and policies will usually list both coverages simultaneously. This is the amount that your insurance will pay for your health and your vehicle in the case that someone else’s insurance doesn’t cover your entire healthcare needs, or your vehicle repair bill. Remember Amy from before? All those people who lost out on that $175,000 that she owed and couldn’t pay? Since they have insurance policies, their insurance policies covered what Amy’s insurance policy couldn’t.
At-Fault vs No-Fault States
Most states are what we consider “At-Fault” states. This means that when there is an accident, the police who respond to the accident decide who was more responsible for the accident, usually determined by “right-of-way” laws. In these states, the person who is found At-Fault for the accident is the party that’s responsible for paying out damages to all other parties involved. Amy, the girl who accidentally caused a pileup, lived in an At-Fault state, meaning she was the party responsible for all damages and injuries that occurred because of the accident. If you are found At-Fault for an accident, it is your insurance that has to pay for damages and healthcare for all other parties involved.
Some states, notably Florida and New York, say that accidents are exactly that: accidents. Depending on your state, your state might restrict your right to sue someone else depending on how much someone was at fault, or how much damage has already been filed against them. Generally, in a No-Fault state, each party involved is responsible for his or her own vehicle. Everyone files a claim with his or her own insurance company, and each individual’s insurance company repairs each individual’s cars and health. It is often not necessary to collect someone else’s insurance information in these states, but it is still a good practice to carry.
Am I Overinsured?
Many people over-insure their older vehicles. When you get into an accident, and your vehicle takes damage, the insurance company first decides if it’s worth it to repair the damage. The vehicle’s current depreciated market value (the blue-book value, usually) is compared with the amount to repair the vehicle. If the car is only worth a total of $5,000, and the damage to the vehicle is $6,000, the insurance company would rather pay you the $5,000 for your vehicle and let you try to find a new one. This is what it means when your vehicle is Totaled (also called Total Loss)
If you go to Kelley Blue Book, you can see roughly* what your insurance company would be paying out to you in the case of a total loss accident. If you think that that amount isn’t enough to get you a new vehicle, you can save money by having the vehicle put on a Liability Only or non-Collision policy. However, that means that you don’t get anything in case you cause an accident, but if someone else causes an accident, their policy will cover you. This will often lower your monthly insurance bill by a significant amount. On the other hand, if you want to make sure you get at least something if your car is totaled, you’ll need to carry Comprehensive and Collision.
*Note: Each insurance company uses a different value system for vehicles. Many use Kelley Blue Book, some use a new system called Clear Book, and others yet use an in-house system specifically for their company. If you want to know which “book” is used in claims processing, please contact your insurance company. Also note that the “book” value of a vehicle can change from day to day in some cases.