The Basics of an Auto Insurance Policy: Breakdown of each coverage explained

Before you can select the level of auto insurance coverage that you need, it’s very important that you understand the basic components of an auto insurance policy. The bad news is that only a fraction of the population understand these basics. The good news is that there is not that much to learn. There are only five components to a basic auto insurance policy. Once you learn those, you will know the bulk of what you need to know in order to select the right coverage for yourself and your family.


1. Liability coverage. While some parts of an auto insurance policy are optional, liability coverage is required on any auto insurance policy. Liability coverage applies when you cause an accident resulting in injuries and/or property damage.

Example: let's say that you run a red light and crash into somebody. Liability coverage pays for damages to the person you hit whether it be medical injuries or property damage. Liability insurance pays the other guy up to the limit you're carrying on your policy.


Caution: Many drivers only select the minimal amount of liability coverage that their state requires. This level of coverage is usually only adequate if you cause a minor accident. If you cause a major accident, it’s usually far too inadquate to cover all the damages. You could be left on the hook for the rest…. So it’s very important to have higher levels of liability coverage than just the minimum your state requires.


2. Uninsured/Under-insured Motorist coverage.  Uninsured Motorist (UM) coverage pays you if someone hit you and it's their fault, but they don't carry liability coverage like they're supposed to. Under-Insured Motorist (UIM) coverage works in the same way except that it applies when the at fault driver that hit you does have liability coverage, but that does not have high enough coverage to pay for all of your injuries or property damage. Both of these coverages are very important to have. Also remember that you're only allowed to carry as much level of coverage as what you're carrying in liability coverage. So if you go with skimpy state minimum liability coverage you will be limited to that amount on UM and UIM.




3. Medical payments coverage. The actual name of this coverage varies from state to state. Some states call it Medical Payments coverage, some states call it Personal Injury Protection (PIP), some call it Medical Benefits coverage. Regardless of what it's called in your state, it pretty much works the same way. Medical payments coverage applies to you and any of your passengers who are injured in an accident, regardless of who is at fault.

In Ohio, Indiana, Virginia and West Virginia medical coverage is optional. In Pennsylvania and Michigan it is required. Most states and auto insurance companies only offer low levels of this coverage except for Michigan which requires unlimited medical coverage.


4. Comprehensive coverage. #4 Comprehensive coverage and #5 Collision coverage in a sense sort of run together (I’ll explain more about that later). Comprehensive covers the vehicles you have insured for damages that result in anything other than an accident. Some states refer to comprehensive coverage as “Other than Collision (OTC)” coverage, but it means the same thing.


Examples of Comprehensive coverage include:
Theft
Fire
Vandalism
Damage from weather (hail, fallen tree, etc.)
Hitting an animal (deer, moose, cattle or any other animal large enough to cause damage to your vehicle)


5. Collision coverage. Collision coverage applies to damage done to your vehicle as a result of an accident, regardless of who is at fault. If you are deemed as at fault for an accident, collision coverage is what applies to repair/replace your vehicle. If the other guy is deemed as the at fault driver, their liability coverage usually pays for it… But if they don’t have auto insurance (or not enough to pay for your vehicle’s damage), collision coverage will kick in.


Important things to know about Comprehensive and Collision coverage:

• Having Comprehensive and Collision coverage both together is what many refer to as having “Full coverage”. I personally don’t like the term “full coverage” because it has misleading implications (you can have “full coverage” and still have lousy coverage all together if you skimped on previously mentioned coverage)…. But the term “full coverage” is common lingo in the auto insurance industry. So just know that it means having comprehensive and collision coverage together.

 

• Both Comprehensive and Collision coverage are optional if you own your vehicle outright. But if you have a loan on your vehicle, your bank/finance company will require you to carry both until you pay the loan off. They will also require you to add their company as the “Lienholder” or the “Loss payee”. Both of those terms mean essentially the same thing. If there’s a comprehensive or collision claim on your vehicle, the auto insurance company will pay that directly to your bank to apply against your loan.

 

• If you own your vehicle outright, most companies will allow you to carry Comprehensive coverage without having Collision coverage, but not vice versa. If you want Collision coverage, you need to carry both…. This usually only applies to older vehicles in which having Collision coverage becomes too expensive relative to the value of the vehicle. But Comprehensive coverage usually costs less than Collision coverage. And drivers who live in areas with a high deer population will at least carry Comprehensive coverage.

• If you have to file a claim for either Comprehensive coverage or Collision coverage, the policy will pay for damages up to the value of the vehicle, minus your deductible.

 

• Once damage estimates approach or exceed 70-75% of your vehicle’s market value, the vehicle will be considered totaled by a claims adjuster. This means the policy will pay the market value of the  vehicle (minus the deductible) to either you or your lienholder.

Understanding Deductibles

• Deductibles only apply to Comprehensive and Collision Coverage. If you file a claim, the deductible is your out of pocket expense….. For example, if a fender bender on a collision claim results in $2000 of damage, and you’re carrying a $500 deductible, $1500 is what the claim will pay out.

 

• The most common deductible levels offered are $250, $500 and $1000. However, some auto insurance companies offer lower deductibles, and some offer higher deductibles (which you would only want if you own a very expensive vehicle). Some companies offer $100 or even zero deductibles, but not very many. Many companies will offer zero deductibles on glass breakage though for comprehensive claims.

 

• If you own your vehicle outright, you are free to choose whatever deductible level that the company offers…. But if you have your vehicle financed, your bank/finance company will limit how high of a deductible you can choose….. Most companies will not let you go higher than $500 on either the Comprehensive or Collision deductible, but some will let you go as high as $1000. If you’re about to buy a car on loan, it’s important to ask your bank or finance company what they require.

Buying a brand new vehicle (or nearly brand new)


If you are buying a brand new car or a car nearly brand new, be sure to take either “GAP” or “Total Loss” coverage! ….. I’m sure you all have heard that once you drive a car off of the dealership lot, that it automatically depreciates….. That is true! This “GAP” or “Total Loss” coverage is a must have because it protects you from being upside-down on a car loan (owing more on your car than what it’s worth). If your vehicle is new enough to qualify, take it! It costs very little extra and is a lifesaver if you were to total a brand new or nearly new car.


Summary: I’ve tried to keep this short and simple, so you would know what you need to know about buying auto insurance. Not everything can be covered in one article. But you now know what you need to know in order to get an auto insurance quote…. If you have any questions that I haven’t answered, feel free to give me a call. I will be happy to explain it to you….. If you would like me to run you an auto insurance quote, click on the link below…. And as always, I handle all quotes personally and privately.



Get an Auto Insurance Quote with Lyles Insurance


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