What is car insurance?
Basic personal car insurance is compulsory in most states and offers you some financial protection in the event of an accident. But is it enough? What are the options? Find out how car insurance works and what types of cover are available.
Understanding car insurance: the basics
Car insurance is a contract between you and the insurance company that protects you from financial loss in the event of an accident or theft. In return for you paying a premium, the insurance company agrees to pay your losses as set out in your policy.
Car insurance covers :
Property - such as damage to or theft of your car
Liability - your legal responsibility to others for personal injury or property damage
Medical - the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses
Basic personal auto insurance is mandatory in most U.S. states and laws vary. Auto insurance coverages are priced individually (a la carte) to allow you to customise coverage amounts to suit your needs and budget.
Policies are usually issued for six-month or one-year periods and are renewable. The insurance company sends a notice when it is time to renew the policy and pay your premium.
Who is covered by my car insurance and under what circumstances?
Your car policy will cover you and other members of your family, whether you drive your car or someone else's car (with their permission). Your policy also provides cover if someone who is not on your policy drives your car with your consent.
Your personal motor policy only covers personal driving, whether you are driving to work, shopping or travelling. It will not cover if you use your car for commercial purposes, for example if you deliver pizzas.
Personal car insurance will also not provide cover if you use your car to transport other people via a ride-sharing service such as Uber or Lyft. However, some auto insurers now offer supplemental insurance products (at an additional cost) that extend coverage to owners of vehicles that offer ridesharing services.
Is auto insurance coverage mandatory?
Car insurance requirements vary from state to state. If you are financing a car, your lender may also have its own requirements. Almost all states require car owners to carry :
Personal injury liability - which covers costs associated with injuries or death you or another driver causes while operating your car.
Property damage liability - which reimburses others for damage you or another driver in your car causes to another vehicle or other property, such as a fence, building or utility pole.
In addition, many states require that you have :
Medical Payments or Injury Protection (PIP) , which provides reimbursement for medical expenses for injuries to you or your passengers. It will also cover lost wages and other related expenses.
Uninsured motorist coverage reimburses you when an accident is caused by a driver who does not have car insurance or in the case of a hit-and-run. You can also buy uninsured motorist cover, which will cover the costs when another driver does not have enough cover to pay the costs of a serious accident.
Even though PIP and uninsured motorist coverage are optional in your state, consider adding them to your policy for better financial protection.
Collision reimburses you for damage to your car as a result of a collision with another vehicle or object, such as a tree or guardrail, when you are at fault. Although collision cover does not reimburse you for mechanical breakdown or normal wear and tear on your car, it will cover damage caused by potholes or the rolling of your car.
Comprehensive provides coverage against theft and damage caused by an incident other than a collision, such as fire, flood, vandalism, hail, falling rocks or trees and other hazards - even being hit by an asteroid!
Glass cover provides cover against damage to the windscreen, which is common. Some car policies include no-excess glass cover, which also includes side windows, rear windows and glass sunroofs. Or you can buy additional glass cover.
What is gap insurance and do I need it?
Collision and comprehensive insurance only covers the market value of your car, not what you paid for it, and new cars depreciate quickly. If your car is destroyed or stolen, there may be a 'gap' between what you owe on the vehicle and your insurance cover. To cover this, you may want to consider taking out gap insurance to pay the difference. Note that for leased vehicles, gap cover is usually built into your lease payments.
What other types of auto insurance coverage are typical?
While most basic legally mandated auto insurance covers damage to your car, it does not cover damage to your own car. To cover your own car, you should consider these optional coverages:
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