How Does Car Insurance Work?

If you drive a car, you need car insurance and in most states (48 of them), it’s more than just a good idea — it’s the LAW! When you buy car insurance, you are buying what is called a policy. The amount you pay is called a premium. Your policy’s premium is based on a variety of factors including the type of car you drive, your driving history, your credit score, other drivers in your family and what kind of insurance you want.

Since state laws vary, some of the coverage types listed here may be required by your state and some of the coverage may be optional.

  • Liability – This is the minimum coverage you must carry in 48 states. Liability protection pays for accidental bodily injury and property damages to others, not YOU! Injury damages may include the medical expenses, pain and suffering and lost wages due to someone involved in an accident where you’re at fault. Property damage includes the damaged property of others and their vehicles. This coverage also pays defense and court costs. State laws determine how much liability coverage you must purchase, but you can always get more coverage than your state requires.
  • Collision – Pays for damages to your vehicle caused by collision with another vehicle or object.This coverage is almost always required if you owe money on your vehicle.
  • Comprehensive – Pays for loss or damage to the insured vehicle that doesn’t occur in an auto accident. The types of damages comprehensive insurance covers include loss caused by fire, wind, hail, flood, vandalism or theft.Again, if you owe money on your car, you’ll probably be required to carry comprehensive coverage.
  • Medical Coverage – Pays medical expenses regardless of who is at fault when the expenses are the result of an auto accident.
  • Uninsured Motorist -Pays your car’s damages when an auto accident is caused by a driver who breaks the law and doesn’t carry liability insurance.
  • Underinsured Motorist – Pays your car’s damages when an accident is caused by someone who didn’t buy enough liability insurance.
  • Rental Coverage – Pays for a rental car if your car is damaged in an auto accident and needs repairs. Often this coverage has a daily allowance for a rental car.

The first step in choosing the insurance you want for your car is to know the laws in your state. This will tell you the minimum insurance you need for your car. It’s good to keep in mind that, just because your state may not require extensive insurance, extra coverage may be worth the expense. After all, no one wants to be stuck with thousands of dollars worth of bills because of an auto accident — especially if you were not at fault!

Many insurance policies combine several of these types of coverage into various packages. Don’t be afraid to ask your agent to tailor a package with the types of insurance you specifically need. They CAN do that, trust me. If they won’t, move on to another agent.


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