How Does Auto Insurance Work?
Auto Insurance is a contract between the insured and an insurance company. If the insured suffers a covered loss, the insurance company will help pay for expenses.
To honor the contract, a driver pays for insurance coverage in monthly premiums, in a lump sum for the year or semi-annual payments. If the driver has an at-fault accident they must first pay a deductible, or set amount of their choosing before the insurance covers most if not all that remains on the balance owed.
Every driver pays a different rate to be insured based on several factors. Each insurance company will rate a driver differently for the same auto insurance coverage. That's why it's important to compare auto insurance rates.
History of Auto Insurance
It used to be that only wealthy people owned cars because drivers had to qualify based on their ability to pay for damages to people and property if they were to have an accident. Imagine having to pay 100% of what it costs to replace a brand-new car and cover hospital bills?
Insurance was created so that anyone at any given time can be financially prepared for an accident at a fraction of the cost.
How Do I Get Auto Insurance Coverage?
Insurance payments for insurance coverage are paid in monthly premiums, in a lump sum for the year and semi-annual payments. If you get into an accident that is your fault, you first pay a deductible, or set amount of your choosing, before the insurance covers most if not all that remains on the balance owed.
How Is My Car Insurance Rate Determined?
Every one pays a different rate to be insured. The factors chosen to determine your rate are factors that indicate risk. The riskier you are, the more you're expected to pay because certain behaviors show that you are more prone to having an accident.
Factors that impact your insurance rate differ from one company to the next. In some states, your credit is used to determine your rate but not in others. Some factors commonly used to determine your car insurance rate include age, driving history, occupation, and garaging address.
Generally speaking, the better a driver you are and the fewer accidents you have, the better your rate will be.
Purchasing Car Insurance: Is It Necessary?
To drive legally, you must carry your state's minimum required insurance coverage on your car. Nearly every state requires liability property and casualty insurance, and many require more. In no-fault states like Michigan, you must have more coverage, usually PIP insurance, which covers damages and injuries regardless of who is at fault.
If you're uninsured and get pulled over or, worse yet, find yourself involved in an accident, you'll pay a hefty fine on top of the legal troubles you'll need to sort out. Also, without car insurance, you're on your own to pay for very expensive damages to another person's car if you're at fault. You'll also be on your own to pay for your own repairs. Car insurance was designed to help with the financial impact of an accident.
How Much Car Insurance Do I Need?
How much car insurance you have depends on a few factors. First, if you're leasing or financing a car you may be required to have full insurance. Each state has different insurance requirements so it's important to check with your local DMV.
Nearly all states require liability insurance at the very least if your car is paid off. Also, you don't want to over insure a car that is worth very little. It's important to have a trustworthy agent guiding you when you renew your policy. To be paired with an insurance professional in your area for a free car insurance quote, enter your zip code on this page.
The Different Types of Personal Auto Insurance
How car insurance works depends on which coverages you buy for your car insurance policy. Most states require liability insurance at a minimum, but liability coverage only protects you against the other driver if the accident is your fault.
You will need to buy additional insurance to cover damages to your own car in case you have an accident that is your fault. You'll also need more insurance if you owe more money on your car loan than what your car is worth. Otherwise, you'll still carry a remaining balance if your car is declared a total loss and you're paid out by your insurer.
Here are the coverages you can add to your auto insurance policy.
Bodily Injury Liability
Bodily injury liability car will pay for medical expenses for the other driver and their passengers if you're at fault in the accident. You and your passengers are never covered by your own bodily injury liability coverage. You must buy medical payments coverage to protect yourself and your loved ones.
Property Damage Liability
When you cause a car accident by hitting another car, you are protected by property damage liability, which will pay for the damages. Property damage liability will also cover damages if you hit private or public property with your vehicle.
If you cause a car accident by colliding with another car or object, you'll have car repairs to pay for. Without collision insurance, you'll have to pay for repair or replacement on your own. Collision coverage is an optional add-on coverage but an important one if you have a car with $4,000 or more.
With collision insurance, you choose a deductible, usually ranging anywhere between $200 and $1,000. The deductible is the amount you are responsible to pay towards repairs. The higher your deductible, the lower your premiums. Be sure that you set aside an emergency fund that will cover the deductible you choose.
Much like collision insurance, comprehensive insurance is not required and has a deductible of your choosing. Comprehensive coverage pays for damages to your car by many perils that do not involve a collision. Natural disasters, theft and vandalism are covered by comprehensive insurance.
Some comprehensive coverages include glass protection. Ask your insurer about what's covered and excluded in their comprehensive insurance package.
For newer cars, gap insurance can help to cover costs if you have a total loss on a car that is worth less than what you still owe to the lienholder. Many factors cause car owners to have an "upside down loan," depreciation being one of them. Gap insurance would cover the amount you're still responsible to pay after your car insurance policy pays for the actual cash value of the vehicle.
Buying gap insurance at a car dealership is the most expensive option. Adding gap coverage to your existing car insurance policy is inexpensive and could save you thousands of dollars.
Uninsured Motorist Coverage
Not all drivers are responsible on the road. Thousands of Americans do not buy car insurance, which is why uninsured motorist coverage is a wise investment, in case you have an accident with someone who doesn't have the coverage to pay for an accident they caused. Suing is another option, but people who do not buy car insurance often don't have the money to pay for the damage they caused.
Underinsured Motorist Coverage
Some drivers have auto insurance but not enough to cover the damage they cause. Underinsured motorist coverage is often bundled with uninsured motorist coverage and works the same way. There are no deductibles for uninsured/underinsured motorist coverage.
Personal Injury Protection (PIP)
In some states PIP is a requirement, and your insurance company will add it to your liability insurance. PIP car insurance works in the same way as medical payments coverage. Regardless of who's at fault in a car accident, your PIP coverage will pay for the medical expenses related to that accident.
Medical expenses that you incur from an at-fault car accident are covered by medical payments if your state does not require personal injury protection (PIP). Your health insurance would be the primary policy to pay for medical costs. After you reach limits, medical payments would provide coverage. Medical payments coverage is an important auto insurance product to buy if you do not have adequate health insurance.
Financial Protection Against an Auto Accident
Auto insurance is meant to protect you if the worst were to happen. According to the Insurance Information Institute, you should have enough car insurance coverage to take care of a costly car accident, which means buying higher limits for liability coverage and adding optional coverages to your auto policy.
SmartFinancial can find you the right car insurance policy at the lowest price. Just enter your zip code below to begin comparing prices.