What is auto insurance?
Auto insurance protects you against financial loss if you have an accident. It is
a contract between you and the insurance company. You agree to pay the premium and
the insurance company agrees to pay your losses as defined in your policy.
Auto insurance provides property, liability and medical coverage:
- Property coverage pays for damage to or theft of your car.
- Liability coverage pays for your legal responsibility to others for bodily injury
or property damage.
- Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes
lost wages and funeral expenses.
An auto insurance policy is comprised of six different kinds of coverage. Most states
require you to buy some, but not all, of these coverages. If you're financing a
car, your lender may also have requirements.
Most auto policies are for six months to a year. Your insurance company should notify
you by mail when it's time to renew the policy and to pay your premium.
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What is in a basic auto policy?
Your auto policy may include six coverages. Each coverage is priced separately.
1. Bodily Injury Liability
This coverage applies to injuries you, the designated driver or policyholder cause
to someone else. You and family members listed on the policy are also covered when
driving someone else's car with their permission.
It's very important to have enough liability insurance, because if you are involved
in a serious accident, you may be sued for a large sum of money. Definitely consider
buying more than the state-required minimum to protect assets such as your home
and savings.
2. Medical Payments or Personal Injury Protection (PIP)
This coverage pays for the treatment of injuries to the driver and passengers of
the policyholder's car. At its broadest, PIP can cover medical payments, lost wages
and the cost of replacing services normally performed by someone injured in an auto
accident. It may also cover funeral costs.
3. Property Damage Liability
This coverage pays for damage you (or someone driving the car with your permission)
may cause to someone else's property. Usually, this means damage to someone else's
car, but it also includes damage to lamp posts, telephone poles, fences, buildings
or other structures your car hit.
4. Collision
This coverage pays for damage to your car resulting from a collision with another
car, object or as a result of flipping over. It also covers damage caused by potholes.
Collision coverage is generally sold with a deductible of $250 to $1,000-the higher
your deductible, the lower your premium. Even if you are at fault for the accident,
your collision coverage will reimburse you for the costs of repairing your car,
minus the deductible. If you're not at fault, your insurance company may try to
recover the amount they paid you from the other driver's insurance company. If they
are successful, you'll also be reimbursed for the deductible.
5. Comprehensive
This coverage reimburses you for loss due to theft or damage caused by something
other than a collision with another car or object, such as fire, falling objects,
missiles, explosion, earthquake, windstorm, hail, flood, vandalism, riot, or contact
with animals such as birds or deer.
Comprehensive insurance is usually sold with a $100 to $300 deductible, though you
may want to opt for a higher deductible as a way of lowering your premium.
Comprehensive insurance will also reimburse you if your windshield is cracked or
shattered. Some companies offer glass coverage with or without a deductible.
States do not require that you purchase collision or comprehensive coverage, but
if you have a car loan, your lender may insist you carry it until your loan is paid
off.
6. Uninsured and Underinsured Motorist Coverage
This coverage will reimburse you, a member of your family, or a designated driver
if one of you is hit by an uninsured or hit-and-run driver.
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Can I drive legally without insurance?
NO! Almost every state requires you to have auto liability insurance. All states
also have financial responsibility laws. This means that even in a state that does
not require liability insurance, you need to have sufficient assets to pay claims
if you cause an accident. If you don't have enough assets, you must purchase at
least the state minimum amount of insurance. But insurance exists to protect your
assets. Trying to see how little you can get by with can be very shortsighted and
dangerous.
If you've financed your car, your lender may require comprehensive and collision
insurance as part of the loan agreement.
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What if I lease a car?
If you lease a car, you still need to buy your own auto insurance policy. The auto
dealer or bank that is financing the car will require you to buy collision and comprehensive
coverage. You'll need to buy these coverages in addition to the others that may
be mandatory in your state, such as auto liability insurance.
If you've financed your car, your lender may require comprehensive and collision
insurance as part of the loan agreement.
- Collision covers the damage to the car from an accident with another automobile
or object.
- Comprehensive covers a loss that is caused by something other than a collision with
another car or object, such as a fire or theft or collision with a deer.
The leasing company may also require "gap" insurance. This refers to the fact that
if you have an accident and your leased car is damaged beyond repair or "totaled,"
there's likely to be a difference between the amount that you still owe the auto
dealer and the check you'll get from your insurance company. That's because the
insurance company's check is based on the car's actual cash value which takes into
account depreciation. The difference between the two amounts is known as the "gap."
On a leased car, the cost of gap insurance is generally rolled into the lease payments.
You don't actually buy a gap policy. Generally, the auto dealer buys a master policy
from an insurance company to cover all the cars it leases and charges you for a
"gap waiver." This means that if your leased car is totaled, you won't have to pay
the dealer the gap amount. Check with the auto dealer when leasing your car.
If you have an auto loan rather than a lease, you may want to buy gap insurance
to protect yourself from having to come up with the gap amount if your car is totaled
before you've finished paying for it. Ask your insurance agent about gap insurance
or search the Internet. Gap insurance may not be available in some states.
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Do I need insurance to rent a car?
When renting a car, you need insurance. If you have adequate insurance on your own
car, including collision and comprehensive, this may be enough.
Before you rent a car:
1. Contact your insurance company.
Find out how much coverage you have on your own car. In most cases, the coverage
and deductibles you have on your personal auto policy would apply to a rental car,
providing it's used for pleasure and not business. If you don't have comprehensive
and collision coverage on your own car, you will not be covered if your rental car
is stolen or if it is damaged in an accident.
2. Call your credit card company.
Find out what insurance your card provides. Levels of coverage vary.
If you don't have auto insurance, you will need to buy coverage at the car rental
counter. The following coverages are available to you at the rental car counter:
1. Collision Damage Waiver (CDW).
Sometimes called a Loss Damage Waiver (LDW), this coverage relieves you of financial
responsibility if your rental car is damaged or stolen. The CDW may be void, however,
if you cause an accident by speeding, driving on unpaved roads or driving while
intoxicated. This coverage generally costs between $9 and $19 a day. If you have
comprehensive and collision on your own car, you may not need to purchase this coverage.
2. Liability Insurance.
This provides excess liability coverage of up to $1 million for the time you rent
a car. Rental companies are required by law to provide the minimum level of liability
insurance required by your state. Generally, this does not offer enough protection
in a serious accident. If you have adequate liability coverage on your car or an
umbrella policy on your home/auto, you may consider forgoing this additional insurance.
It generally costs about $7 to $9 a day. If you don't own a car, and rent cars often,
consider purchasing a non-owner liability policy. This costs approximately $200
- $300 per year. Frequent car renters sometimes find this more cost-effective than
constantly paying for the extra liability coverage.
3. Personal Accident Insurance.
This provides coverage to you and your passengers for medical/ambulance bills. This
type of insurance, usually costs about $3 per day, but may be unnecessary if you
are covered by health insurance or have adequate medical coverage under your auto
policy.
4. Personal Effects Coverage.
This provides coverage for the theft of personal items in your car. However, if
you have homeowners or renters insurance, you may be covered for items stolen from
the car, minus your deductible. You need to have receipts or other proof of ownership.
This type of insurance usually costs about $1.25 per day. Some rental car companies
combine personal accident and personal effects coverage together as one type of
insurance, while others sell it individually.
The cost of insurance at the rental car counter will vary depending on the rental
car company, state, and location of the dealer and the type of car you rent.
Some rental car companies may check your credit and driving history and may deny
coverage. Check with the rental car company to find out its policy.
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What's the difference between cancellation and non-renewal?
There is a big difference between when an insurance company cancels a policy and
when it chooses not to renew it. Insurance companies cannot cancel a policy that
has been in force for more than 60 days except:
- If you fail to pay the premium.
- You have committed fraud or made serious misrepresentations on your application.
- � Your driver's license has been revoked or suspended.
Non-renewal is a different matter. Either you or your insurance company can decide
not to renew the policy when it expires. Depending on the state you live in, your
insurance company must give you a certain number of days notice and explain the
reason for non-renewal before it drops your policy. If you think the reason is unfair
or want a further explanation, call the insurance company's consumer affairs division.
If you don't get an explanation, call your state insurance department.
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