Quick riddle: What is the one thing that every car owner must have but no one wants to use? If you guessed “car insurance,” . . . ding! ding! ding! You’re right!
For most people, car insurance is a hassle to carry around but something you have to keep in place just in case you get in an accident or are stopped by the police. But when you’re shopping for car insurance, you can get bogged down by all the jargon. “Comprehensive.” “Collision.” “Liability.” “Gap.” “Umbrella.” What does all this mean? Then come the acronyms and abbreviations: PIP, Med-Pay, etc. Then the numbers: 10/20/10. When did math get involved? All of this can make you feel like running out of the insurance office in confusion or asking for a dictionary just for these terms. Below, we discuss the most common terms used when purchasing insurance.
All Kinds of Auto Insurance
For most people, the most important type of car insurance is liability insurance. This form of insurance covers the damages to the other driver and passengers in case you are at fault for the accident. Your state probably requires you to carry a certain minimum amount of liability insurance. This is where the numbers come into play. For example, Florida requires a minimum of 10/20/10 liability insurance for all motorists in the state. This means you have to carry the following amounts of liability insurance:
- $10,000 in bodily injury liability per person in a single accident
- $20,000 in maximum bodily injury liability for a single accident
- $20,000 for the maximum amount of property damage liability for a single accident
Therefore, if you cause a car accident and carry only these minimum requirements, your insurance would cover up to $10,000 for injuries you cause to each person in the accident, up to a maximum of $20,000 for the entire accident. It would also cover up to $20,000 to repair or replace the other driver’s vehicle. And what happens if the other driver has more injuries than just $10,000 or more than $20,000 in property damage? The driver can sue you for the difference between their damages and the amount of insurance coverage you have. That’s why it’s important to consider carrying more insurance than just the minimum amount.
Also, liability insurance doesn’t cover your own damages. If you want to protect yourself in case of an accident, you may consider purchasing the following types of insurance:
Collision insurance covers the cost to repair or replace your vehicle, even if you are at fault for an accident.
Comprehensive insurance covers damages caused to your vehicle other than those caused by an accident. For example, it can cover damage caused to your vehicle due to theft, vandalism, weather events, accidents with animals or fire.
Uninsured/Underinsured Motorist Insurance
If the at-fault driver does not have insurance or doesn’t have enough insurance, this form of insurance can cover your damages.
Personal Injury Protection (PIP) Insurance
PIP insurance covers certain medical expenses and lost income caused by an accident, regardless of who is at fault.
This type of insurance covers any difference between the cost your other insurance provides to replace your vehicle and the amount of a loan used to finance the vehicle purchase. This prevents you from owing on a wrecked vehicle that was totaled.
Another term should be aware of is your “deductible.” This is the amount that you will have to pay out of pocket before the insurance covers the rest. For example, if you have collision insurance and get in an accident and the cost to repair your vehicle is $5,000 and your deductible is $1,000, you would first have to pay $1,000 and then the insurance company would cover the remaining balance of $4,000.
What You Pay
Your “premium” is the amount that you pay for your insurance. The insurance company may charge you every month, three months, six months or year. Some insurance companies offer you a discount if you pay more months in advance. The amount of your premium depends on a number of factors, such as:
- The type of insurance you purchase (see above)
- The amount of coverage you purchase
- The amount of your deductible (see above)
- Your demographic information, like your sex, age and location
- Your driving history
- Your vehicle information
- Your insurance information, such as how many insurance claims you have filed in the past
Every insurance company uses different criteria to determine how much to charge for your premium. Some companies may use factors like your credit history, personal claims history or occupation in making these decisions. Some may consider the number of miles you drive on average. Others may have you use a device that monitors your driving habits and bases your insurance premium on these behaviors. Additionally, some insurance companies may offer discounts for certain things, like your insured teen having good grades, having certain safety features on your vehicle or insuring multiple vehicles with the insurance company. Because these discounts or charges can significantly impact your insurance premium, it’s smart to shop around for rates before signing up with a particular company.