Auto Insurance 101

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When it comes to auto insurance, there are some basic things you know. Most states require you to purchase a minimum amount of coverage in order to drive, and that auto insurance can be expensive. But do you really understand the coverages you are paying for? Do you even know whether you have too much or too little coverage?

An auto insurance policy is actually a package of different coverages. The following should help you navigate through the twists and turns of automobile insurance coverage.

Liability
Medical payments
Uninsured motorist/Underinsured motorist
Personal injury protection (No Fault)
Damage to your auto
Additional, optional coverages

Liability insurance

Liability coverage is the foundation of any auto insurance policy, and is required in most states. If you or a member of your household are at fault in an accident, your liability insurance will pay for the bodily injury and property damage expenses caused to third parties in the accident, including legal bills. Bodily injury expenses include medical bills and lost wages. Property damage expenses pay for the repair or replacement of things you wrecked. The third party may also decide to sue you in order to collect "pain and suffering" damages.

Medical payments

The last thing you need to worry about at the time of an accident is your medical insurance. The medical payments portion of your policy assures that you, your family members and passengers in your car will receive necessary medical and dental services resulting from an auto accident. Med Pay also will provide coverage while you're driving someone else's car (with their permission) and injuries you or your family members incur when you're pedestrians. Medical Payments will pay regardless of who is at fault, but if someone else is liable, your insurer may seek to recoup the expenses from them.

Uninsured motorist/Underinsured motorist

Uninsured motorist coverage will pay for injury expenses incurred should you, your family members or passengers be involved in an accident with an uninsured motorist. This coverage also provides protection for a hit-and-run accident or an accident with a driver who has less insurance than required by law. It is required in many states.

Underinsured motorist coverage comes into play when the other driver is found legally responsible for an accident and has coverage, but not enough to cover your injuries. If your coverage limits are higher than those of the at-fault driver, this coverage will absorb the additional expenses.

Uninsured and Underinsured coverage are not identical in all states, since each state has its own uninsured motorist laws. In most states this coverage applies to bodily injury only. However, property damage coverage is available in some states.

Personal Injury Protection (PIP)

Your policy can provide no-fault insurance for residents of states where it is required. This means that you, your family and any passengers are covered under your policy regardless of who is responsible for the accident. This coverage includes medical, surgical, dental, hospital, work loss and certain other related expenses. This same coverage extends to you or your family member in an accident as a pedestrian.

Damage to Your Vehicle

We've discussed legal and medical damages. Another common loss is the physical damage to your vehicle that can result from an accident. There are two types of physical damage coverages: collision and comprehensive.

Collision coverage pays for any damage to your car caused by accidental impact with another vehicle or object...or if your vehicle overturns. The maximum amount to be paid is limited to the actual cash value of your vehicle, commonly referred to as "blue book" value, less the collision deductible. Please remember that the blue book is only a guide. The actual cost of the car may be more or less depending on the actual condition of the car. Collision coverage is normally one of the most expensive components of auto insurance. By choosing a higher deductible, say $500 or even $1,000, you can keep your premium costs down. However, keep in mind that you must pay the amount of your deductible before the insurance company kicks in any money after an accident. Insurance companies often will "total" your car if the repairs the company must pay exceed what the car is worth.

Comprehensive coverage pays for most types of damage to your car resulting from a situation other than a collision. Typical examples include breakage of glass, falling objects, fire, theft, windstorm, hail, water, flood, malicious mischief, vandalism, or impact with a bird or animal. The maximum amount paid is limited to the actual cash value of your vehicle less the "other than collision" deductible. Your insurer will only pay as much as the car was worth when it got wrecked.

There are situations where damage is not covered. Please be aware that your policy will not pay for damages due to normal wear and tear such as mechanical or electrical breakdowns and flat tires.

Because insurance companies normally will not pay you more than your car's book value, it's helpful if you have a rough idea of this amount. Most insurance adjusters use the Kelley Blue Book. The National Automobile Dealers Association also publishes the Official Used Car Guide, which is updated each month. If your car is worth less than what you're paying for the coverage, you're better off not having it.

Additional, optional coverages

Some coverages are not included as part of the basic auto policy. However, you can customize your policy to your needs by adding the following coverages:

Towing and labor: a common coverage that pays for towing and labor costs each time your car is disabled. Covered labor must be performed at the place where your car is disabled. There's usually a limit to the dollar amount that will be applied to each loss.

Rental reimbursement: another common add-on coverage, pays for a rental car if your car is damaged by a situation covered by comprehensive or collision coverage and if your car is out of commission for more than 24 hours.

Tapes, records, CD coverage: pays up to a certain amount for loss of tapes/CDs used with your car's stereo equipment, as long as they are in your car at the time of loss.

CB radio/car phone: Unless installed by the manufacturer, these items are not covered under your basic policy. This additional coverage pays for loss to your CB or two-way radio/telephone if the equipment is not permanently installed in your car at the time of loss.

Auto replacement coverage: guarantees car will be completely repaired or replaced, even if these costs exceed its depreciated value.

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