Auto Coverage Defined
An auto insurance policy is a package of different coverage for your car. Most states require you to purchase a minimum amount of certain kinds of coverage. But if you're interested in protecting yourself from a lawsuit or from hefty repair bills, then it makes sense to buy more than what's required.
Liability Coverage
Liability coverage is the foundation of any auto insurance policy, and is required in most states. When you’re at fault in an accident, the liability insurance pays for the bodily injury and property damage expenses caused to others in the accident including your legal bills. Bodily injury coverage pays for medical bills and lost wages. Property damage coverage pays for the repair or replacement of things you wrecked other than your own car. Liability coverage is usually described in a series of three numbers – like, 50/100/20. This means that you have coverage for $50,000 in bodily injury per person, $100,000 in bodily injury coverage per accident and $20,000 in property damage per accident.
The foundation of your auto insurance is liability insurance. Forty-five states require that you purchase auto liability insurance. State that don’t require this, like South Carolina and Virginia require that you register as an uninsured motorist. Tennessee requires proof of financial responsibility, and New Hampshire and Wisconsin don't mandate liability coverage except in certain cases. The minimum amount of insurance you must carry also depends on where you live.
Just because a state has a minimum is not a good reason to get just that minimum. Remember, if you cause a serious accident your policy may not cover all the expenses. That's why it's a good idea to buy more than what your state requires. And, what if you get sued? Well, if you own a home and have nest egg and a savings account, you should consider more liability insurance because drivers are allowed to sue other drivers who injure them in car accidents. If you're sued and your liability insurance doesn't pay for all of the damages, you have to pay the rest!
Collision and Comprehensive Coverage
If you cause an accident, collision coverage pays to repair your vehicle. You usually can't collect any more than the actual cash value of your car. Collision coverage is normally the most expensive component of auto insurance. The insurance company pays for the repairs AFTER you have shelled out for the deductible. Sometimes it’s okay to not have a low deductible if your car isn’t worth a lot or not expensive to have repaired. However, keep in mind that you must pay the amount of your deductible before the insurance company will pay for anything.
Insurance companies often "total" a car if the repair costs exceed a certain percentage of the car's worth. The critical damage point varies from company to company – 55% - 90%. Claim adjusters usually figure the Actual Cash Value (ACV) of a car by taking the replacement cost and subtracting the depreciation. The replacement cost is the amount of money it would take to replace the car or repair the damage.
Comprehensive coverage will pay for damages to your car that weren't caused by an auto accident: Damages from theft, fire, vandalism, natural disasters, or hitting a deer all qualify. Comprehensive coverage also comes with a deductible and your insurer will only pay as much as the car was worth when it got wrecked. You can check the Kelley Blue Book or the National Automobile Dealers Association (NADA) to find out the value of your car.