Why is car insurance necessary?
Car insurance is essential because it is a legal requirement in most states for driving. If you finance or lease your vehicle, your finance company may require you to maintain car insurance. Your insurance policy protects your interests in the event of an accident or damage to other individuals or property.
How much car insurance coverage do I need?
The appropriate car insurance policy varies for each individual, even if they are insuring the same make and model of vehicle. When customizing your car insurance policy, it is crucial to consider your need to manage both legal and financial risks. State laws mandate a certain level of insurance coverage to be a legal driver, but the specific amount and types of required car insurance vary by state. Only two states allow driving without any car insurance. While meeting your state's legal requirements, purchasing car insurance is a wise financial decision. By paying a small amount each month, you protect yourself from potential future expenses that could otherwise be unaffordable. Accidents can happen, and car insurance covers the cost of repairing your vehicle or paying for damages caused by you. It also helps cover significant medical costs for you, your passengers, and anyone involved in an accident you caused.
Car insurance coverages
The choice of coverage amounts is up to you, but remember that lower coverage levels increase your personal exposure. Even if you have no assets, the debt for damages not covered by your car insurance remains. If you possess assets, they are at risk for any damages you are responsible for that exceed your car insurance coverage.
What is Liability Insurance?
Liability insurance safeguards you from financial losses if an accident is determined to be your fault. Most states require liability insurance to register a vehicle or obtain a driver's license. Liability coverage is typically expressed as three numbers, such as 100/300/100. In this example, the insurance policy would cover a maximum of $100,000 for bodily injury per person, $300,000 for bodily injury per accident, and $100,000 for property damage. Bodily injury coverage generally pays for medical bills, loss of income, funeral costs, and pain and suffering resulting from an injury. Property damage coverage pays for damages to another person's vehicle or property, such as repairs for a vehicle or damages to a home, fence, or garage.
What is Collision Insurance?
Collision coverage pays for repair and replacement costs for your vehicle when it collides with another vehicle or object. This coverage takes effect after you exceed your deductible. For example, if you have a $500 deductible and the repair cost is $1,700, you will pay $500 out of pocket, and the insurance will cover the remaining $1,200. Deductibles for collision coverage typically range from $0 to $1,000. Opting for a higher deductible reduces your auto insurance costs but requires you to pay more out of pocket before your insurance coverage applies.
What is Comprehensive Insurance?
Comprehensive coverage addresses damages to your vehicle that results from incidents other than collisions with other vehicles. It helps pay for damages caused by theft, vandalism, falling objects, fire, storms, floods, earthquakes, and collisions with animals. Comprehensive car insurance also includes a deductible that you can choose, typically ranging from $0 to $1,000.
What is Gap Insurance?
Gap insurance covers the difference between the present value of your vehicle and the amount you owe on it to the financing company. Without gap insurance, if you total your vehicle and owe more than its value, you would be responsible for the difference between the loan balance and the vehicle's worth. Some car loans and leases require gap insurance.
Other common auto insurance coverages include:
- Medical Payments: Optional coverage that pays for medical expenses for you and your passengers resulting from a car accident, including coverage as a passenger in another person's vehicle or if you are hit by a car while walking. Coverage levels can vary.
- Personal Injury Protection (PIP): Broader than medical payment insurance, PIP covers medical expenses, funeral costs, pain and suffering, and lost wages for you or your passengers, regardless of fault. PIP is required in some states.
- Uninsured Motorist Coverage: Covers you in the event you are hit by an uninsured driver or are the victim of a hit-and-run. It pays for car repair bills, medical expenses, lost wages, and pain and suffering, up to the coverage limit of your policy. Some states mandate uninsured motorist coverage.
- Underinsured Motorist Coverage: Protects you when the other driver's coverage is insufficient to pay for the damages to your car, property, or yourself. It covers the difference between the other party's insurance payout and your total costs, up to your policy's coverage limit. Some states have a high percentage of uninsured drivers.
How much does car insurance cost?
The cost of auto insurance depends on various factors. Ownership plays a role, as finance or lease agreements often require car insurance, while it may be optional for a vehicle you own outright. Personal factors such as gender, age, and driving experience can influence the premium, with males, teenagers, and young drivers typically paying more. Your net worth is also a factor as your assets are at risk if you are responsible for damages exceeding your insurance coverage. The value of your vehicle affects the coverage needed, as a low-value vehicle may not require certain coverage if the additional premium cost outweighs the benefit of the maximum payout. Your driving record, location, the level of risk you accept, and your affordability all contribute to the cost of auto insurance.
