Although it can be a considerable expense, if you own a car, understanding auto insurance is a must - most states won't even issue registration without it. Accidents happen. No matter how short a distance you have to travel, you'll need to protect yourself and those around you should something go wrong.
Fault vs. no-fault states
States fall into two broad categories when it comes to the types of auto insurance coverage mandated by state law:
Check with your insurance provider to determine the type of coverage that is compulsory in your state.
What is "no-fault" insurance?
No-fault insurance is a system adopted in some states that essentially bypasses the conventional legal procedure that finds fault in an accident. That is the procedure by which you hire a lawyer, file suit, and possibly go to court to prove the accident was the other party's fault. No-fault simply does away with the concept of one party or the other being at fault - no lawyers, no court, no judge, no jury, no lengthy lawsuits against the other party. This is considered beneficial to taxpayers, because it eliminates costly legal proceedings that the state must manage, and to insurance policyholders, because it helps keep rates down.
If you are insured in a no-fault state and have an accident, you don't go after the other driver. Instead, you contact your own insurer and file a claim. Your own insurance company guarantees you immediate compensation for damages, medical expenses, lost wages, etc., and will then purse the other driver if possible.
The type and range of no-fault coverage varies from state to state. What defines the limitations of no-fault policies can differ in two critical areas:
- Threshold: The type of damage/injury or the cost of repair/recovery that triggers the need for legal action.
- Mandated: Benefit level-The package of benefits (medical, wage loss, replacement services, and other expenses) your state requires you to carry.
The details of no-fault insurance can be complicated. Contact your agent or state's insurance department for further information.
Fault states or states with financial responsibility laws
Most other states, while not mandating auto insurance, have "financial responsibility laws" that require all drivers to be able to pay for any damage or injury they may cause. However, carrying liability insurance is still the best way for you to meet your state's financial responsibility requirements.
Uninsured motorists and underinsured motorists policies are offered by law in all states, including no-fault states. In fact, some states require all motorists to carry this coverage in order to gain protection from inadequate insurance coverage of other drivers.
Factors affecting auto insurance
Drivers are grouped according to the level of risk each one poses, i.e., the amount of loss incurred by insurers within various categories of policyholders. For various reasons, drivers are categorized by:
- Sex - Men have more accidents on the road than women.
- Age - Drivers under twenty-five (and, for some insurers, under thirty) are considered at higher risk of having an accident.
- Marital status - Married drivers tend to have fewer accidents than single drivers.
- Personal driving record - Years of driving experience, accidents, speeding tickets, and drunk-driving offenses are all factors in determining how much of a risk you pose as a motorist.
- How you use your vehicle - If you commute by car during rush hours, you're at greater risk of having an accident than if you only drive for errands and recreation on the weekends. Drivers who use their own vehicles for business also are considered to be at greater risk.
- Type of vehicle - The value, size, weight, age of your vehicle - even the cost of replacement parts - are essential to determining the price of your insurance. Larger, heavier vehicles are considered at lower risk than smaller, lighter ones. Plus, more expensive cars are costlier to have repaired than economy models.
The cost of your insurance policy is based on the average cost of covering actual losses, spread out over your particular "rating group" as a whole. Of course, you may never have an accident or have your car stolen, and therefore will never need to be compensated. But others in your category may not be so lucky. Your premium will help to pay for their losses, just as their premiums would help to pay for yours. In other words, you are investing a little today in case you need a lot tomorrow; your investment is pooled with others, and the pool pays for your loss. What should auto insurance cost?
Not all auto insurance policies are the same. There are many variables that can contribute to the cost of your policy. These include:
- Where you live: Insurance rates are usually higher in urban areas or areas with a higher crime rate.
- Age of all licensed drivers in the household.
- Driving record: The worse yours is, the more it will cost to insure you (and may deem you uninsurable).
- Sex
- What kind of car you drive: Is it expensive? Economy?
- Size of your deductible: The bigger your deductible, the lower your premiums will be. (The larger deductible chosen for collision and comprehensive coverages, the more the cost savings.)
- Type and level of coverage: There are several types of auto insurance. We'll discuss each in detail in the next section.
What are the different types of auto insurance?
Auto insurance is divided into several different types of coverage:
- General liability
- Collision
- Comprehensive
- Medical payments
- Uninsured motorist
General liability covers damage you may cause to other people's property and injuries to the people themselves. Liability coverage protects you in the event that you are involved in an accident resulting in someone else's death or injury.
If you were driving negligently at the time of the accident, you are normally responsible for paying for the damages, including medical bills, loss of personal property, lost wages, and possibly pain and suffering if the state you live in assigns fault for accidents.
Most states have a minimum, usually $15,000 to $25,000, coverage that you must carry, although these are typically far lower than the potential costs you may be faced with.
HerTip: Remember, while these limits are state mandated, you can easily purchase more coverage.
Collision
Collision insurance will reimburse costs related to repairing damages to your car due to an accident. Most policies will cover enough repairs to get your car back to pre-accident condition. Collision insurance usually will protect you when you are driving a car that you do not own but are authorized to drive, such as a rental car.
Comprehensive
Comprehensive insurance pays for damages caused by events other than collision, unless the vehicle is overturned, then it is considered a collision. These may include:
- Natural disasters
- Theft
- Riots
- Explosions
- Falling objects
Medical payments insurance, usually in the range of $5,000 to $10,000, covers medical expenses for injuries. This "good-faith" coverage guarantees immediate medical payments for you, your passengers, and other parties, regardless of who is at fault. It also covers you and members of your household in any accident involving an automobile, whether you are on foot, on a bicycle, in a friend's car, etc.
Examples of these costs could include:
- Hospital and doctor bills
- Funeral expenses
- Medical bills if you or a member of your family are hurt either while in someone else's car or if struck by a car when walking.
- Many policies limit coverage for each individual injured in a single car.
Uninsured motorist (UM) and underinsured motorist (UIM) coverage protects you if you are injured in an accident with others who themselves carry insufficient or no liability insurance. These policies protect you against damage costs including lost wages, medical bills, pain, and suffering.
HerTip: There is "extra coverage" that includes expenses for towing, labor, temporary replacement vehicles, etc. These generally are defined as add-ons or endorsements to your auto insurance policy.
Personal Injury Protection (PIP) policies cover various medical charges not covered by "med pay." Personal injury covers medical bills, replaces lost wages, or pays to replace the services of someone injured in an accident. For example, if you are laid up because of a car accident and you are unable to care for your children, PIP payments will cover babysitter fees until you are able to care for your children again. PIP is often required in states with no-fault plans and is usually available in states assessing fault.
Determining how much car you can afford