Auto Insurance Coverage Explained

What is auto insurance for, anyway? It is to protect you against financial loss if you have a car accident. It is a contract between you and the insurance company, where you agree to pay them premium, and in exchange, they agree to compensate for your losses as defined in your auto insurance policy.

Before buying auto insurance, read carefully the policy to make sure the coverage meets your needs. The standard auto insurance policy includes the following coverage:

1. Bodily Injury and Property Damage Liability (Liability Limit)

This coverage is required by law. Liability insurance provides coverage for you (and family members listed on the policy) if someone else is injured or killed in a car accident where you are found “at-fault”, and are legally responsible for the injuries. It also provides coverage if their property is damaged. You and family members listed on the policy are also covered when driving someone else’s car with their permission.

It is very important to make sure you have enough liability coverage in your auto insurance. If you are involved in a serious car accident, you may be sued for a large amount of money, paying of which could cost you all of your assets such as your home and savings. Therefore, consider purchasing more than the minimum required by law (varies in different states and provinces). If you are uninsured, you will also be charged with driving without insurance, and may be fined. You may also have your driver's license suspended until you have made satisfactory arrangements to repay the amount owing. This could become a critical problem if you are using your car to drive to work.

2. Accident Benefits (Personal Injury Protection)

Accident Benefits coverage pays for the treatment of injuries to the driver and passengers of the auto insurance policyholder's car (medical, rehabilitation and attendant care expenses). It also provides for your (driver’s) family if you are injured or killed in a car accident (funeral expenses, payments to survivors of a person who is killed, etc.). Accident Benefits provide income replacement for persons who have lost income as well as payments to non-earners who are not able to carry on a normal life.

3. Collision

Collision coverage protects your vehicle if it is damaged in an accident, even if you are at fault. There is a deductible amount for this coverage in the range of a few hundred dollars – a fixed amount you pay regardless of the claim amount. The higher your deductible, the lower your premium. Some insurance companies offer auto insurance with zero deductible. If you're not at fault, your auto insurance company may try to recover the amount they paid you from the at-fault driver’s auto insurance company. If they are successful, you will also be reimbursed for the deductible.

This coverage is optional because the cost of insuring some older vehicles for collision could be higher than the value of the vehicle itself.

4. Comprehensive

Comprehensive coverage protects your car against loss due to theft or damage caused by something other than a collision with another car or object, such as fire, explosion, earthquake, windstorm, flood, falling objects, vandalism, riot, or contact with animals such as deer or birds. It will also compensate you if your windshield is cracked or shattered.

There is usually a $100-$500 deductible amount indicated in your auto insurance policy for this coverage. This amount either is paid by you toward the cost of repairs or is deducted from a claims settlement. You may want to go for a higher deductible to lower your premium.

5. Uninsured/Underinsured Motorist coverage

This auto insurance option provides coverage for you, a member of your family, or a designated driver if hit by an uninsured or underinsured driver. This coverage will also protect you if you are hit as a pedestrian.

Some auto insurance companies sell uninsured motorist coverage that will only protect you in the case of at-fault, uninsured driver who is identified at the scene of the accident, and not in the case of a hit-and-run driver. In my opinion, this type of uninsured motorist coverage is not worth it, as an uninsured driver is most likely to be a hit-and-run driver as well (shows equal disrespect of the law).