Automobile insurance is designed to provide financial protection from auto-related damages, loss, or injuries to you, your passengers, other drivers and pedestrians. In addition, it can protect against financial loss in the event of an accident to your car, as well as the property of others. It can provide financial reimbursement if your car is vandalized, damaged by fire, or stolen. Driving without automobile insurance is illegal in almost all states, so having sufficient auto insurance coverage is a social responsibility. Driving without insurance and the inability to pay for any damages you may cause puts others at financial risk.
A basic auto insurance policy contains six types of coverage.
- Bodily injury liability: Liability coverage is for the damage you do to others. This coverage is expressed as three numbers, for example 100/300/100, which means $100,000 in bodily injury coverage per person, $300,000 in bodily injury coverage per accident and $100,000 in property damage coverage per accident. This coverage is also designed to pay for your legal bills if you cause an accident and covers medical bills and lost wages for others if you are the cause of the accident. Because this coverage pays for damage you do to others, states require certain minimum levels of coverage.
- Property damage liability: This coverage pays for repairs or replacement of property that you destroy, such as someone else’s car or structural damages if you run into their fence or wall. This coverage can also pay for “pain and suffering” damages if you are sued after a car accident.
- Collision: Collision coverage pays to repair your own vehicle in the event of an accident. In the event of significant damage, your car might be considered “totaled,” which means that the repair costs exceed a certain threshold of the car’s value. At that point, the insurance company will generally pay to tow the car to a salvage yard and pay you its actual cash value.
- Medical payments or Personal Injury Protection (PIP): Medical payments coverage pays for the medical expenses incurred by you and your passengers as the result of an accident. Coverage also extends to you when you are driving someone else’s car or if you are injured when a car hits you. The policy pays regardless of who caused the accident. Personal Injury Protection coverage pays for medical expenses and lost wages for you and your passengers who are injured in an accident and also covers funeral costs. If you have good health and disability insurance, you might decide not to purchase this coverage as it may duplicate coverage you already have.
- Comprehensive: This coverage pays for damage to your car that is not the result of an accident. This includes things such as fire, vandalism, theft, natural disasters, and collisions with animals (such as hitting a deer).
- Uninsured/Underinsured motorists coverage (UM/UIM): Uninsured motorists (UM) coverage pays for your medical bills if an uninsured driver hits your car or if you’re the victim of a hit-and-run. Underinsured motorists (UIM) coverage comes into play when someone causes an accident but doesn’t have enough insurance to cover all medical bills. In that case, the at-fault person’s insurance pays up to its maximum and then your UIM coverage pays for the remaining bills, up to your policy limit.