Nearly everyone is required by law to carry car insurance, so it is likely you have and pay for insurance every month. If you have not yet made a claim on your car insurance, you probably will at some point in the future. Not all car insurance policies are the same, and it is important to understand the different types of coverage as well as auto insurance lingo so you can purchase a policy that protects you without spending extra on what you don’t need.
With the exception of New Hampshire, every state requires drivers to carry car insurance policies. Even though almost everyone has car insurance, many people don’t fully understand some of its provisions.
A better understanding of basic coverage types and definitions associated with car insurance can give you the knowledge you need to make a smart choice when buying your insurance. Here is the information you need to make sure you are saving on your car insurance.
Why is Car Insurance Required?
When we think of insurance, we normally think about it protecting us from unfortunate situations that could be costly. Car insurance can pay for damages done to your car, but the real reason insurance is required by law is to protect other drivers in the event that you are the cause of damage.
For example, if you rear-end someone at a stop sign, causing damage to the other person’s car and possibly injury to the driver, your car insurance with pay for the repairs and for any hospital bills that are a result of the accident. Your insurance protects you financially in this situation. So, the primary function of your insurance is to protect you from being sued by another party. This is why, even if you are driving a beat up old car that is not worth much, you still need to carry insurance.
Conversely, if you were crossing the street when a driver ran a red light and hit you, if that driver did not have car insurance, you would be responsible for paying your own hospital bills. You would then have to try and sue the driver who hit you, but even if you win the suit, there is the possibility that the driver simply does not have the money. In this scenario, you are just out of luck because the driver neglected to purchase the required car insurance.
Insurance Discount Perks for Traffic School and Defensive Driving Courses
Depending on your state, attending traffic school and/or defensive driving can reduce or eliminate increases in insurance premiums if you are at fault in an accident. In addition to insurance discounts, attending traffic school, whether online or in a classroom, can improve your driving skills and knowledge of road rules. It is a good way to learn how to prevent accidents and traffic violations that can affect your car insurance costs. In some states, attending traffic school can even reduce the points incurred on your driving record in addition to lowering your premiums.
The amount of any discounts that you will receive will vary from state to state, and depending on where you live, you could possibly save as much as 10% during a 3 – 5 year period. You can check with your insurance company in advance in order to determine the exact amount you could save by taking a defensive driving course.
Insurance Discount for New York Drivers: Point & Insurance Reduction Program (PIRP)
NY licensed motorists are eligible to receive a minimum 10% discount in the base rate of your auto or motorcycle liability and collision coverage. Simply complete our New York DMV-approved Defensive Driving Course and turn in your official certificate to your insurance agent. This discount will remain in effect for 3 years. If every licensed driver in your household takes the course, you could potentially save hundreds on your auto insurance!
Are you 55 and over? You can save up to 15% on your auto insurance premiums with a Mature Driver Course
In the District of Columbia and over 33 states, aging can help you get car insurance at a decreased cost. You’ll simply need to complete an approved mature driver course that helps keep you safe on the highway. Finish the class successfully, and you can reduce your insurance premium by up to 15 percent.
A typical insurance policy covers six basic provisions, four of which we will define first. The final two provisions will be discussed separately because they are easily confused.
Liability coverage is part of almost every auto insurance policy available. This part of your insurance will cover any vehicle or property damage that you caused in any auto accident.
Bodily Injury Liability
If you are at fault in an accident that results in any injury or death of the other party, your bodily injury coverage will take care of the costs associated with the injuries. It will cover any medical bills and costs, claims for loss of income, and any pain and suffering damages that may be incurred. It is important to remember that bodily injury liability only covers the other party’s medical expenses- but not yours.
Property Damage Liability
If you cause any damage to another person’s property while driving your car, the property damage liability portion of your auto insurance will cover the costs of the damage. While this coverage generally pays for damage to other vehicles, it also extends coverage to damage of property such as landscaping or real estate. Many states do require this liability coverage in a car insurance policy. Just like with bodily injury coverage, property damage liability does not cover your own vehicle or property.
Uninsured and Under-insured Coverage
This portion of your insurance policy will cover your car if someone who does not have car insurance damages it, or if that person is under-insured and cannot pay for the extent of the damage. Uninsured and under-insured coverage encompasses both liability and collision.
Comprehensive vs. Collision Coverage
These two provisions are easily confused, so we are defining them separately from the other four provisions of basic car insurance. Here is everything you need to know to understand the difference between comprehensive and collision coverage.
- Comprehensive Insurance
This type of coverage refers to damage done to your vehicle as a result of any incident that is not a collision. It covers things like theft, vandalism, and weather-related damage like flooding, falling tree limbs or hail damage. It is very important to read exactly what is covered under your policy’s comprehensive coverage because not all policies cover the same incidents.
- Collision Insurance
Just as the name suggests, collision insurance covers any damage caused to your vehicle in a collision with another vehicle. Collision insurance differs from the property damage liability discussed above because it covers damage to your own car, regardless of who was at fault in the accident.
While we will discuss deductibles and premiums in greater detail later, it is important to know that both collision and comprehensive insurances have deductibles. With a lower deductible comes a higher premium and vice versa. Below we will talk about how to save on premiums by choosing to raise the deductible.
Law does not require the following provisions to car insurance, but it is important to understand what these terms mean. Many of these are very inexpensive and have a lot of value to add to your car insurance policy.
You can add medical coverage to your insurance policy to help cover any of your potential medical expenses. If you find yourself in an accident that requires you seek medical attention, medical coverage can help pay the bills if you have a high-deductible health insurance policy or no health insurance. You may want to consider adding this depending on what type of health insurance you currently carry.
If your car is either stolen or damaged, rental reimbursement covers can really come in handy. It pays for you to receive a temporary rental car while your car is out of commission. If you cannot afford to miss work due to your car being in the shop, then rental reimbursement coverage is a good option.
Towing and Labor Coverage
If your car breaks down on the side of the road, towing and labor coverage will pay for your car to be towed to the mechanic. It usually covers other types of roadside assistance such as flat tires or battery jumps.
Gap Auto Insurance Coverage
This type of coverage is sometimes called an umbrella rider. If your car is totaled in an accident, gap insurance will pay you the difference between the book value of your car and the amount you still owe on your car loan if that amount is higher than what the car is currently worth. If your car is completely paid off, this type of coverage is unnecessary, so check before you purchase gap coverage.
The amount of required car insurance differs from state to state. There are usually three numbers that represent the coverage requirements, and they are expressed in the format XX/XX/XX. Here are the meanings of those three numbers:
- XX/XX/XX- The first series of numbers indicates the upper limit of bodily injury costs that will be covered for any one single person who suffers an injury in an auto accident.
- XX/XX/XX- This number is usually higher than the first because it indicates the upper limit of bodily injury costs that will be covered for the total number of people injured in a single auto accident.
- XX/XX/XX- The third series of numbers indicates the maximum property damage costs that will be covered for a single auto accident.
The amount of car insurance you need to carry depends on which state you are living in as the minimum requirements vary greatly. If you live in New York, the insurance requirement is 30/60/25, which means you will need $30,000 in bodily injury coverage for a single person, $60,000 in bodily injury coverage for all persons injured, and $25,000 to cover any property damage in an accident. These numbers vary greatly, and in Florida, the minimum coverage is 10/20/10, in California the minimum is 15/30/5, in Illinois it is 25/50/20, and for Texas, it’s 30/60/25. This gives you a good picture of how you need to consider what your specific state requires.
Most people elect to purchase only the bare minimum of what is required by their state. Depending on your net worth and assets, you may need to purchase more than the minimum to ensure you are adequately protected in the event of an accident.
The deductible on your insurance policy is the amount of money you will pay upfront before your insurance begins to cover the claim. The premium refers to how much you pay yearly to carry your insurance policy. Many people choose to lower their annual premium by choosing a higher deductible for their plan. This can be an effective way to save on your premium costs, but it can also cause trouble if you make your deductible too high to handle. For example, raising your deductible from $500 to $1000 could save you around 20% on your annual premium. A jump from a $250 deductible to $2,500 could mean a 50% savings. Though the savings look good in these examples, don’t be too quick to raise your auto insurance deductibles. You should make sure you are financially able to cover the deductible in the event of an accident.
So, if your current deductible $500 and your premium is $1,500 per year, you could save around $300 yearly by increasing the deductible to $1,000 from $500. However, if you find yourself in just one accident during that year, you will be paying an additional $500 in your deductible for only $300 in premium savings. If you have plenty of extra money sitting in savings, then it may be safe to risk the higher deductible, but if you are living paycheck to paycheck, a high deductible can be a financial disaster.
Always make sure you are purchasing the coverage you need to protect yourself rather than relying on just the state minimums. These minimums don’t offer complete protection for every person in every situation.