Basic types of auto insurance coverage

Auto insurance can be broken down into three major types of coverage – liability coverage, personal property coverage and personal injury protection.

In terms of auto insurance coverage, first party is the policy holder, while the the third party is the other person involved in the accident. The second party is the insurer providing the coverage (the auto insurance company).

Liability Coverage (Third-party liability)

Liability coverage can be broken down into two types – property damage and medical payments (also called bodily injury). Property damage liability coverage protects you by paying for damages caused to others’ vehicles when you are at fault in an accident.

Medical payments (bodily injury) coverage also falls under liability coverage. This provides payment for medical treatment of bodily injuries caused to others.

Property Coverage (First-party expense)

Property coverage is normally referred to as comp and collision. Comprehensive (comp) coverage helps pay for damages or replacement of your own car resulting from something other than a collision, such as theft or storm damage. Collision coverage helps to pay for repairs or the replacement of your car due to an accident (collision).

Along with personal injury coverage, comp and collision coverage kicks in when the policy owner is not at fault or no one was at fault for the damages. Full coverage insurance refers to when a policy holder has both collision and comprehensive insurance.

Personal Injury Coverage (First-party expense)

Personal injury protection is for damages incurred to yourself in a covered accident. It provides coverage for certain expenses deemed reasonable and necessary such as medical and hospital bills, lost wages and funeral expenses. Personal injury protection also oftentimes pays your expenses from the result of a hit-and-run accident.

About third-party liability coverage

Most states (other than "no-fault" states) mandate that you have a set amount of third party liability coverage. Third party coverage refers to both bodily injury coverage and property damage coverage. These policies cover the damage caused to a third party in an accident in which the policy holder is at fault.

Bodily Injury
Bodily injury coverage, also referred to as medical payments, is noted on an auto insurance by a set of numbers such as 50/100 or 100/300.

The first number indicates the maximum amount of coverage for one person in thousands of dollars. The second number indicates the maximum amount of coverage per accident in thousands of dollars.

For example, if you have 50/100 coverage, that means the maximum amount your policy covers is $50,000 for one person’s injuries and $100,000 per accident.

Property Damage
If you have property damage coverage, there is a third number in the series of numbers such as 50/100/25. The third number indicates the amount of policy coverage to repair of replace the third party’s property in thousands of dollars.

Visit the Insurance Information Institute Web site to find out how much third party coverage is required in your state.

About uninsured motorist coverage

Uninsured motorist coverage is an automobile policy option which pays the policy owner and/or his passengers for medical bills, pain and suffering and lost wages if the driver at fault has no insurance.

This type of insurance is sometimes packaged with underinsured motorist coverage, which similarly covers damage caused by at-fault drivers with too little insurance.

The following states mandate uninsured motorist coverage: Connecticut, Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Dakota, Oregon, Rhode Island, South Carolina, South Dakota, Vermont, Virginia, Washington DC, West Virginia and Wisconsin.

In the other states, uninsured motorist coverage is optional. Some of these states also require underinsured motorist coverage. Consult the Insurance Information Institute Web site to find the laws in your state.

Even if it is not mandated by your state, it is very wise to have uninsured motorist coverage to protect yourself. In addition to covering damages caused by drivers that are not insured, it will also cover damaged caused to you and your passengers in a hit-and-run accident. It may also cover if you are a pedestrian hit by an uninsured motorist.

Rental Car Insurance Coverage

When someone uses the term "rental car insurance coverage," it can mean two different things.

One is auto insurance coverage offered by rental car companies on their own rental cars. If you already have third party liability coverage and comp and collision insurance on your personal auto insurance policy, then the coverage is normally extended to rental cars.

Therefore, you normally do not need to accept the optional insurance (which can be very expensive) offered by a car rental company. However, check your personal policy or ask your insurance agent to be sure your policy will cover.

Rental car coverage can also refer to an add-on to your own insurance policy that covers free car rentals while your vehicle is in repair. If you do not have a second car, it’s a good idea to add this type of insurance onto your automobile insurance policy. It’s normally very affordable and can save you a considerable amount of money by providing free car rentals in the time of need.

About Gap Insurance

Gap insurance is an auto insurance policy that covers the difference between the amount your insurance company says its worth and what you owe on your car.

If your car is totalled or stolen, your insurance company will award you only the amount they believe your vehicle is worth. However, you could owe thousands of dollars more to the bank or lien holder. If you don’t have gap insurance, you will be stuck paying the difference out of your pocket.

Many auto dealerships will offer you a gap policy when you purchase your car. However you may be able to find gap insurance at a cheaper rate from a different auto insurance provider. Research on the Internet and call local insurance companies for price quotes on gap insurance.

Remember that gap insurance is a type of coverage that you will only need for the period of time until you pay off your car (or the amount owed is less than the car’s worth).

See also: Gap insurance explained

Insurance coverage for non-policy owners

When you purchase auto insurance, the policy may cover the damages as stipulated no matter who is driving the car at the time of accident as long as the policy owner has granted the driver permission to drive the car.

However, some insurance companies will exclude other members of your household from being covered unless you include them by listing each person on your policy as a frequent driver of the vehicle.

When purchasing car insurance, notify the insurer about who will be driving your car on a regular basis. If necessary, they will add the drivers to the policy to make sure that there are no questions of coverage should an accident occur.

About auto Insurance Limits

Before getting auto insurance quotes, you must decide how much coverage you need. Each policy has limits to how much coverage the car insurance company will provide. The limits are normally represented on a policy with a series of numbers, such as 50/100 or 100/300 coverage.

The first number is the per person limit (in thousands of dollars) and the the second number is the per occurrence limit (in thousands of dollars).

Per-person limit

The per person limit is the maximum amount the insurance company will pay for any one person’s injuries arising from a single incident or accident. For example if you have a policy with 50/100 limits, the insurance company will pay up to $50,000 in bodily injury damages sustained to one person.

Per-occurrence limit

The per occurrence (or per accident) limit is the highest amount your insurance company will pay for all claims from a single incident. This is the total amount of damages for bodily injuries of all parties. For example if you have a policy with 100/300 limits, the insurance company will pay up to $300,000 in bodily injury damages sustained per occurrence.

Tips for finding affordable auto insurance

There are several things you can to do to make saving money on auto insurance easier. Follow these simple rules to get a head start on saving money on your auto insurance costs.

Shop Around
The easiest way to find affordable auto insurance is to shop around. Whether through the insurance companies directly or through an online auto insurance broker, get free quotes from several different insurance providers. Be sure to pay attention to deductibles, limits, exclusions and perks when comparing care insurance quotes.

Drive Safely
You can save money on auto insurance by driving safely. Policy holders with no accidents or moving violations in the last three to five years can receive a discount on car insurance rates. If you drive safely, you can also avoid an insurance premium increase to your existing policy. In addition, some insurance companies may offer discounts to drivers that use air bags, seatbelts, anti-lock brakes, alarms and security devices.

Maintain good credit
Car insurance companies often consider drivers with stable credit histories less likely to be involved in accidents. Therefore, if you maintain good credit or improve poor credit, you may be able to lower your auto insurance costs.

Drive less
Some auto insurance companies offer cheaper rates if you drive under a specified number of miles per year. Be sure to ask about mileage discounts when applying for insurance.

Raise your deductible
You can assume more risk by raising your deductible. You can also considering dropping collision insurance on older vehicles.

Pay your policy in full
Many insurance companies offer lower car insurance rates if you pay the entire policy amount in full annually or every six months, rather than paying monthly payments. Some insurers also will charge less if you pay electronically rather than by check in the mail.

Ask about other discounts
There are many other types of discounts that can lower your auto insurance rates. Ask your insurance company about multiple car discounts, senior discounts, low risk occupation discounts and other discount opportunities.

Basic auto insurance terminology

Here are some terms that can be found in most, if not all, auto insurance policies.

Benefit – The amount an insurance company pays out when a claim is filed.

Bodily Injury Liability – Type of auto insurance coverage that covers the medical expenses to a third party caused by the policy holder.

Claim – The formal incident report and request for reimbursement that a policy holder files with their insurance company. Depending on your auto insurance carrier, you can file a claim in person, on the phone or online.

Collision – Type of auto insurance coverage that covers damage to the policy holder’s vehicle due to a collision.

Comprehensive (Comp) – Type of auto insurance coverage that covers damage to the policy holder’s vehicle due to things other than a collision, such as fire, theft, falling objects, earthquake and flood.

Deductible – The amount the policy holder agrees to pay in the event of an accident. Low deductibles cause higher premiums and higher deductibles cause lower premiums.

Exclusions – Things outlined in an auto insurance policy that are not covered.

Limits – The cap amount that the insurance company will pay out per person and per occurrence. Check with your state insurance office to be sure you have the minimum mandated limits.

Personal Injury Protection – Also referred to as medical payments coverage, this insurance covers the medical bills and lost wages as a result of injuries to the driver and passengers.

Premium - The amount of money that the policy holder pays for their auto insurance policy. Premiums can be paid monthly, every six months, annually or as often as stipulated by the auto insurance company.

Property Damage Liability – Type of auto insurance coverage that covers the damage that the policy holder causes to a third party’s vehicle or other property.

Uninsured/Underinsured Motorist – Type of auto insurance coverage that pays the driver and passengers for medical bills, pain and suffering and lost wages if the driver at fault has no insurance or not enough insurance.

Explanation Of deductibles

When you purchase auto insurance to cover your vehicle, you must choose a deductible amount for the policy. If your car is damaged or stolen and you file a claim, the only amount you have to pay is the deductible amount. The auto insurance company pays the rest of the claim up to your coverage limit.

If you want a low deductible to curb out of pocket expenses at the time of an accident, the lower the deductible, the higher your insurance premiums will be. It may be more cost effective to have a higher deductible but also have a higher coverage limit.

Ask your insurance provider to give you multiple quotes with various deductibles before deciding a deductible amount.