What exactly is auto insurance?
Understand your auto insurance policy and what it covers.
Most states require basic personal auto insurance, which provides you with some financial protection in the event of an accident. Is it, however, sufficient? What are the alternatives? Learn about car insurance and the various types of coverage available.
The Fundamentals of Auto Insurance
Auto insurance is a contract you enter into with an insurance company that protects you from financial loss in the event of an accident or theft. The insurance company agrees to pay your losses as outlined in your policy in exchange for you paying a premium.
Auto insurance covers the following:
- Property damage or theft of your vehicle
- Liability is your legal obligation to others for bodily harm or property damage.
- Medical expenses include the cost of treating injuries, rehabilitation, and sometimes lost wages, as well as funeral expenses.
Most states require basic personal auto insurance, though laws vary. Auto insurance coverages are priced individually (a la carte), allowing you to tailor the coverage amounts to your specific needs and budget.
Who is covered by my car insurance, and under what conditions?
Your auto insurance policy will cover you and any other family members on your policy, whether you are driving your own car or someone else’s (with their permission). Your policy also covers you if someone who is not on your policy drives your car with your permission.
Your personal auto policy only covers personal driving, such as commuting to work, running errands, or going on a trip. It will not cover you if you use your car for commercial purposes, such as delivering pizzas.
Personal auto insurance will also not cover you if you use your car to transport others via a ride-sharing service like Uber or Lyft. However, some auto insurers are now providing supplemental insurance products (at an additional cost) that extend coverage to vehicle owners who provide ride-sharing services.
Is auto insurance coverage required?
The requirements for auto insurance vary by state. If you are financing a car, your lender may have additional requirements. Almost every state requires car owners to have:
Bodily injury liability – this covers the costs of injuries or death caused by you or another driver while driving your car.
Property damage liability – compensates others for damage caused by you or another driver operating your vehicle to another vehicle or other property, such as a fence, building, or utility pole.
Furthermore, many states require you to carry:
Medical payments or personal injury protection (PIP), which reimburses you for medical expenses if you or your passengers are injured. It will also cover lost wages and other associated costs.
Uninsured motorist coverage reimburses you in the event of an accident caused by a driver who does not have auto insurance or a hit-and-run. You can also buy underinsured motorist coverage, which will cover costs if another driver does not have enough coverage to cover the costs of a serious accident.
Even if PIP and uninsured motorist coverage are not required in your state, consider adding them to your policy for added financial security.
What other types of auto insurance are common?
While most basic, legally required auto insurance covers damage caused by your vehicle, it does not cover damage to your own vehicle. Consider the following optional coverages for your own car:
Collision pays for damage to your car caused by a collision with another vehicle or another object, such as a tree or guardrail, when you are at fault. While collision coverage does not cover mechanical failure or normal wear and tear on your vehicle, it does cover damage caused by potholes or rolling your vehicle.
Comprehensive insurance protects against theft and damage caused by events other than collisions, such as fire, flood, vandalism, hail, falling rocks or trees, and other hazards—even being hit by an asteroid!
Glass Coverage protects you against common windshield damage. Some auto insurance policies include no-deductible glass coverage, which includes side and rear windows, as well as glass sunroofs. You can also purchase additional glass coverage.
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