Car Insurance Basics

Basic Terms

Coverage – When, to whom, and how much the insurance provider pays for damages and injuries.

Deductible – The part of the claim that you pay on your own, out of pocket.

Liability – Being legally responsible for injuries or damages.

Policy – The complete agreed-upon terms and conditions between the insurer and policyholder, including coverage, deductible, and premium.

Premium – Regular payments to the insurer by the policyholder. These are required to keep coverage. Payments can be made monthly, twice yearly, or once yearly.

Tort Insurance vs No-Fault Insurance

States are split between two major systems of car insurance, though some form of coverage is required in 99% of cases. The most common system is a tort system, where the at-fault party pays for damages and injuries and disputes about liability are settled by  legal action.

No-Fault Insurance is a major alternative to the tort system. Instead of fighting over assigning fault, each party in a collision is required to cover the injuries for those in their own vehicle. Each no-fault state has different variations of this.

Types of Coverage

Liability – Pays for damages, injuries, and death to others for which your vehicle is found to be responsible. If there is a lawsuit, this coverage provides for your legal defense. There are different coverages for Bodily Injury Liability and Property Damage Liability.

Personal Injury Protection – The essential no-fault coverage, this pays for the medical expenses for people in the insured vehicle, no matter the legal fault.

Collision – Pays for damages to the insured vehicle caused by traffic accidents, no matter the fault.

Comprehensive – Pays for damages to the insured vehicle caused by non-driving incidents, such as weather, natural disasters, wildlife, hit-and-runs, arson, theft, and more.

Gap – Pays for the difference in value between the price you paid for the vehicle and the value of the vehicle at the time of the damage. This is in effect for only a set period of time. Gap coverage is very important if you still owe money on the vehicle.

Medical Payments – Gives the driver and passengers of the insured vehicle financial assistance for medical treatment necessary after crashes. There is a maximum dollar-amount per person and total. Funeral costs are also paid for.

Uninsured/Underinsured Motorist – Compensates you for damages and injuries caused by a driver who does not have the coverage to pay. This is essential, since up to 50% of drivers are uninsured or underinsured. There may be different coverage needed for injuries and vehicle damage.