What is car insurance?

 Understand your car insurance and what it covers

Basic personal auto insurance is mandatory in most states and gives you some financial protection in the event of an accident. But is it enough? What are the options? Learn how auto insurance works and what types of coverage are available.

Understanding Auto Insurance: The Basics

Auto insurance is a contract between you and the insurance company that protects you against financial loss in the event of an accident or theft. In exchange for you paying a premium, the insurance company agrees to pay your losses as described in your policy.

Auto insurance provides coverage for:

• Property, such as damage to or theft of your car
• Liability - Your legal liability to others for bodily injury or property damage.
• Medical - The cost of injury treatment, rehabilitation, and sometimes lost wages and funeral expenses.

Basic personal auto insurance is required in most states in the US, and laws vary. Auto insurance coverages are priced individually (à la carte) to allow you to customize coverage amounts to meet your exact needs and budget.

Policies are generally issued for periods of six months or one year and are renewable. The insurance company sends a notice when it is time to renew the policy and pay your premium.

Who is covered by my auto insurance and under what circumstances?

Your car policy will cover you and other family members on your policy, whether they drive your car or someone else's car (with your permission). Your policy also provides coverage if someone who is not on your policy drives your car with your consent.

Your personal auto policy only covers personal driving, whether you're commuting, running errands, or traveling. It will not provide coverage if you use your car for business purposes, for example if you deliver pizzas.

Personal car insurance will also not provide coverage if you use your car to provide transportation for others through a ride-sharing service like Uber or Lyft. However, some auto insurers now offer add-on insurance products (at an additional cost) that extend coverage for vehicle owners who provide ride-sharing services.

Is auto insurance coverage mandatory?

Auto insurance requirements vary from state to state. If you are financing a car, your lender may have their own requirements as well. Almost all states require car owners to carry:

• Bodily Injury Liability - Covers costs associated with injury or death caused by you or another driver while driving your car.
• Property Damage Liability - Reimburses others for damage that you or another driver operating your car causes to another vehicle or other property, such as a fence, building, or utility pole.

Additionally, many states require you to carry:

• Medical Payments or Personal Injury Protection (PIP), which provides reimbursement for medical expenses for injuries to you or your passengers. It will also cover lost wages and other related expenses.
• Uninsured motorist coverage reimburses you when an uninsured driver causes an accident, or in the event of a hit and run. You can also buy with insured motorist coverage, which will cover costs when another driver lacks adequate coverage to pay for the costs of a serious accident.

Even if PIP and uninsured motorist coverage are optional in your state, consider adding them to your policy for added financial protection.

What other types of auto insurance coverage are typical?

While the most basic and legally required car insurance covers damage your car causes, it does not cover damage to your own car. To cover your own car, you should consider these optional coverages:

• Collision: reimburses you for damage to your car that occurs as a result of a collision with another vehicle or other object, for example a tree or a railing, when you are at fault. While collision coverage will not reimburse you for mechanical failures or normal wear and tear on your car, it will cover damage caused by potholes or rolling your car.
• Comprehensive: provides coverage against theft and damage caused by an incident other than a collision, such as fire, flood, vandalism, hail, falling rocks or trees, and other hazards, even from being hit by an asteroid!
• Glass coverage: provides coverage against windshield damage, which is common. Some auto policies include deductible-free glass coverage, which also includes side windows, rear windows, and glass sunroofs. Or you can buy a complementary glass coverage.

What is gap insurance and do I need it?

Collision and comprehensive coverage only cover the market value of your car, not what you paid for it, and new cars depreciate quickly. If your car is stolen or totaled,There may be a “gap” between what you owe on the vehicle and your insurance coverage. To cover this, you may want to consider purchasing gap insurance to pay the difference. Keep in mind that for leased vehicles, the gap coverage is generally included in your lease payments.