Understanding Your Auto Insurance Coverage [Complete Guide]

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This article may contain affiliate links. We may receive a commission for purchases made through these links. Privacy Policy.

For a lot of us, car insurance is one of those mystical topics. We know it exists and have been told to always keep good coverage. But our knowledge often stops there. How many of us can honestly say we understand the nitty-gritty details of our policy?

This comprehensive guide to auto insurance will cover all the ins and outs of your policy.

If knowledge is power, get ready to power up.

The Purpose of Auto Insurance

Auto insurance plays a major role in the community of drivers; it provides accountability that someone will cover damage caused by automobile accidents in some capacity. We have all seen or heard about an auto accident gone seriously wrong or someone causing mayhem on the roads. Having proper coverage provides some much-needed protection for drivers from…well…other drivers.

Look, accidents happen. We’ve all been there. But the damage associated with those accidents is not as easy to fix as that broken lamp from playing ball in the house. And, depending on the circumstances of the accident and the state you live in, the cost could result in financial ruin if you don’t have proper coverage. And that’s not an exaggeration–just ask your insurance agent.

Know your State Requirements

Most states think auto insurance is so important that it is legally mandated. In these states, failure to provide proof of insurance could result in fines, community service or even jail time for repeat offenders. A few states have not jumped on the auto-insurance bandwagon, although you may still have to prove that you can adequately cover the repair cost in case you cause an accident.

In areas where you are required to carry insurance, you also likely have minimum coverage limits. As the name implies, these limits dictate the minimum amount of coverage you will be required to carry on your auto policy. And these limits often change based on the state you live in.

Another big-ticket item to pay attention to is whether you live in a no-fault or an at-fault state. The way your state chooses to allocate fault is also how the cost of repair will be allocated.

At-Fault States

Most states operate as at-fault states, meaning the accident’s financial responsibility is determined by which driver was at fault. In particularly muddy circumstances, law enforcement officers may be brought in to determine fault and may even issue citations. Whoever was deemed responsible for the accident is also responsible for the cost of restoration.

Let’s break it down with an example.

Let’s say you are driving down the road with some friends, and you misinterpreted the color of the light. (It was yellow, I swear!) And let’s say your little misinterpretation brought you smack dab into the side of a luxury SUV owned by Sue. And Sue also happened to have a few passengers.

And maybe in your effort to make the light, you pressed a little too hard on the accelerator and that SUV spun and hit the bumper of Harry’s Honda Pilot as he was waiting for the light.

In that scenario, you would be the at-fault driver. And as the at-fault driver, you would also be responsible for the cost of repairing all three vehicles and any injuries sustained by passengers in each car. (That escalated quickly.)

And in these unfortunate scenarios, having proper insurance coverage (and good property damage liability coverage to foot the bill) will be your saving grace.

No-Fault States

Accidents that happen in no-fault states are a little different. In the 12 states that operate in this way, officials don’t particularly care to figure out who was at fault. Instead, each driver is responsible for their own damages.

Using the scenario above in a no-fault state, you would be responsible for repairing your car, Sue’s insurance would take care of her SUV, and Harry’s carrier would fix his bumper.

While this may seem grossly unfair, the goal is to reduce the legal fees naturally occurring in at-fault states. With the opportunity to shift blame comes lengthy court battles and arbitration costs that delay the actual remediation. In other words, when insurance companies fight, nothing gets done.

These states usually require personal injury protection, or PIP coverage, as well. Just like the name suggests, personal injury protection covers your injuries from the accident.

Auto Insurance Policy Breakdown

While personal auto policies vary depending on the state you live in and the carrier you choose, some basic features are pretty universal for all auto insurance policies. First, the terminology is all pretty much the same.

Insurance Lingo

Like most things, insurance has its own language. Your policy will make a lot more sense once you understand these key phrases.

Insurance Premium

Your premium is the amount you pay for your auto coverage. It is your half of the bargain so that your insurer will shell out their half (the serious bucks) in the event of an accident. Whether or not you have a claim, you will always have a premium to account for.

Policies are typically contracted for six-month increments, although some carriers do go a full year. Your premium can be paid monthly or all at once with a paid in full discount.

There are a number of factors that determine your insurance costs. A few of them include the number of family members on the policy, the market value of your used or new car and any traffic violations connected to your driver’s license. We’ll go over all that a little later.

Claim

A claim is an official request for your insurance carrier to pay for a loss. Claims come in all shapes and sizes. A smaller claim might be fixing a chip on your windshield, while a larger claim could be covering the cost of a multi-car accident.

While not all claims are created equally, there is one universal truth: The more claims you have, the higher you can expect your premium to be. And the harder it will be for an insurer to want to keep you as an insured. Yes–insurance companies can and do decline coverage to high-risk drivers.

Deductible

A deductible is your portion of the cost of your claim, on top of your normal premium. Your insurance carrier will not offer any financial help to your problem until your deductible has been met. And unlike health insurance, your auto deductible starts new with each claim.

Luckily, you get to choose your deductible amount. But keep in mind that deductibles play a big role in determining your premium. Higher deductibles (or a higher dollar amount you pay with each claim) coincide with lower premiums. Similarly, if you want to avoid paying anything out of pocket in the event of an accident, you should expect higher monthly premiums.

Related: How to Build Credit [For Credit Newbies]

Coverage Breakdown

Another unifying feature of auto policies is the type of coverages. While each carrier and state may differ a bit on how they package these coverages together, or sometimes even the way they describe them, here are the main coverage options you should know and understand. Let’s break down the types of coverage that go into an automobile insurance policy.

Property Damage Liability Coverage

Property damage liability coverage, or commonly referred to as just liability coverage, is often the basic, less costly policy option for drivers hoping to appease state requirements. This type of policy provides coverage for other drivers in case you hit them. Keep in mind that liability coverage does not include provision for your own vehicle in case of an at-fault accident–it only covers other vehicles.

However, that’s not to say that you don’t benefit from carrying liability insurance too. While it does not help repair your own vehicle, liability insurance protects you from liability when you damage another person’s property or injure them with your vehicle. In other words, it keeps you from having to foot the bill by yourself.

Uninsured Motorist Coverage

Uninsured motorist coverage comes in handy if someone hits you but doesn’t have insurance or if you can’t get the insurance information from them (think hit-and-run driver.)

I know, I know, most people are required to carry auto insurance. Unfortunately, that doesn’t always happen. And you would be surprised at how many times uninsured drivers cause accidents.

Underinsured Motorist Coverage

Like uninsured coverage, underinsured motorist coverage protects you from the cost of repair if the other driver’s insurance isn’t enough to cover the damage they caused you.

Sticking with our story from above, let’s say that you are law-abiding citizens, and you carry the state minimum of $25,000 in liability coverage. Unfortunately for Sue, her SUV was totaled in the accident and the cost to replace it is $40,000. Your insurance policy stops at $25,000. While she could come after you for the remaining $15,000 it will take to replace her vehicle, you may not have it.

If Sue carries proper underinsured coverage, her insurance carrier will pick up the tab for the remaining balance and everyone will heave a big sigh of relief.

Bodily Injury Liability

Bodily injury liability will kick in to help passengers in other vehicles in case you cause an accident. So in our example above, bodily injury coverage would be the portion of your insurance to cover any medical bills that Harry, Sue and Sue’s friends incur due to the accident.

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The Full Coverage Team

The following options are usually paired together to build a full-coverage policy. They go a step beyond state requirements to give you awesome protection without any gaps.

Collision Coverage

Collision insurance takes care of your car’s damage that is caused by a collision with another vehicle. Unlike liability coverage, your collision coverage will kick in even if you are the one to cause the accident.

This type of coverage can be pretty wonderful–especially if you drive a higher value vehicle. If you are worried about your budget, it’s easy to change your monthly premium based on the collision deductible you choose.

A standard collision deductible is $500, meaning in case of an accident, you would pay $500 before your insurance policy kicks in. But to lower your monthly premium, you could increase this coverage’s deductible to $1,000 or even $2,000.

Comprehensive Coverage

Comprehensive insurance coverage protects you when there is damage to your vehicle that is not caused by a collision. While it sounds a little odd, it is actually pretty common. Think vandalism, broken windshield or damage from hail.

Because these are much more common occurrences than accidents (and generally cost less to repair), typical deductibles for comprehensive coverage vary from $0 to $200.

Medical Payments Coverage

Similar to bodily injury liability, medical payments handle the injuries caused by accident. Unlike bodily injury, which covers the injuries for other drivers and passengers, medical payments cover your medical expenses in case you end up in the hospital.

And although no one likes to think about it, this coverage may come in handy if your loved ones have to tackle funeral expenses as a result of the accident.

Roadside Assistance | Rental & Towing

Roadside assistance is everyone’s favorite coverage. Whether you locked your keys in the car right after you did your entire month’s worth of grocery shopping (speaking from experience) or you ran out of gas in the middle of nowhere, we all want someone to call and come help us.

In those moments, you will be very glad you paid the extra money for some roadside assistance. And as a bonus, most policies offer roadside for just a few extra dollars a month.

Rental reimbursement is sometimes thrown into the same category as roadside, so we are including it here. Rental car reimbursement is just that–it covers the cost of a rental vehicle if yours becomes undrivable.

Some carriers automatically incorporate roadside and rental vehicle reimbursement onto full-coverage policies. Others still require you to add it separately. These are great things to chat with your agent about to make sure there are no unfortunate surprises in an already stressful situation.

Paul Corazza, Executive Director, and a licensed Real Estate Agent at Independent Property Group recommends considering Gap insurance. Corazza adds, “As a protection for your vehicle, car dealers and lenders provide assured auto protection insurance. It is offered to you in order to close the financial gap between what your loan balance is and what your insurance provider estimates your automobile is worth.”

“If your automobile is totaled in an accident, regardless of who was at blame, you may be confident that you won’t owe anything if your insurance provider determines that it is worth less than what you owe, Corazza continues”

Okay, but How Much Does it Cost?

I’m sure by now you are wondering, “Okay, but how much does it all cost?”

It’s a fair question. And also nearly impossible to answer.

Your insurance costs are determined by your insurance rate and the coverages you carry.

Since we already covered most of the coverage options, this section is designed to help you better understand your insurance rate and give you some tips on snagging a better premium.

1. Driving Record. This is pretty common knowledge, but one of the biggest factors that determine your rate is your driving record. And since your record is tied with your driver’s license number (not your license plate), you are stuck with it. But not forever.
   Usually, traffic and moving violations stop impacting your insurance premiums after a set amount of time. Check with your local agent to get a find out that magic number in your state.
2. Insurance Claims. Much like your driving record, if you have quite a few claims on your record, your insurance carrier will view you as a higher risk driver and bump up your insurance rate. And also like your driving record, your insurance claims go into a universal database that all insurers can access. So switching companies post-claim isn’t going to do you any good.
3. Demographics. Like it or not, your age, marital status and gender all affect your rate and can result in higher premiums.
4. Type of Car. Your car type also impacts your insurance rate. Your insurer will pay attention to the cost of replacing the vehicle (more valuable car = higher rate).
   Keep in mind that if you have a car loan, your lender usually gets a say in the kind and amount of coverage you have to carry.

Did someone say discount?

Luckily, most insurance carriers offer a variety of discounts (like the safe driver, good student and defensive driving course discount) to help keep their prices competitive.

And many offer a small incentive if your vehicle has airbags and an anti-theft device.

You can also save some cash on your auto policy by bundling it with other policies like homeowners, renters or life insurance policy.

Finally, some companies even offer discounts based on the way you pay. For example, paying via an automatic bank draft and signing up for estatements will save you processing fees and may also save you the fee to generate your monthly invoices.

Related: 20 Military Discounts All Veterans and Active Duty Military Members have Earned

Get a Good Agent

If all this insurance talk seems a little overwhelming, don’t worry. The world of insurance is pretty overwhelming. In addition to each state having its own requirements, each insurance company has their own tendencies and rules to abide by.

It’s a lot.

The best thing you can do to snag the best auto policy for your situation is to partner with an insurance agent you trust. Your insurance agent will be there to answer all your questions, help you file claims, and offer some tried & true advice.

Insurance agents offer great advice and make a world of difference in the event of a claim, but your insurance policy is really up to you at the end of the day.

Remember, knowledge is power. And now that you know a little more about auto insurance and are an educated policyholder, you are one step closer to being in control of your coverage and making it work for you.‍

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