Understanding auto insurance—the basics
Car insurance is a contract between you and an insurance company that protects you from financial loss in the event of an accident or theft. In return for paying the premium, the insurance company undertakes to cover your losses as stated in your contract.
Auto insurance provides coverage for:
- Property – such as damage to or theft of your car
- Liability – your legal responsibility to others for bodily injury or property damage
- Medical – the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses
Basic personal auto insurance is mandated by most U.S. states, and laws vary. Auto insurance coverages are priced individually (a la carte) to let you customize coverage amounts to suit your exact needs and budget.
Policies are generally issued for six-month or one-year timeframes and are renewable. The insurance company sends a notice when it’s time to renew the policy and pay your premium.
Who is covered by my auto insurance—and under what circumstances?
Your car insurance will cover you and other family members in your insurance, or you will drive your car like someone else’s car (with their permission). Your insurance also provides coverage if someone does not drive your car with your permission to your insurance.
Your car policy only applies to personal driving, whether you go to work, walk or travel. It offers no coverage if you use your car for commercial purposes – for example, you supply pizza.
Car insurance also does not cover cases where you use your car to transport other people via a carpooling service, such as Uber or Lyft. However, some car insurers now offer additional insurance products (at an additional cost) that extend coverage to car owners who provide ride-on parts.
Is auto insurance coverage mandatory?
Auto insurance requirements vary from state to state. If you’re financing a car, your lender may also have its own requirements. Nearly every state requires car owners to carry:
- Personal Injury Response – covers costs associated with injury or death caused by you or another driver while driving your car.
- Property Liability – to pay others for damage caused by you or another driver of your vehicle to another vehicle or other property, such as a gate, building or utility hall.
In addition, many states require you to bring:
- Medical Compensation as Personal Injury Protection (PIP), which provides medical expenses for injuries to you or your passengers. It will also cover lost wages and other related expenses.
- An uninsured motorist will pay you if the accident is caused by an uninsured driver – or in the event of a accident. You can also shop under motor insurance to cover the cost if the other driver does not have sufficient coverage to cover the cost of a serious accident.
Although PIP and uninsured motor insurance are optional in your state, consider adding them to your policy for greater financial protection.
What other types of auto insurance coverage are typical?
While most basic, legally mandated auto insurance covers the damage your car causes, it does notcover 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—e.g., a tree or guardrail—when you’re at fault. While collision coverage will not reimburse you for mechanical failure or normal wear-and-tear on your car, it will cover damage from potholes or from 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 getting hit by an asteroid!
- Glass Coverage provides coverage from windshield damage, which is common. Some auto policies include no-deductible glass coverage, which also includes side windows, rear windows and glass sunroofs. Or you can buy supplemental glass coverage.
What is gap insurance and do I need it?
Collision and comprehensive only cover the market value of your car, not what you paid for it—and new cars depreciate quickly. If your car is totaled or stolen, there may be a “gap” between what you owe on the vehicle and your insurance coverage. To cover this, you may want to look into purchasing gap insurance to pay the difference. Note that for leased vehicles, gap coverage is usually rolled into your lease payments.