Understanding Your Auto Insurance Policy

It’s one of those things that are like death and taxes – insurance. It is the protection against the unknown, and represents one of the monthly bills that many of us pay. Yet for many of us we don’t really understand what we are paying for. Our auto insurance policy can be made up of several types of coverages, deductibles and amendments. What does it all mean? And most importantly, do we need a particular coverage?

Everyone who owns a car and drives on public roads must carry liability insurance. This is considered the minimum level of insurance and each state has its own definition of what the minimum amount is. This can be considered your base insurance. However, by itself liability does not offer you any protection other than if you are in an at-fault accident your insurance company will pay (up to your limits) for damages and medical treatment for the other party. Your injuries and damage to your car is up to you, liability insurance does not provide for any coverage for your damages.

The next “step up” in auto insurance coverages is collision coverage. This is similar to liability insurance, but it covers your damages and losses should you be in involved in an at-fault accident. It will pay for repairs to your car (or the market value) and any medical needs up to the limits of the policy.

Following that is comprehensive coverage. This can be considered the gold level of insurance as it covers damages you may incur that are not your fault but are caused by an unknown party or “Act of God”. Examples would include damage your car would get if someone would attempt to steal it or damage incurred as a result of a deer dashing out in front of you. Comprehensive insurance does not count against you when you make a claim on it, unlike liability and collision. After all, it was not your fault the accident occurred.

Both collision and comprehensive insurance come with deductibles. You can think of a deductible as “how much risk will I take should an accident occur?” The higher your deductible, the more you save on your insurance. The savings can be significant; bumping a deductible from $250 up to $500 can cut hundreds off your yearly auto insurance bill. Smart consumers will have a savings account setup to cover any deductibles on their insurance so they can save the maximum amount of money possible on their auto insurance policies.

As a rule of thumb most people only add collision and comprehensive insurance to their auto policy as long as the total cost of the policy in one year’s time does not exceed 10-15% of the car value. Remember, if you have an older car you may end up paying more for these coverages than you will ever back out of the policy should an accident occur – and you can bet your insurance company won’t tell you that fact!

After the accident coverages there are also endorsements that can you add to the policy. Examples of these are emergency roadside service and rental car reimbursements. In almost 100% of the cases these endorsements are not necessary and a waste of money. Many times people already have a service such as AAA or a credit card that will cover ERS service, and just how many times do you plan to have to rent a car because your car is being repaired from an accident where you were at-fault? Keep your money on these endorsements, they aren’t worth it.