Understanding Car Insurance: A Comprehensive Guide

Car insurance is a legal requirement in almost every state, but the types of coverage you need can vary significantly depending on where you live. The minimum coverage required by your state may not be sufficient to protect you in the event of a serious accident. To ensure you get the best deal on auto insurance while meeting your needs, it’s crucial to understand the different types of coverage available and how they work. Here, we break down 18 essential car insurance terms to help you make an informed decision when shopping for a policy.

Collision Coverage

Collision coverage pays for damage to your vehicle after an at-fault accident with another car or a crash with a stationary object, such as a fence or lamppost. It also covers damage caused by potholes or vehicle rollovers.

Comprehensive Coverage

Comprehensive coverage pays for damage caused by something other than a crash, such as a falling object, severe weather, theft, vandalism, and more.

Credit-Based Insurance Score

Credit-based insurance scores help insurance companies predict the likelihood that a policyholder will file a claim. Insurers calculate scores using information from consumer credit reports. However, some states limit the use of these scores in determining premiums.

Deductible

A car insurance deductible is the amount you must pay before the insurance company will cover your claim. Deductibles don’t apply to every type of car insurance coverage. Collision, comprehensive, uninsured/underinsured motorist, and personal injury protection coverage typically have deductibles. Higher deductibles usually result in lower premiums and vice versa.

Depreciated Value

The depreciated value of a car is its current market value or how much it’s worth today. It’s not what you paid for the vehicle or how much you still owe on your auto loan or lease. If you have comprehensive and collision coverage and your vehicle is declared a total loss, the insurer will reimburse you for the value of the vehicle at the time the loss occurred.

Excluded Driver

When you purchase auto insurance, the provider generally includes everyone in your household who is old enough to drive on the policy. However, there may be times when you don’t want your insurance policy to include everyone. An excluded driver is someone who lives with you that you ask the insurance company not to insure. If they get behind the wheel, your insurance company likely won’t cover any damage they cause.

Full Coverage

The term “full coverage” can be misleading because no auto insurance policy can cover every potential mishap that may occur. However, it’s a common term many people use to refer to a combination of liability, collision, and comprehensive coverage. Lenders typically require drivers with an auto loan or lease to maintain full coverage.

Grace Period

A car insurance grace period is a window of time after your payment is due when the insurer keeps your policy in place even though you haven’t made your payment. The grace period for a car insurance policy typically ranges from 10 to 20 days, depending on your state and the insurer.

Guaranteed Asset Protection (Gap Insurance)

New cars depreciate quickly, which could leave you on the hook for out-of-pocket expenses if your vehicle is totaled soon after you purchase it. Gap insurance helps protect you if you owe more than your car is worth by covering the difference between the depreciated value of your vehicle and the balance on your auto loan or lease.

Liability Coverage

Nearly every state in the country requires drivers to maintain liability coverage to help protect other drivers. Liability covers injuries and damage you cause to other people and their property when you’re behind the wheel.

Medical Payments Coverage

Some states require medical payments coverage, and in others, it’s an optional coverage you may add to your auto insurance policy. It helps pay for your and your passengers’ medical bills after an accident, no matter who is at fault. Medical payments coverage isn’t available in all states.

Non-Renewal

A non-renewal occurs when your insurance company chooses not to renew your coverage at the end of the policy term. Non-renewals can occur for many reasons, including an insurer’s decision to no longer offer car insurance in a particular area or because the insured has too many at-fault accidents, speeding tickets, or other moving violations on their record.

Personal Injury Protection

Like medical payment coverage, personal injury protection (PIP) helps cover your and your passengers’ medical bills after an accident, regardless of who is at fault. However, PIP may also cover lost wages, funeral costs, and services you can’t perform while recovering, such as child care or house cleaning. PIP is required in some states and optional in others, but it isn’t available everywhere.

Policy Limit

Your policy limit is the maximum amount the insurance company will pay for a covered loss.

Premium

Your premium is the amount you must pay the insurance company in exchange for auto insurance coverage. You may be able to pay your premiums monthly, quarterly, semiannually, or annually, depending on the insurer. It may be cheaper overall to pay your policy’s premiums in one lump sum.

State-Minimum Insurance

The state’s minimum insurance requirement is the least amount of coverage you must purchase to drive legally in your state. It’s often insufficient to provide adequate coverage if you’re in a serious accident. You may choose to purchase optional coverage for additional protection.

Total Loss

If your vehicle sustains damage that exceeds the actual cash value of the car, the insurance company will usually declare it a total loss. Depending on the type of coverage you have, the insurer may reimburse you for the fair market value of the vehicle at the time of the loss—not the cost to repair it.

Uninsured/Underinsured Motorist Coverage

Not all drivers have car insurance, even though the law in most states requires it. Some drivers who have coverage may not have adequate policy limits to cover a claim after a serious accident. Uninsured/underinsured motorist coverage covers your injuries and vehicle damage if an uninsured or underinsured driver hits you.

The Bottom Line

Understanding standard car insurance terms can help you find a policy that meets your needs. The policy that’s best for you should combine affordability and adequate protection. Since your credit-based insurance score may affect your premium in most states, it’s a good idea to get a copy of your credit report and credit score before purchasing a policy to know where you stand. People with higher scores could qualify for lower rates.

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