If you are new to the idea of auto insurance, or if it is something you always knew you needed but never quite understood, here are some basic concepts that will help you understand the ins and outs of this important risk management tool.
Recognizing insurance as a tool to manage the risks that you take by owning a vehicle and driving down the road is the first important step. The next step is to recognize that auto insurance has two basic components that can be broken down into other facets. One of these components pays you directly when a claim occurs, and the other component pays other people when an accident occurs.
An auto insurance policy can pay you for damage to your car or for injuries to you. In order for your policy to pay you for your car when an accident happens, you must have collision coverage. This is optional, unless you have a loan on the car. If that is the case, the loan contract usually requires that you carry collision coverage. Another type of damage coverage for your car is Comprehensive coverage. This pays for things that happen to your car other than collisions like fire, theft, or hail damage.
In order for your policy to pay for injuries to you, Personal Injury Protection or PIP coverage must be on the policy. Depending on where you live, this may be required by law; this is something you should verify with your agent. PIP is an important coverage that you should carry even if you are not required to have it by law. It should be clarified here that PIP will also pay benefits to people that occupy your car in an accident, and in some cases it will pay for a pedestrian’s medical payments in the event that they are injured by your car.
This brings us to the liability section of your policy. This usually has “split limits” which means that one component of pays for property damage and one pays for injuries to others. These limits are often subject to a minimum by law, which in some cases is quite low. The property damage limit pays for damage to things that your car might hit in an accident that is your fault. This includes other cars, buildings, road signs, fences etc. The liability limit pays for all of the financial consequences resulting from your negligence in causing an injury to someone else. This will include medical bills, lost wages, and pain and suffering.
With all of the components of insurance policy discussed above, it is important to make certain that you maintain adequate limits. Your failure to do so will result in you having to fund these potential problems yourself.