Next to your home and your office, your car is probably where you spend the greatest amount of time—and it’s likely one of the things you pour the most money into.
Between the costs of routine maintenance, repairs and trips to the pump (is it time to buy an electric car yet?), being a car owner requires an investment—not the least of which is the auto insurance you’re required to buy.
But not all policies are created equal—and, put simply, “Consumers need to understand the terminology of car insurance to shop for and compare policies and coverage,” says Jeff Blyskal, auto insurance expert and senior editor at Consumer Reports.
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Although we can’t choose your auto insurance for you, we can help you learn some of the lingo you’ll come across during your search, in hopes that you’ll be able to understand what types of coverage exist and make the most-informed decision.
You’re probably already familiar with this term because it’s essentially the same concept as the deductible you pay for your health insurance. This is the dollar amount you pay out of pocket in the event of loss or damage to your car before your insurance plan kicks in to cover the remaining expenses.
For example, let’s say your deductible is $1,000. If you get rear-ended and repairs cost $5,000, you’d fork over the first $1,000 and the insurance company would cover the remaining $4,000.
Some plans offer a $0 deductible. But there’s typically a catch: the lower your deductible, the higher your premium, which is the payment you make on a regular basis to keep your insurance coverage active (more on that below).
Therefore, upping your deductible can help you save money (assuming you don’t get into an accident). One 2016 report by insuranceQuotes.com found that Americans save an average of 9% on their car insurance premium by increasing their deductible from $500 to $1,000; raising the deductible to $2,000 saves drivers an average of 15% nationwide.
The premium is the amount of money you pay to the insurance company to maintain active coverage. Premiums vary in price based on a number of factors, including your age, sex, years of driving experience, driving record and the type of car you have. (Suffice it to say, a new Maserati would cost more to insure than an old clunker.) Some companies may even take into account your credit score and occupation, among other things.
Moreover, where you live and where you park your car overnight can significantly affect your premium. Urban areas typically have higher rates of accidents, theft and vandalism, often resulting in higher premiums.
Lastly, your premium can also reflect how much coverage your policy provides, and you can choose to pay a higher premium in order to get greater coverage.
3. Collision Coverage
If your vehicle is damaged or destroyed in an accident, collision coverage typically pays to fix or replace it, whether the damage was, say, sustained by hitting another car or by hydroplaning into something stationary, such as a streetlight or tree. Collision coverage also offers protection if another driver causes damage to your vehicle, possibly including hit-and-run accidents or damage caused by a driver with no insurance.
4. Comprehensive Coverage
This term is a bit of a misnomer, given that comprehensive coverage doesn’t actually mean complete coverage. Rather, comprehensive coverage insures your vehicle if it sustains damage due to an event other than a collision. This can include natural disasters, such as a fire, flood, or hailstorm or damage resulting from theft, vandalism—and even a deer in headlights.
5. Liability Coverage
A certain level of liability coverage is mandatory in most states, and for good reason: If you get into an accident and another person is injured or their property is damaged, liability coverage will help cover at least some of the resulting expenses.
There are two main types of liability coverage: bodily injury liability and property damage liability.
If you’re found at fault of the crash, bodily injury liability coverage may pay for the other person’s medical costs, recovery costs and loss of income, as well as your legal defense if you’re sued. However, insurance companies may limit how much they’re responsible to pay if you’re found liable.
Property damage liability, meanwhile, will help cover the costs of damage that you cause to another person’s property, such as whether you hit their car, crash into their fence or run into their front yard. States generally require drivers to purchase a specified minimum amount of property-damage coverage.
When shopping for policies, you may see liability coverage limits described something like this: $50,000/$200,000/$100,000. The first number describes how much coverage the policy would provide per person for bodily injuries; the second describes total bodily injury coverage per accident; and the third represents how much property-damage coverage you’d get.
6. Personal Injury Protection
With personal injury protection (PIP) coverage, the insurance company pays—within specified limits—the medical, hospital and funeral expenses of the insured person, wages lost due to injuries, people in the insured vehicle and pedestrians struck by the insured vehicle. While it’s only available in certain states, some states require it.
PIP is often referred to as "no-fault" coverage because it pays for the medical expenses of the policyholder and others in the policyholder’s car regardless of who caused the accident. This is a selling point for many drivers, since they don’t have to wait for the insurance company to determine blame in order to be compensated.
PIP limits work differently than they do with bodily injury liability coverage in that they usually pay for a percentage of the expenses that result from the accident; some policies cover up to 80% of the costs. But if your household already has health insurance with excellent post-accident benefits, you may choose to opt for a plan with lower PIP limits.
7. Occasional Driver
If you allow someone like a roommate, spouse or child to sometimes drive your car, you’ll want to list the person as an occasional driver on your policy.
Caveat: Insurance companies have the ability to pick and choose to whom they will extend coverage. Some base their decision on how frequently the person uses the car (e.g., 25% of the time), while others look at the total number of miles the person drives the vehicle (e.g., 25% of the annual mileage).
One of the more common situations in which you’d add an occasional driver to your policy is if you had a teenager who sometimes borrows your car. This would likely result in a lower premium than if you were to list your kid as a primary driver—but would still likely raise your rates overall. Your child can, however, help minimize the costs if she does well in school and your insurance company offers a “good student discount.”
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.