They Want Me to Buy What? Understanding Car Insurance

Image Source: Wikimedia Commons

Image Source: Wikimedia Commons

The idea of having your own car was probably pretty exciting until you realized you had to pay for maintenance, gas, and car insurance. While a basic gas budget is pretty easy to calculate, trying to understand car insurance policies can be confusing. So what are you actually buying?

Automobile Liability

No matter where you go, you’re going to find that the law requires you purchase automobile liability insurance. The requirement varies depending on the state or country you’re in, but it is mandated by law. If you are found responsible for causing an accident, the liability portion of the policy will pay for the damage you cause to a person or to his property.

Medical Payments or Personal Injury Protection (PIP)

Most areas require you have one or the other (or both). Medical payments cover the medical bills you, your family members, or your passengers have as a result of an accident.

PIP does the same thing, but it also includes some extra expenses – like income continuation while you are unable to work, or childcare expenses you ended up having to pay while you recover.

Comprehensive and Collision Coverage

Comprehensive coverage pays for damages to your vehicle that happen as a result of theft, vandalism, fire, and any non-collision causes. The only “collision” covered by comprehensive is a run-in with a deer.

If you are found responsible for an accident, your liability coverage will pay for the damages you cause other people. Collision, on the other hand, will pay to repair your own car.

While you can’t buy one without the other, each piece will have separate deductibles. Carrying a lower deductible will cost you more in premium but a lower out-of-pocket cost, while a higher deductible will cost less.

While comprehensive and collision coverage is optional, there is one exception. You will be required to buy these coverage options if you are leasing or financing your purchase. The requirement will be a part of your contract with the bank.

Towing and Rental Reimbursement

Not all policies offer these coverage options and they’re usually packaged with the comprehensive and collision portions of the policy.

These options only apply to incidents related to a covered accident. You can’t use the towing portion to have your car towed if you have a general breakdown on the highway.

Gap Insurance

Gap insurance isn’t included on your standard automobile insurance policy but it is incredibly important to consider if you are leasing or financing a vehicle.

Why? Because of depreciation. The moment you drive your $25,000 car off of the dealer’s lot, it loses value. The older a car is, the less it’s worth.

The problem? The bank who lent you that $25,000 will expect full repayment of said $25,000.

So let’s say you’ve had the car for a year and it’s now worth $15,000. You still owe $20,000 on your loan. If your car is totaled, your insurance will pay your bank $15,000. Who pays the other $5,000 you still owe?

You do. Unless you have gap insurance. This is something your car dealer will likely offer you when you make your purchase.

It doesn’t matter if you’re living in California or if you’re looking for Quebec car insurance quotes. You’re going to see the same coverage options over and over again. Carefully review each part of the policy and consider each in relationship to your lifestyle and the value of your car. And when in doubt? Ask your agent for help!

 

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