What You Need to Know About Car Insurance – Terminology Made Easy
We're told to shop for car insurance, but how do you know you're comparing apples to apples? Our guide with the key terms you need to know can help you find the right policy.
Tabatha Chovanetz
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Car insurance shopping can be confusing.
We are told to shop for car insurance to make sure we are getting the best rates and not overpaying. But comparing policies side by side can be … not that easy. How do you know what you need? And how easy is it to tell between different types of car insurance? Understanding insurance lingo should not feel like a required course in a foreign language. And while car insurance is required by law, and necessary to protect yourself, your car and your passengers, many people don’t understand all the provisions it provides.
Knowing a few key terms is the key to getting the right policy. So we compiled the most critical terminology so that you know exactly what is covered, what is not and what you need based on your situation.
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Limited liability insurance means you’re covered if you’re at fault in an accident. Photo by Matt C on Unsplash
Limited Liability Insurance: Least Expensive, Least Coverage
Limited Liability Insurance is the least expensive option and the most common type of insurance to have. Limited liability insurance covers the cost of repairs and/or bodily injury for the other driver in an accident in which you are responsible.
Having this type of insurance means that you do not have to pay for the damage done to their car or pay for any injuries they may have sustained. However, any injuries you have suffered are not covered under this insurance and you will have to pay out of pocket.
If you are a cautious driver and you have not had many, if any previous accidents, this coverage may be the best option for you. Also, your own health insurance may cover injuries sustained in an accident, but your health insurer will look closely at all your coverage before writing a check, your deductibles may be higher and your health plan may not cover all treatments. And if you’re not covered, it only takes one accident to wreak havoc on your bank account.
Limited liability insurance is for those who have a clean driving record and no lien holder.
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Collision insurance will help to cover your repair costs, whether it’s a tree or another vehicle. Photo by Julie Tupas on Unsplash
Collision Insurance: If You Have a Loan, You Need This
Collision insurance coverage will help pay for repairs on your car (or even replace it if necessary) if it has been damaged in an accident. The collision could involve another car, a tree, a telephone pole, or other objects. This type of coverage is not required by law, but your lender may require it if you owe a balance on your car. If you do not owe a balance, you still may consider purchasing it if you cannot afford to replace your car in the event of an accident, or if you want to protect your savings account from being wiped out. This is also a good choice if you travel in high-traffic areas where an accident is more likely to occur.
When is it ok to opt out of collision insurance? If you rarely drive your car, if your car is paid for, or if you could easily pay for damages out of pocket, then it may be worth the savings.
Related: What to do if you have an accident
Comprehensive insurance coverage will come in handy for non-collision incidents, including flood damage. Photo by Wes Warren on Unsplash
Comprehensive Insurance: When Disaster Strikes
Comprehensive insurance is optional and pays for damage to your car by non-collision events beyond your control. These include falling objects, theft, vandalism, flood damage, fire damage, animal damage (hitting a deer for example), glass damage, or any damage from a natural disaster. The amount you will be paid by having comprehensive insurance is usually the actual cash value of your car prior to the accident.
Things to consider regarding comprehensive insurance:
- You likely will be required to purchase collision insurance when you purchase comprehensive, as most insurance companies do not sell comprehensive policies alone
- Comprehensive claims are always filed with your own insurance company
- You are still required to pay a deductible when you file a comprehensive claim
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The amount of your deductible varies depending on the insurance premium you choose. Photo by Scott Graham on Unsplash
Deductible…? Yes, You Have to Pay
A deductible is the amount of money that you are out of pocket when an accident occurs. It is the amount that you pay before your insurance company picks up the rest. For example, if you file a claim for $2000 worth of damage, and you have a $500 deductible, then your insurance company will cover the remaining $1500.
Here are a few takeaways regarding deductibles:
- The average deductible is $500
- The higher your deductible is, the lower your insurance premium
- Most drivers will pay a deductible even when they are not at fault, but there are a few exceptions to this. If you are at fault, you cannot avoid paying your deductible
- Deductible amounts are chosen and agreed upon by you and the insurance company when you are purchasing a policy
- Deductibles work the same for car insurance as they do in health and homeowners insurance. It does not matter what insurance company you go with, deductibles are handled the same way across the board
Personal injury protection will cover those of you in the car if you have an accident. Photo by Andraz Lazic on Unsplash
Personal Injury Protection (PIP)
Personal Injury Protection (PIP) is car insurance that covers medical expenses, lost wages, or even funeral costs. Personal injury protection covers both you and your passengers if you are in an accident, regardless of who is at fault.
PIP does not cover the damage to your vehicle, property, or injuries to other people outside of your car.
It is important to understand car insurance terminology when making insurance purchases so that you know exactly what you are getting for your money, and for comparing plans. If you have questions, reach out to your insurance agent or the company; they should be able to explain these terms in extensive detail. Knowing these things will help you to panic less and better understand what to do if you do get into an accident.
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