Car Insurance: Understanding Your Coverage Options
Some car insurance policies are fairly bare bones, while others offer protection for nearly every scenario of loss or damage. With a number of auto insurance companies, coverage types, and policies to choose from, where do you even begin? Below, we discuss the basics of car insurance coverage, including what's required by law, what coverage you may want to consider, and the importance of understanding deductibles.
Car Insurance Basics
When you purchase an insurance policy, you buy protection that will absorb some or all of your damage costs.
If you have a deductible, it means you agree to pay a share of the damage cost out of pocket. This lowers your insurance cost upfront, but it also means you must pay more when damage occurs.
Once you've paid your deductible, your coverage depends on limits (i.e., how much is covered in total per accident) and types of losses. Every policy has a limit; no insurer provides unlimited loss coverage. The total ceiling amount will vary depending on the plan you buy. The types of losses are spelled out in the agreement and cover various types of damage that could occur.
Your premium is the amount you pay each month to keep your coverage in place and active. Miss a payment, and the insurer can choose to cancel your policy or charge a late fee.
High vs. Low Deductible
Why does the deductible matter? Because insurance providers offset their risk with premiums. The longer a customer pays, the more likely it is that a claim can be paid back with recovered premium payments. However, when a customer agrees to bear some of the cost of a claim, this also reduces the provider's risk.
Simply put, a higher deductible will likely mean lower monthly premiums. A lower deductible will typically keep monthly premiums higher. Just remember, when a damaging event does occur, you'll be on the hook for that deductible amount before your insurance provider kicks in its share.
Types of Car Insurance Coverage
The type of coverage you choose will impact what damage is protected and how much you can expect to pay each month.
Basic coverage typically encompasses your state's minimum requirements for all drivers in terms of insurance protection.
A common example of basic coverage is liability insurance. If you are determined to be at fault in an accident, liability insurance will pay for the damage to the other cover/driver. In many states, this is the only type of insurance required. However, it does not cover any damage to your own vehicle.
Collision covers damage to your own vehicle in the event of an accident, regardless of who is at fault. However, you will likely need to pay a deductible to cover part of the cost of the damages before your insurance company covers the rest.
Extended coverage can include a variety of coverage types you pick and choose to add to your insurance policy. Some examples of extended or premium coverage add-ons include:
- Gap coverage: Provides a value return between the market value of your car and what you originally paid for the vehicle.
- Vandalism protection: Protects your vehicle from intentional damage.
- Powertrain coverage: Protects the expensive inner workings of your vehicle, including the engine, driveshaft, transmission, and so on. Many new car buyers find this protection built into their car purchase from a dealer.
- Extended coverage: Provides additional coverage for areas already covered by a car warranty plan for an extended period of time (beyond what the original warranty was set for).
Comprehensive or Premium Coverage
Just as it sounds, comprehensive coverage covers all major types of losses, both for you and any other parties you damage. These plans typically provide additional benefits for theft, travel problems, roadside assistance, and more. The cost tends to be higher to account for all the additional coverage, but it can be lowered with a higher deductible and a good driving record.
It can be tough to determine what type of car insurance coverage you may need. Review your options with your insurance agent, run through "what if" scenarios to determine how much and when you'd be liable to pay, and assess your monthly premium.
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