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| The Basics | Your guide to car-insurance speak
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Can't tell PIP from UIM or UM coverage? Here's a quick guide to some common car insurance terms and what they mean for your policy.
By Insure.com
An auto insurance policy is actually a package of different types of coverage. Most states require you to purchase a minimum amount of some of these. But if you're interested in protecting yourself from a lawsuit or from wicked repair bills, it makes sense to buy more than what's required.
Liability insurance
Liability coverage is the foundation of any auto insurance policy, and is required in most states. If you are at fault in an accident, your liability insurance will pay for the bodily injury and property damage expenses caused to third parties in the accident, including legal bills. Bodily injury expenses include medical bills and lost wages. Property damage expenses pay for the repair or replacement of things you wrecked. The third party may also decide to sue you in order to collect "pain and suffering" damages.
Remember, if you cause a serious accident, minimum insurance may not cover you adequately. That's why it's a good idea to buy more than what your state requires.
Collision and comprehensive coverage
Collision
If you cause an accident, collision coverage will pay to repair your vehicle. You usually can't collect any more than the actual cash value of your car, which is not the same as the car's replacement cost. Collision coverage is normally the most expensive component of auto insurance. By choosing a higher deductible, say $250 or even $500, you can keep your premium costs down. However, keep in mind that you must pay the amount of your deductible before the insurance company kicks in any money after an accident.
Insurance companies often will "total" your car if the repairs the company must pay exceed what the car is worth.
Comprehensive
Comprehensive coverage will pay for damages to your car that weren't caused by an auto accident; damages from theft, fire, vandalism, natural disasters, or hitting a deer all qualify. Comprehensive coverage also comes with a deductible and your insurer will only pay as much as the car was worth when it got wrecked.
Because insurance companies normally will not pay you more than your car's book value, it's helpful if you have a rough idea of this amount. Most insurance adjusters use the Kelley Blue Book. The National Automobile Dealers Association also publishes the Official Used Car Guide, which is updated each month. If your car is worth less than what you're paying for the coverage, you're better off not having it.
Medical payments, PIP and no-fault coverage
Medical payments coverage will pay for your and your passengers' medical expenses after an accident. These expenses can arise from accidents while you're driving your car or someone else's car (with their permission) and injuries you or your family members incur when you're pedestrians. The coverage will pay regardless of who is at fault, but if someone else is liable, your insurer may seek to recoup the expenses from them.
Personal injury protection (PIP) and broader "no-fault" coverage are expanded forms of medical payments protection that may be required in your state. Some states have optional PIP or no-fault coverage. Expanded features include lost wages and payments for childcare.
Uninsured, underinsured motorists
Uninsured motorists (UM) coverage pays for your injuries if you're struck by a hit-and-run driver or someone who doesn't have auto insurance. It is required in many states.
Underinsured motorists (UIM) coverage will pay out if the driver who hit you causes more damage than his or her liability coverage can cover. In some states, UM or UIM coverage will also pay for property damages.
Add-on features
Several supplemental types of coverage are available, either as separate premium items or included in augmented policies.
- Rental reimbursement, a common add-on, covers vehicle rentals required because your car is damaged or stolen.
- Coverage for towing and labor charges in case of a breakdown is also common.
- Auto replacement coverage guarantees your car will be completely repaired or replaced, even if these costs exceed its depreciated value.
There are also some great ways to save so that you can increase your coverage and still keep your automobile insurance premiums within your budget:
- Driver's ed and burglar alarms. Consider installing an anti-theft device and buying cars with passive restraints such as airbags. Take a driver's education course. Driver's education is especially important for teenagers or adults just learning to drive because taking (and passing) the course will keep the premiums down. Many states now require teenagers to take driver's education before they can get a license.
- Buy a low-theft car. Check out what your insurance premiums would be for different models of cars you're considering before you make a decision on what to buy. If you buy a car that's considered a high theft risk, your premiums will be much higher than if you settle on models less likely to be stolen. Your insurance agent or company or your state insurance department can give you a list of vehicles on the "high theft list."
Copyright insure.com. All rights reserved.
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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