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Auto Insurance 101: Your Policy and Its Components

Auto insurance can make up a significant chunk of your household budget. You might feel challenged in finding the best coverage possible for your money while balancing value with affordability. Thankfully, the vast range of options on the market today makes it easier to purchase budget-friendly insurance that’s tailored to offer the protection you need. Before you begin shopping for indemnity products, it’s helpful to understand the most common components that you’ll find in most automobile policies.

Understanding Basic Auto Insurance Options

In Investopedia’s guide to car insurance, contributor Lisa Smith explained that policies can be comprised of three major components:

  • Liability, which typically handles third-party personal injury, death-related and property damage claims from an automobile accident
  • Collision, used to pay for repairs to your vehicle from an accident
  • Comprehensive, which kicks in and covers automobile damage from theft, vandalism, fire, water and most weather-related incidents

These three combined usually make up a “full coverage” package. If you’re financing or leasing a vehicle, your lender or leasing agency will insist that you carry full coverage auto insurance. That’s because the bank or leasing firm still technically owns the automobile while you’re still making payments, and this requirement will be written into their loan or lease contract. Nevertheless, drivers who have already paid off their loans or have vehicles with a blue book value below $5,000 may be able to forgo comprehensive and collision.

Other Useful Add-Ons for Your Policy

In addition to some basic insurance components, you may opt to include other indemnity protection products onto your policy:

  • Medical payments and personal injury protection, which reimburses for your and your passengers’ medical bills
  • Towing coverage, which pays for a towing company to transport your vehicle if it’s rendered inoperable from an accident
  • Rental reimbursement coverage, which reimburses you for renting another automobile while yours is being repaired

While these are not mandatory, they can be useful to add depending on your individual situation. If you don’t already have roadside assistance, including towing in your package may be a smart idea. Also, keep in mind that rental reimbursement only kicks in when your own insurer is paying for repairs. If the other driver’s company is footing the bill, you may be reliant on them to pay for the cost of your transportation. However, you might have to pony up for a rental vehicle on your own if the faulty party hasn’t yet been determined for your claim.

What About Uninsured or Underinsured Motorist Coverage?

Uninsured and underinsured motorist coverage handles medical expenses and property damage should you be involved in a collision with an uninsured or underinsured driver. While this type of coverage is usually considered a non-mandatory addition, it is strongly recommended for nearly every driver. The Insurance Information Institute reported that uninsured motorists make up 12.6 percent of drivers on the road, while 11.9 percent of motorists in the District of Columbia do not have auto coverage. Moreover, unpaid damage caused by uninsured drivers totals around $28 billion dollars annually in the United States. With statistics like these, you can’t afford to forgo this protection.

Know Your Options

While your automobile insurance policy is a sophisticated piece of protection with many components, it doesn’t take a rocket scientist to comprehend their essential benefits. You’ll need liability coverage, along with comprehensive and collision if you’re financing or leasing your car. While towing and rental are useful additions for some drivers, nearly everyone should include uninsured/underinsured motorist coverage to shield you against unexpected losses. The age of your vehicles, your financial situation, driving habits and state-mandated insurance requirements are all important factors that determine the package you’ll buy. Your local insurance agent can guide you to an ideal coverage solution.

 

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