Excited about your car insurance? As soon as you received your policy, you read it from cover to cover, right? Truth is, most people don’t ever bother to read their auto insurance policy. They’ll glance at the coverage summary, put the proof of insurance in the glove compartment and then forget about it.
And that’s fine, if you don’t ever have a claim. When that happens, the last thing you want is to learn your policy is missing a critical piece of coverage. The information within your policy can be a bit daunting. Start by mastering these 10 important concepts, and you’ll find it a lot easier to understand your auto policy.
1. Bodily injury (BI)
Bodily injury covers you if you injure or kill someone with your car. BI liability will pay for medical expenses and your defense costs, as well as any settlements or lost wages incurred by the injured party.
Collision coverage pays for repairs to your car if it is damaged during a collision with an object or another vehicle. It is not mandatory, though your lender will require it if you finance or lease your car. The amount of coverage you get is based on the current value of your car. Collision insurance may not make sense if your car is an older model and fully paid for.
Comprehensive insurance covers every other damage to your vehicle not covered by collision. You’ll be covered if your car is damaged by hail, you collide with a deer, your windshield is cracked by a couple of unruly teenagers or your car is taken for a joyride.
A deductible is the amount of money you’ll have to pay out of pocket before your coverage kicks in. Not every policy has a deductible — only collision and comprehensive (basically, if your car is damaged or stolen). Collision and comprehensive coverage costs can be controlled by raising your deductibles.
Depreciation is the estimated loss of value of your vehicle. A car loses upwards of 25% of its value in the first year alone. Insurers use this during a claim to establish the amount that will be paid out if you don’t have guaranteed asset protection (GAP) insurance to make up for depreciation.
GAP is optional insurance that covers the difference between what the value of your loan or lease is and what the insurance company is willing to pay when factoring in depreciation.
7. Medical payment
Medical payment or personal injury protection (the terms are used interchangeably) can cover your injuries, those of your passengers and, depending on the policy, even pedestrians. The coverage can be either optional or mandatory; it’s often required in states with no-fault insurance.
Certain states have no-fault laws. The idea behind this system is that drivers (and their insurance providers) can’t sue other drivers (or their insurance providers) for most injuries sustained. This allows the companies to bring down their claim costs because of the drastic reduction in lawsuits. In a no-fault system, your own insurer pays your claim, regardless of which driver is at fault.
9. Property damage
Property damage covers any damages you may cause with your vehicle to someone else’s private property. Even though it's mandatory in most states, the minimum requirement is often low and may not be enough to cover all damages.
Uninsured motorist coverage protects you if you're in an accident with an at-fault driver who doesn't carry liability insurance. Underinsured motorist coverage, on the other hand, steps in when you're in an accident with an at-fault driver whose liability limits are too low to cover the damage or medical expenses. Uninsured coverage also protects you from any injuries you or a passenger sustains by a hit-and-run driver.
Once you master insurance vocabulary, you can truly begin to understand how insurance works. These 10 terms are only the beginning, but understanding them can help you make more informed choices on selecting the best coverage for your needs. Be sure to call your insurance professional if you have any questions about your policy or want to reevaluate your coverage.