Auto insurance policies consist of many types of coverage – some are required and others are voluntary. Here’s a brief look at first vs. third party coverage, liability, collision, comprehensive, uninsured, underinsured, supplemental and medical payments insurance.
- First party vs. third party coverage
Auto insurance policies cover two types of parties – first and third. First party covers injury to you and your property as well. Examples include medical expenses that you incur, damages to your vehicle and your insurance company’s duty to defend you if you are sued. Third party covers injury caused to other people that are involved in an accident, whether they are in your vehicle, in another vehicle or are pedestrians.
- Liability insurance
Liability insurance includes both bodily injury coverage for medical expenses, lost wages and property damage that covers repair or replacement of items damaged as a result of the accident. It pays for property damage and personal injury expenses of others when the accident was your fault. It also pays for your legal bills. Damage to your vehicle is covered under the collision portion of your policy (see below).Most states require a minimum amount of liability insurance; however these minimum amounts may not provide adequate protection if you are involved in an accident. Check with your state’s insurance department or your insurance agent to determine what amounts best suit your needs.
- Collision insurance
Collision insurance covers damage to your vehicle regardless of fault. Payment of collision insurance is subject to your deductible. Depending upon the seriousness of your accident, your insurance company will either 1) pay for your vehicle to be repaired* or 2) “total” your vehicle (declare it a total loss).
*Note: You can avoid paying the deductible on your policy by filing a claim with the other person’s insurance company for having your vehicle repaired.
If your insurance company decides to “total” your vehicle, it will pay you the actual cash value of the vehicle (the replacement cost less depreciation) as opposed to the replacement cost of the vehicle (what it costs to replace or repair your vehicle with materials that are of a similar type and quality without deducting for depreciation). Depreciation is the decrease in value of your vehicle due to wear and tear and age.
Collision coverage can be expensive depending on the make, model and year of your vehicle. Increasing your deductible can lower your premium, but make certain that it is not so high that you can’t afford to pay it if needed.
- Comprehensive insurance
Comprehensive coverage is coverage for accidents that don’t involve a collision, such as fire, theft, vandalism and natural disasters. For example, if a tree falls on your vehicle, you’ll be covered by the comprehensive portion of your coverage.Knowing how much comprehensive coverage to purchase can be difficult. Insurance companies will generally only pay the “book value” of your vehicle if it is destroyed. The general rule of thumb is to purchase enough to cover you up to the book value of your vehicle. However, if your vehicle is in bad shape to begin with and you wouldn’t have it repaired, you can save money by not purchasing comprehensive coverage at all.
- Medical payments
Medical payments coverage pays not only for your medical expenses, but the medical expenses of other passengers in your vehicle at the time of the accident – regardless of fault. This coverage “follows the driver”, which means that it covers you when driving your own vehicle and when driving another’s vehicle with their permission. It also covers you and your family as pedestrians if you are struck by a vehicle.No fault and personal injury protection (PIP) coverage are typically expanded forms of medical payments that may include coverage for lost wages and child care. These are only required in certain states, so check with your state’s insurance department or insurance agent to make sure you are adequately covered.
- Uninsured / Underinsured insurance
Uninsured/Underinsured coverage protects you from injuries and property damage when the other driver is at fault and has limited or no liability insurance. While only required in some states, it is an important aspect of insurance coverage as statistics have shown that 25% of drivers don’t have any insurance and even more only carry the absolute minimum.
- Supplemental insurance
These are essentially “add-ons” to your basic insurance policy. You can add on coverage for rentals, repairs or towing, which could save you money in the long run.