If you own or lease a car, having auto insurance coverage isn't optional. By law, all states require auto owners to insure vehicles titled in their name, although the types and amounts of required coverage differ in each state.
Auto Insurance Coverage Explained
Auto insurance coverage protects a car owner in the event of an accident, loss, or theft. An auto insurance policy can be purchased from a licensed insurance agent, insurance broker, or insurance company.
A policy acts like a contract. The insured agrees to pay a premium and the company agrees to pay for any losses incurred by events as defined in the policy.
Required Insurance Coverage
Depending on your needs and the laws in your state, there are certain forms of auto insurance coverage that are required. Required coverage may be called "minimum auto liability insurance limits." These limits refer to not only the types of coverage an auto owner must have, but also the monetary amounts of coverage they must purchase.
The National Association of Insurance Commissioners (NAIC) states that there are three main parts to most auto insurance policies: bodily insurance coverage, property damage coverage, and uninsured/underinsured motorist coverage.
Bodily Injury Liability
This type of coverage pays for injuries suffered by another person due to an auto accident caused by the insured vehicle. It will pay for medical expenses and related costs due to the accident as well as for the expense of mounting a legal defense if the injured party sues the driver or auto owner. It also pays for pain and suffering, rehabilitation costs, and funeral bills. This coverage does not pay for medical expenses incurred by the policyholder as a result of an accident.
On a policy, coverage is presented using two numbers, for example: $50,000/$100,000. The first number stands for the per person maximum that the company will pay, while the second represents the total per accident maximum the company will pay. Each insurance company establishes available limits, but options may include $15,000/$30,000, $20,000/$40,000, and $100,000/$300,000.
In 2013, Forbes.com published an article listing the average yearly car insurance rates in each state. The state in which drivers paid, on average, the most for car insurance was Louisiana, at $2,699. The state in which drivers paid the lowest on average was Maine, with residents paying $934 per year.
Property damage coverage protects the insured against damage caused to another vehicle or another person's property as the result of an auto accident. For example, the policy would pay for the cost of repairs to fix damages to the other vehicle, a fence or for the cost to replace a tree after an auto accident. This type of coverage does not provide payment to the policyholder for the damage to the policyholder's vehicle.
Coverage amounts are typically provided in a maximum amount and given in a single number, for example $10,000. This means that the most the insurance company would pay for property damage on a per-accident basis is $10,000. The insured would be responsible for paying any amount over this maximum for each accident.
Uninsured and Underinsured Motorist Coverage
Most states require drivers to protect themselves against the financial issues of being involved in an accident with an uninsured or underinsured driver. An underinsured driver is one who does not carry enough coverage to pay for the damages they cause in an auto accident. This type of coverage provides protection in case a driver or his or her passengers are injured in a hit-and-run accident or in an accident in which the responsible party cannot pay for damages. In effect, it is coverage that the other driver should have purchased but did not.
The NAIC explains that this type of coverage will pay policyholders an additional lump sum above policy limits. It is normally offered in a single maximum dollar amount, for example $30,000. In the case of an accident with an uninsured or underinsured motorist, or if involved in a hit-and-run, the policyholder could receive up to $30,000 additional coverage to pay for injuries and damage. On average, this type of coverage costs an additional $15-$20 every six months.
Optional Insurance Coverage
Many insurance companies also offer optional insurance coverage, which are coverage types that states do not require car owners or lessees to purchase, but which they may want to nonetheless. Because they are optional, there are no minimum limits that must be purchased.
This type of coverage pays for repairs to, or replacement of, a policyholder's vehicle after being involved in an accident with another car or a stationary object, such as a tree. It differs from property coverage because it protects the car insured under the policy.
According to Allstate, this type of coverage is often the most expensive in an auto insurance policy. Allstate also reports that older cars might not need this type of coverage. The NAIC states that there are three deductible levels for collision coverage: $250, $500, and $1,000.
This coverage protects against losses not due to an accident, such as theft, vandalism, or natural disasters. The NAIC explains that this coverage provides protection against damage to a vehicle from a cause other than a collision.
Comprehensive coverage is normally offered at three deductible levels - $250, $500, and $1,000 - according to the NAIC.
Medical Payment Coverage
This type of coverage pays for the medical expenses incurred by the policyholder or passengers in the policyholder's vehicle after an accident. It usually pays for hospital stays, dental visits, and funeral costs. Typically, coverage extends to pedestrians injured due to being nearby the accident.
Coverage amounts typically range from $1,000 to $10,000.
Rental Reimbursement Coverage
Rental Reimbursement coverage pays for the cost of a rental car used if the vehicle covered under a policy is damaged. The NAIC explains that this type of coverage is usually offered with daily and total maximum amounts, for example: $30/$700. This means that coverage is offered for up to $30 per day and $700 total overall.
Road Service Coverage
This coverage pays for towing and other related expenses incurred when transporting a vehicle to a repair facility. It applies regardless of whether the vehicle was damaged in an accident or stopped running for a maintenance reason. Some policies cover key replacement and flat tire repairs.
Coverage in No-Fault States
A "no-fault state" is one in which neither party involved in an accident is deemed to have caused the event. According to the Insurance Information Institute, there are 12 states that operate a no-fault system, including Florida, New York, Hawaii, Minnesota, Utah, and Pennsylvania. Required insurance coverage in no-fault states slightly differs.
Personal Injury Protection
This coverage pays the policyholder or anyone in the vehicle a set amount for their injuries after an accident. It is intended to pay for medical expenses and, sometimes, lost wages and other types of damage. This type of coverage is often supplemental to a policyholder's traditional health insurance plan. According to AgentInsure.com, this type of coverage usually costs about $145 per year.
Residual Bodily Injury Coverage
This type of coverage comes into effect if the amount of damages caused by an accident in a no-fault state exceeds the threshold established by the state. The NAIC states that thresholds may be a specific dollar amount, a list of injuries, or a death resulting from an accident. Residual bodily injury coverage provides protection in the event that the policyholder or anyone else driving the vehicle at the time of the accident is sued for injuries caused to another by an accident that meet the state's threshold.
Average Cost of Auto Insurance
The reason that average costs of some types of coverage are unavailable or unreported are because they are often included in an entire premium amount, which differs depending on the auto owner's driving record and credit report. An insurance company determines premium amounts and deductibles based on this information. Other factors affecting the average cost of insurance coverage are the type of car driven and coverage limits sought.
Reports of average costs of auto liability insurance typically do not divide expenses into categories, but instead provide a numerical expense for an entire policy. These values may include required and voluntary coverage. In 2010, the average cost for liability, collision, and comprehensive coverage was $791 per year, according to the Insurance Information Institute.
Choosing Your Coverage Types
When determining what types of coverage to purchase, consider how much you drive, the value of your car, and the protection you have under your health insurance policy. Additionally, compare multiple insurance companies' rates and coverage options prior to selecting a policy.