Choosing the right auto insurance policy means asking the right questions: How much coverage do I need? Where can I get the best rate? Who’s got the best customer service? Having to deal with unfamiliar and confusing insurance terms doesn’t help.
It can be overwhelming. Especially when insurance policies seem to be written in a language that doesn’t always translate into answers to those questions.
Luckily, Semo is here to help you untangle the verbal knots. We’ll offer a clearer understanding of what the insurance terms in your policy actually mean, how they work, and what that means for you.
Your Policy Is Like A Bunch of Mini Insurance Policies
Your auto insurance policy isn’t one policy. It’s like several mini-policies acting independently of each other. These mini-policies each cover different types of accidents or situations. They are enacted (or not) depending on the specific circumstances of what happened.
The most important mini-policy is the insurance term liability coverage and it’s required by law in almost every state. If you injure someone or damage their property, liability coverage pays for the damage, medical bills, or even lawsuits if they decide to sue you.
The XX/XX/XX Factor – Liability Coverage
You’ve seen state auto insurance minimums expressed as three numbers — XX/XX/XX. These three numbers refer to the minimum amount of liability coverage you need to carry as expressed in thousands of dollars.
- XX/XX/XX – The first number is how much your policy will pay for a single person’s medical bills in one accident.
- XX/XX/XX – The next is how much your policy will pay for all medical bills (the other driver and their passengers, for example) in one accident.
- XX/XX/XX – The final number is how much your policy will pay for property damage (car, house, antique cheese grater collection, bike, etc.) in one accident.
The specific amounts vary greatly from state to state. In Maine, the minimums are 50/100/25, meaning your insurer will pay up to $50,000 for injuries to one person, $100,000 for all injuries in a single accident, and $25,000 for property damage in one accident. Whereas in California, the minimums are only 15/30/5.
Many states require you to have a minimum amount of liability coverage before you can renew your license or your vehicle registration. These legal minimums are defined by the state. If the state finds out you’re not meeting them, you can face heavy fines, have your car impounded, or even do jail time.
Pobody’s Nerfect – Uninsured Motorist and PIP Coverage
In a perfect world, everyone has insurance. When an accident happens, any injuries or damages would get paid by the liability coverage of the person at fault. Unfortunately, we don’t live in a perfect world, so many states require another mini-policy — uninsured motorist coverage.
Uninsured motorist coverage covers your repair and medical bills should the other driver be carrying too little, or no insurance. Because they don’t have the insurance to pay, with uninsured motorist coverage, your insurance will.
However, every state does things slightly differently. To limit lawsuits over who was at fault in an accident, some states have a no-fault insurance system. You can look up your state’s policy here.
In a no-fault insurance system, you have to purchase a minimum of Personal Injury Protection (PIP) coverage. This is another mini-policy and covers the injuries of you and your passengers if you get into an accident. Regardless of who’s at fault, everyone’s insurance pays for their own medical bills, hence, no-fault.
As PIP coverage works similarly to uninsured motorist coverage, states will require one or the other, though some states do require both. And as every state is different, some let you roll the dice and don’t require either. As always, check your local laws and regulations to make sure you’re fully compliant before you sign a policy or move across state lines.
Mind The Gap (Coverage) and Beyond
Liability and Collision Insurance
While liability coverage and uninsured motorist/PIP coverage are required by the state, insurance companies offer many more mini-policies beyond the legal minimum. One common add-on is collision coverage.
Collision coverage is for when you cause an accident (although we’re sure you drive like a perfect angel). If you hit another car, liability coverage pays for the other person’s damages; collision coverage pays to fix or replace your car. Without it, when you’re at fault, all the damages to your vehicle are coming out of your pocket.
Gap Coverage Insurance
Another mini-policy insurers often offer is gap coverage. Say you bought a car for $20,000 and a few years later, you cause an accident and it gets totaled. At that time, if you still owe $12,000 on your loan but the current, depreciated, value of the car is only $10,000. Your collision coverage would cover $10,000 of your loan and you’d be on the hook for the other $2,000. Gap coverage would help pay that extra $2,000.
Instead of gap coverage, another mini-policy some insurers offer is zero depreciation. With zero depreciation, should you total the car you bought for $20,000, your collision coverage would pay the full $20,000. Allowing you to pay off the remainder of your loan and get into a shiny new ride.
Comprehensive Coverage Insurance
Another common add-on mini-policy is comprehensive coverage. Comprehensive coverage pays to repair your car if something out-of-the-ordinary happens like you hit an animal or a tree branch falls on your car. You may think collision coverage would pay for the damage, but as we said at the start, these mini-policies only work in specific situations and collision coverage only kicks in if the accident is your fault, not Mother Nature’s.
At this point, we should note there’s really no such thing as full coverage car insurance. Full coverage is just a policy that includes lots of mini-policies like liability, collision, and comprehensive. Sometimes even more bundled together in one package, just like every insurance policy. Some you need, some you may not. Be sure to fully investigate what’s included and at what cost before signing up for anything advertised as a full coverage policy.
Untangling the Mess
Insurance can be complicated. By knowing that all policies are just combinations of these mini-policies, you’ll be able to shop smarter.
Whether that means only meeting state minimums or ensuring that you’ll be able to replace your vehicle. By untangling the mess of auto insurance, you can get the coverage you need.
Now that you know what insurers are talking about, are you ready to shop for a new policy? Ready or not, Semo’s here to help.