Understanding Your Car Insurance Policy

For drivers, purchasing a car insurance policy is not just an option—it's a legal necessity. Those caught driving without a car insurance policy could face steep fines, suspended driving privileges or even jail time.

Most drivers already know that in the event of an accident or car theft, their car insurance policy will help cover financial losses. But how much do drivers really understand about their car insurance policy?

What is Car Insurance?

Car insurance protects against financial loss in the event of a car accident, theft, or other unforeseen occurrence. It is a contract between you and your insurance company: you agree to pay an insurance premium and your insurer agrees to cover losses as defined in your contract (called a "car insurance policy").

Car insurance policies typically last from six months to a year. Your insurance company will notify you when it's time to renew your car insurance policy.

The Basics of a Car Insurance Policy

A basic car insurance policy may include several forms of coverage. Each form of coverage is priced separately, and not every one is required in a standard car insurance policy:

• Bodily Injury Liability - a mandatory coverage that financially protects you from injuries you or covered driver cause to someone else.
• Property Damage Liability - a mandatory coverage that financially protects you for damage you or a covered driver cause to someone else's property (such as another vehicle, telephone pole, fence, structure, etc.).
• Uninsured/Underinsured Motorist Coverage - this optional coverage will pay for injuries sustained by you, a member of your family, or a designated driver in the event an accident occurs with an uninsured or underinsured driver (or hit-and-run driver).
• Waiver of Collision Deductible - this coverage is available in certain states and only if you have Uninsured Motorist Coverage. The Waiver of Collision Deductible coverage will pay your Collision deductible if the damage to your vehicle is caused by an uninsured motorist. Example: You have a $500 Collision deductible and you are hit by an uninsured motorist. This coverage will pay the $500 deductible and your Collision will cover the rest of the damages to your vehicle.
• Medical Payments coverage - optional in most states. If you have an accident, it helps pay for medical, dental and funeral expenses for you or your passengers, regardless of who is at fault. In those states with no-fault coverage, Personal Injury Protection (called "PIP") covers the basic expenses incurred by the insured or his family in an automobile accident without regard to fault.
• Comprehensive - this optional coverage protects you in the event of theft, vandalism or non-collision damage (including fire, earthquake, flood, etc.)
• Collision - this optional coverage pays for damage resulting from a collision with another vehicle or object (or damage caused by rollover).

How Much Coverage Do I Need?

Nearly every state in the U.S. requires that drivers purchase a minimum level of liability insurance, but you will likely require additional coverage. Purchasing only enough insurance to cover the state minimum may keep you in compliance with state laws, but it may not be enough to protect yourself or your assets in the event of a major accident. While you should check with your attorney or financial planner to determine the appropriate amount of coverage you may need, the Insurance Information Institute recommends at least $100,000 of bodily injury protection and $300,000 of liability coverage per accident for the average driver.

What if I Need to File a Claim?

If you're involved in an accident, you may need to file an insurance claim. At the scene, make sure you first call 911 for police and/or medical assistance if necessary. Next, you should always write down the other driver's insurance information as well as contact information from the other driver and/or witnesses (including, if possible, the other driver's license plate number, address and telephone number).

It doesn't matter if you're at fault or not: if you're involved in an accident, it's your contractual duty to report it to your car insurance company. Remember: The sooner you report a claim, the sooner the process can get started, so don't delay reporting an incident. Your insurer may deny payment of your claim if you do not report the accident within a reasonable period.

After the incident, contact your insurance company to file a claim. A claims adjuster may be assigned to your case. They will walk you through the claims process. In most cases, the claim will be settled quickly.

How is the Cost of my Car Insurance Policy Calculated?

Car insurance rates are determined primarily by your driving record, as it most accurately reflects your driving habits. However, in most states, your age, vehicle make and model, location, credit history, gender, and annual mileage also affect the rate you pay for car insurance. Some states (such as New Jersey) even allow companies to use occupation and achieved education level in factoring rates.

What is a Deductible?

A deductible is the amount of money you must pay before your car insurance policy will take effect. For example, if your car insurance deductible is $500 and you're involved in an accident, in which you were legally determined to be "at fault," you will be personally responsible for $500 of any repairs made to your vehicle. Generally, the higher your deductible, the less you pay for a car insurance policy.

Am I Legally Required to Purchase a Car Insurance Policy?

In most states, driving without car insurance is illegal. If you are caught driving without insurance (or other proof of financial responsibility), you will likely receive a fine. Additionally, your driver's license may be suspended, and you could be subject to further punishment.

Even worse, when you do purchase a car insurance policy, you may be charged a higher rate if you have been caught driving without insurance.

Where Can I Buy Car Insurance?

One of the best places to shop for car insurance is on the web. InsuranceRates.com is a quick, hassle-free way to shop and compare car insurance rates.