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How Car Insurance Works

Types of Auto Coverage

Everyone who drives needs car insurance. In fact, most states require it by law. When you buy car insurance, you are buying what is called a policy. Your policy is based on a variety of factors including what kind of car you drive as well as what kind of insurance you want. Auto insurance policies are actually a package of different types of insurance coverage.

The first step in understanding an auto insurance policy is to learn the various types of coverage insurance companies offer. Some of this coverage may be required by your state and some of the coverage may be optional.

  • Liability - This coverage pays for accidental bodily injury and property damages to others. Injury damages include medical expenses, pain and suffering and lost wages. Property damage includes damaged property and automobiles. This coverage also pays defense and court costs. State laws determine how much liability coverage you must purchase, but you can always get more coverage than your state requires.
  • Collision - This coverage pays for damages to your vehicle caused by collision with another vehicle or object.
  • Comprehensive - This coverage pays for loss or damage to the insured vehicle that doesn't occur in an auto accident. The types of damages comprehensive insurance covers include loss caused by fire, wind, hail, flood, vandalism or theft.
  • Medical Coverage - Pays medical expenses regardless of fault when the expenses are caused by an auto accident.
  • PIP - Personal Injury Protection (PIP) is required in some states. This coverage pays medical expenses for the insured driver, regardless of fault, for treatment due to an auto accident.
  • Uninsured Motorist - Pays your car's damages when an auto accident is caused by a driver who doesn't have liability insurance.
  • Underinsured Motorist - Pays your car's damages when an auto accident is caused by someone who has insufficient liability insurance.
  • Rental Reimbursement - This type of coverage will pay for a rental car if your car is damaged due to an auto accident. Often this coverage has a daily allowance for a rental car.

Many insurance policies combine a number of these types of coverage. The first step in choosing the insurance you want for your car is to know the laws in your state. This will tell you the minimum insurance you need for your car. It's good to keep in mind that, just because your state may not require extensive insurance, extra coverage may be worth the expense. After all, no one wants to be stuck with thousands of dollars worth of bills because of an auto accident.

Now, let's take a look at how to determine your insurance needs.