Auto insurance basics

An auto insurance policy is a package of different coverages. Most states require you to purchase a minimum amount of certain kinds of coverage. But if you're interested in protecting yourself from a lawsuit or from hefty repair bills, then it makes sense to buy more than what's required.

Liability insurance

Liability coverage is the foundation of any auto insurance policy, and is required in most states. If you are at fault in an accident, your liability insurance will pay for the bodily injury and property damage expenses caused to others in the accident, including your legal bills. Bodily-injury coverage pays for medical bills and lost wages. Property-damage coverage pays for the repair or replacement of things you wrecked other than your own car. The other party may also decide to sue you to collect "pain and suffering" damages.

The foundation of your auto insurance puzzle is liability insurance. Forty-five states require the purchase auto liability insurance (South Carolina and Virginia require that you register as an uninsured motorist if you do not have liability insurance, Tennessee requires proof of financial responsibility, and New Hampshire and Wisconsin don't mandate liability coverage except in certain cases). Your insurance minimum will depend on where you live. For example, in Texas, drivers have to purchase at least $20,000 worth of bodily injury coverage per person, $40,000 worth of bodily injury coverage per accident, and $15,000 worth of property damage coverage (also known as 20/40/15).

See the Minimum levels of required auto liability insurance to find out what's required where you live. Remember, if you cause a serious accident, minimum insurance may not cover you adequately. That's why it's a good idea to buy more than what your state requires. If you own a home and have nest egg and a savings account, you should consider more liability insurance because, in most states, drivers are allowed to sue other drivers who injure them in car accidents. If you're sued and your liability insurance doesn't pay for all of the damages, your personal finances are on the hook, and it's likely you'll become a target.

Collision and comprehensive coverages

If you cause an accident, collision coverage will pay to repair your vehicle. You usually can't collect any more than the actual cash value of your car, which is not the same as the car's replacement cost. Collision coverage is normally the most expensive component of auto insurance. By choosing a higher deductible, say $500 or $1,000, you can keep your premium costs down. However, keep in mind that you must pay the amount of your deductible before the insurance company kicks in any money after an accident.

Insurance companies often will "total" your car if the repair costs exceed a certain percentage of the car's worth. The critical damage point varies from company to company, from 55 percent to 90 percent.

Comprehensive coverage will pay for damages to your car that weren't caused by an auto accident: Damages from theft, fire, vandalism, natural disasters, or hitting a deer all qualify. Comprehensive coverage also comes with a deductible and your insurer will only pay as much as the car was worth when it got wrecked.

Because insurance companies normally will not pay you more than your car's book value, it's helpful if you have a rough idea of this amount. Check the Kelley Blue Book or the National Automobile Dealers Association. If your car is worth less than what you're paying for the coverage, you're better off not having it.

Medical payments, PIP, and no-fault coverages

Medical payments (MedPay) coverage will pay for your and your passengers' medical expenses after an accident. These expenses can arise from accidents while you're driving your car, someone else's car (with their permission), and injuries you or your family members incur when you're pedestrians. The coverage will pay regardless of who is at fault, but if someone else is liable, your insurer may seek to recoup the expenses from him or her.

Personal injury protection (PIP) and broader "no-fault" coverages are expanded forms of medical payments protection that may be required in your state. Some states have optional PIP or no-fault coverage. Expanded features include payments for lost wages and child care.

If you have a good health insurance plan, there might be little need to buy more than the minimum required PIP or MedPay coverages, if at all. And, if you already have disability insurance, there's little reason to purchase higher-than-minimum amounts of PIP.

Uninsured/Underinsured motorists coverages

Uninsured motorists (UM) coverage pays for your injuries if you're struck by a hit-and-run driver or someone who doesn't have auto insurance. It is required in many states.

Underinsured motorists (UIM) coverage will pay out if the driver who hit you causes more damage than his or her liability coverage can cover. In some states, UM or UIM coverage will also pay for property damages.

You'll probably want to have at least the minimal amount of UM/UIM because if you can't find the other driver, you'll at least have some coverage for pain-and-suffering damages.

Add-on features

Several supplemental auto coverages are available, either as separate premium items or included in augmented policies.

• Rental reimbursement, a common add-on, covers vehicle rentals required because your car is damaged or stolen.
• Coverage for towing and labor charges in case of a road breakdown is also common.
• Gap coverage for your new car will pay the difference between the actual cash value you receive for the car and the amount left on your car loan if your vehicle is totaled in an accident.

All 50 states have different requirements when it comes to auto insurance. In some states, motorists can't register a car without showing proof that they have liability insurance, while other states use an "honor system" that doesn't ask for proof of insurance until drivers have accidents or tickets on their records.

Only five states do not require motorists to carry liability coverage, but those that do demand that drivers purchase at least the state's minimum. In other words, if you live in a state that requires liability insurance, you can't walk into your insurance agent's office and buy only $2,000 worth of liability coverage. If you're going to buy it, you must purchase at least the minimum amount required.

The following information will help you understand the table of liability limits.

First number: bodily injury liability maximum for one person injured in an accident.
Second number: bodily injury liability maximum for all injuries in one accident.
Third number: property damage liability maximum for one accident.

So, looking at the table, you find that in Alabama the minimum liability limits are $20,000 for injury liability for one person in an accident, $40,000 for all injuries in an accident, and $10,000 for property damage in an accident.

What is no-fault?

Some states have "no-fault" laws, meaning your auto policy must pay medical bills for injuries suffered in an auto accident regardless of who caused the accident. The laws were enacted in an attempt to reduce auto-injury fraud and keep insurance cost down.

¹ Low-cost policy minimums for Los Angeles and San Francisco for eligible low-income drivers in the California Automobile Assigned Risk Plan are 10/20/3, effective July 1, 2000, to Jan. 1, 2004.
²Only property-damage liability is compulsory.
³Drivers can choose a standard or basic policy. Basic policy limits are 10/10/5; only property-damage liability is mandatory.
⁴Liability rises to 50/100 if injury results in death.

Have you been in an auto accident? Many people think their injuries or conditions are minor or even nonexistent. Only later they discovered they had received major, lifelong damage and trauma. However, all this is usually avoidable if you get proper early treatment. Good auto insurance coverage is a must. Get great cheap auto insurance coverage.