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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 lingo


Liability coverage limits (that's for the damage you do to others) are usually presented as a series of three numbers. For example, your agent might say that your policy carries liability limits of 20/40/10. That stands for $20,000 in bodily injury coverage per person, $40,000 in bodily injury coverage per accident, and $10,000 in property-damage coverage per accident.

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.


Replacement cost vs. actual cash value


Replacement cost is the amount it would take to replace your vehicle or repair damages with materials of similar kind and quality, without deducting for depreciation. Depreciation is the decrease in vehicle value because of age or wear and tear.

Actual cash value (ACV) is the value of your property when it is damaged or destroyed. Claims adjusters usually figure ACV by taking the replacement cost and subtracting depreciation.


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.

Minimum levels of required
auto insurance


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.


How to read liability limits

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.


State Liability required? Liability minimums (in
thousands of dollars)
PIP required? No-fault state? Uninsured motorist coverage required?
Alabama Yes, 20/40/10 No No Yes
Alaska Yes, 50/100/25 No No Yes
Arizona Yes, 15/30/10 No No No
Arkansas Yes, 25/50/25 No No Yes
California1 Yes, 15/30/5 No No Yes
Colorado Yes, 25/50/15 No No Yes
Connecticut Yes, 20/40/10 No No Yes
Delaware Yes, 15/30/10 Yes No Yes
Florida2 Yes, 10/20/10 Yes Yes Yes
Georgia Yes, 25/50/25 No No Yes
Hawaii Yes, 20/40/10 Yes Yes Yes
Idaho Yes, 25/50/15 No No No
Illinois Yes, 20/40/15 No No Yes
Indiana Yes, 25/50/10 No No Yes
Iowa Yes, 20/40/15 No No Yes
Kansas Yes, 25/50/10 Yes Yes Yes
Kentucky Yes, 25/50/10 Yes Yes Yes
Louisiana Yes, 10/20/10 No No Yes
Maine Yes, 50/100/25 No No Yes
Maryland Yes, 20/40/15 Yes No Yes
Massachusetts Yes, 20/40/5 Yes Yes Yes
Michigan Yes, 20/40/10 Yes Yes No
Minnesota Yes, 30/60/10 Yes Yes Yes
Mississippi Yes, 10/20/5 No No Yes
Missouri Yes, 25/50/10 No No Yes
Montana Yes, 25/50/10 No No Yes
Nebraska Yes, 25/50/25 No No No
Nevada Yes, 15/30/10 No No Yes
New Hampshire No, 25/50/25 No No Yes
New Jersey3 Yes, 15/30/5 Yes Yes Yes
New Mexico Yes, 25/50/10 No No Yes
New York4 Yes, 25/50/10 Yes Yes Yes
North Carolina Yes, 30/60/25 No No Yes
North Dakota Yes, 25/50/25 Yes Yes Yes
Ohio Yes, 12.5/25/7.5 No No Yes
Oklahoma Yes, 10/20/10 No No Yes
Oregon Yes, 25/50/10 Yes No Yes
Pennsylvania Yes, 15/30/5 No Yes Yes
Rhode Island Yes, 25/50/25 No No Yes
South Carolina No, 15/30/10 No No Yes
South Dakota Yes, 25/50/25 No No Yes
Tennessee Yes, 25/50/10 No No Yes
Texas Yes, 20/40/15 No No Yes
Utah Yes, 25/50/15 Yes Yes Yes
Vermont Yes, 25/50/10 No No Yes
Virginia No, 25/50/20 No No Yes
Washington Yes, 25/50/10 No No Yes
Washington D.C. Yes, 25/50/10 No Yes Yes
West Virginia Yes, 20/40/10 No No Yes
Wisconsin No, 25/50/10 No No Yes
Wyoming Yes, 25/50/20 No No Yes

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.


Auto Insurance QuotesHave 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.




Nine ways to save on your auto insurance policy


Want to save money? Here are nine suggestions to help you save on your auto insurance policies.

1. Comparison shop.
Use consumer information provided by your state's insurance department. These guides tell you what coverages you need and show you sample rates, usually from the biggest companies. You can find your state's web site by visiting the National Association of Insurance Commissioners web site. Then, get shopping. Get quotes from at least three insurers.

2. Consider higher deductibles.
When you file a claim, a deductible is the amount of money you pay before your insurance company pays for the rest of the damage. Higher deductibles mean lower premiums. For example, increasing your deductible from $200 to $500 on collision coverage could reduce your premium by as much as 30 percent potentially saving you hundreds of dollars. Choose the highest deductible you can afford, then set aside that amount in a savings account so you'll have the funds available if needed.

3. Drop collision and/or comprehensive coverages on older cars.
If you own a car that's worth less than $2,000, you'll probably pay more for the coverage than you would ever collect on a claim. Although insurance companies use their own criteria to determine fair market value for vehicles, you can find out how much your car is generally worth by using the Kelley Blue Book.

4. Buy a "low-profile" car.
Cars that are expensive to repair or that have a high theft rate generally have higher insurance costs. The Highway Loss Data Institute publishes a report listing average collision and theft losses for 297 car and truck models. For example, the Institute's most recent report shows theft losses for the 4-door Accura Integra (1999-2001 models) were a whopping 562% above the average for similar-sized cars, while collision losses were among the highest for the Mitsubishi Mirage, at 50% above average. The Insurance Services Office (ISO), an industry data-collection service, has determined that certain vehicles are capable of causing more damage than they receive while passengers in some vehicles are more likely to be injured than passengers in other autos. In 2004, ISO introduce a revised auto insurance rating system that recognizes these differences. Under this plan, liability insurance for that Mitsubishi Mirage, for example, would cost 30% more than the same amount of coverage for a Mitsubishi Endeavor and Personal Injury Protection would cost 50% more. As of this writing, not all insurers have adopted the new rating system, which makes it a particularly good time for comparison shopping.

5. Take advantage of low-mileage discounts.
Some insurance companies offer discounts to drivers who put fewer than a predetermined number of miles on their vehicles each year. To take advantage of these offers, you'll have to provide accurate mileage information each year. You might also recieve a discount if you can show that you use public transportation to commute to work.

6. Check your credit history and correct inaccuracies.
Many insurance companies use insurance credit scores in figuring rates. Your score is based on information contained in your credit report. If your credit reports contain errors or inaccurate information, you may end up paying more for insurance than you need to.

7. Ask about discounts for antilock brakes, air bags and other safety features.
Some states, including Florida and New York, require insurers to give discounts for cars equipped with antilock brakes. Some insurance companies give the discount no matter where you live. Most policies also give discounts for air bags. Your insurance agent should let you know about these discounts when you purchase your coverage.

8. Check on group insurance and corporate discounts.
Members of the American Automobile Association (AAA) collectively save more than $27 million annually on their auto insurance just by providing their membership information when they purchase a policy. You may also be able to get a discount through trade or professional associations that you belong to, or through your employer's corporate benefits program.

9. Ask about other discounts.
Some companies offer discounts for insuring more than one car, also insuring your home with them (known as a multiline discount), having no accidents in three years, being a driver over age 50, taking driver training courses, and having antitheft devices. Plus, remember good-student discounts when you are insuring a student who drives.





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