Imagine reading a science article and not understanding any of the article's vocabulary. It's highly unlikely you'll be able to comprehend the meaning of the article, what the author is trying to convey, the conclusion of the article, and how it affects you.
The same is true of your auto insurance policy. If you can't comprehend the words and phrases on your insurance policy, you won't be able to understand what you're paying for, if you are overpaying for car insurance, or if you have enough coverage.
To know what you are paying for, you need to understand the language. And insurance policies don't make it any easier.
To cut through the jargon, here is a simplified explanation of the most confusing car insurance terms you need to know to make the best decision for choosing your auto insurance policy.
1. Deductible
Your deductible is the amount of money you pay out of your own pocket before your insurance company pays for any damages if you file a claim.
For example, say you get in an accident and damage your car and have a $1,000 deductible and $4,000 worth of damage. You pay $1,000 first out of pocket and the insurance company will pay the remaining $3,000.
It's important to know your deductible affects your premium. A higher deductible will enable you to pay a lower monthly premium.
You can get a $0 deductible. But this will raise your monthly car insurance payments in a big way. If you have a $0 deductible and get in an accident, the insurance company will pay for all the damages, but your premium will be much higher.
A lower deductible means you pay a higher premium. A higher deductible means you'll pay less every month but more when you need to use your insurance.
2. Premium
Your premium is what you will pay for your car insurance policy. Different insurance companies offer different premiums, also known as rates. Your premium can be a rate you pay annually, every six months or monthly.
It's usually less expensive to pay for a longer term, but it depends on the insurance company. That's why it's important to shop for insurance with different companies. There can be a big difference in price.
Insurance companies base premiums or rates on a number of factors including your driving history, age, the location you live, your credit score, points on your license, and the number of accidents you got in during a three to five year period.
Premiums can decrease if you are a teacher, government employee, or work for a specific company that an insurance company has a relationship with. But they can increase when you add a teenager to your policy. If you're considering doing this, here are some tips to help.
3. Collision Coverage
Collision coverage protects you when you hit another car, the curb, or an object. If you are leasing a car or financing it, your lender will require you to have collision coverage. This costs more than liability coverage which protects you if you hit another vehicle.
The law does not require you to buy collision coverage if you own your car. People with older cars often don't carry collision because the insurance will pay you based on your car's value.
4. Comprehensive Coverage
Also called physical damage coverage, comprehensive coverage protects you from damages not caused by collisions. Insurance companies cover insurers for these instances:
- Storm damage
- Broken windows
- Natural disasters such as earthquakes and hurricanes
- Theft
- Falling trees or objects
- Damage caused when hitting an animal
5. Property Damage Coverage
Property damage coverage will protect you if your vehicle hits another person's car or property. Not all insurance companies offer property damage coverage, so if you want it, make sure to buy from a company that offers it.
6. No-Fault Insurance
Drivers can't sue other insurance companies if an accident was deemed to be no one's fault. Some no-fault states make exceptions if someone is critically hurt.
In a no-fault state, your insurance company pays for damages, not the other driver's insurance company.
7. Bodily Injury Liability
This covers you if you cause an accident that injures or kills another driver or passenger. It pays for your legal costs, the medical expenses, and lost wages of the person you injured in an accident.
The coverage you receive is based on the cost of your policy and it won't cover you. That's why you need Personal Injury Protection or Medical Payment coverage.
8. Personal Injury Protection or Medical Payments Coverage
Personal injury protection (PIP) or Medical payments coverage (MPC) covers you and your passengers when you're injured in a crash. Some plans may cover you if you hit a pedestrian who gets injured.
In some states, this coverage is optional. But in most no-fault states outside of North Carolina, drivers must purchase Personal Injury Protection.
9. Uninsured Motorist Coverage
This insurance will pay for damages if an uninsured motorist hits your car. Insurance companies offer two types: Bodily Injury which covers you and your passengers when you are hit by an uninsured driver.
The second is Property. This covers damages to your car when a driver without insurance hits your vehicle.
10. Gap Insurance
It's no secret a new car depreciates instantly when it's driven off the lot. Its value decreases proportionately.
If you get into an accident, your car insurance company will only pay the used Blue Book value, not the total money you paid for your new car. In order to avoid this from happening, purchase Gap Insurance.
This will cover new car owners by covering the difference between what you will get paid by the insurance company and what you owe if your the accident totals your vehicle.
Car Insurance Terms Demystified
We hope this guide helped clear up the confusion about car insurance terms and their jargon which can seem so mind-boggling. Now you're armed with the right knowledge you need so you can know what you're buying the next time you shop for a new insurance policy.
Need more tips and clarification about the world of insurance? Explore our blog to learn more. We aim to make it simple.
