What are the main types of auto insurance?

Although the choice can look a little confusing and, sometimes, the jargon is hard to understand, the basic system is actually quite simple. There are just two basic types of auto insurance policy:

(a) a liability policy covers you against claims made by the people who are injured and whose property is damaged by the way you drive; and
(b) the other policies pay you when you have medical expenses and your property is damaged.

In all but three US states, it is mandatory for you to carry a minimum amount of liability insurance. The reason is basic fairness. Suppose you leave your vehicle parked outside your home and a driver totals it. You should always be in a position to recover some, if not all, of the cost of replacing your vehicle. This collision is not your fault. It would be unfair if you would get nothing when it turned out the other driver had not a cent to his or her name.

The liability policies cover two different types of risk:

(a) when physical property is damaged, this covers the cost of repairing or replacing that property; but
(b) when people are injured, the coverage is wider, including not just the cost of medical treatment, but also loss of earnings and other consequential losses if the victim loses important skills or abilities.

In most states, the minimum amounts in the mandatory policies were set many years ago and often do not represent a realistic assessment of the real costs of medical treatment or vehicle repair. If you own your home or have assets, it is a good idea to buy more than the minimum. Remember, in the majority of states, any third party who is injured can sue and, if the insurance is not enough to pay, you have to make up the balance out of your own resources.

As to your own needs, there are three basic types of policy:

(a) Collision policy This coverage pays out if your own vehicle is damaged, no matter who was at fault. It is usually required when you buy your vehicle with a bank or other loan, i.e. because the lender wants you to protect the value of the vehicle. When buying this policy, always think carefully about the amount of any deductible. Make sure you can afford the amount as a cash sum should you have an accident.

(b) Comprehensive policy This coverage pays for all the other loss and damage you may suffer, say, when your car is stolen, vandalized or washed away in a flood.

(c) Personal Injury Protection and the other policies covering medical expenses. This is self-explanatory, covering the cost of the treatment necessary because of the accident.

There is a further range of add-ons:

(a) uninsured or underinsured coverage The extent to which you decide to buy depends on how pessimistic you are feeling. It is a sad fact there are an increasing number of people driving without any insurance or with only the mandatory minimum. If the driver at fault has no money and/or the mandatory minimum is not enough, your decision to buy this cover will be good value.

(b) an umbrella policy covers you against unusually high claims. For example, you may have the misfortune to crash into a wealthy banker driving a top-of-the-range luxury car. This is someone who may earn several million a year in pay and bonuses. The total amount of damages for repair or replacement of the car, medical treatment, pain and suffering, and consequential losses is likely to be far greater than the standard policies cover.

(c) towing costs and rental reimbursement Such policy terms get your vehicle off the road after an accident with delivery to a body repair shop, and supply a replacement vehicle during the time of repair. It is for you to decide what you fear and what you can afford. In the middle, you buy the auto insurance policies that seem wisest for you.