Auto Insurance Basics

Understanding the Basics of Auto Insurance Can Go A Long Way

We realize that it is likely that when you hear the term auto insurance you don’t become instantly engaged. However, as we all know, it is just one of those things you have deal with. So, to make it a bit less painful we put together a brief guide that we hope will help you understand the basics in a way that makes sense.

What Exactly is Insurance?

In very basic terms, auto insurance is a way of transferring risk or financial responsibility, to the extent of the coverage limits you purchase, from yourself to a 3rd party, an insurance company. The insurance company then assumes financial responsibility on your behalf (again, up to the policy limits you purchase) in exchange for a premium.

So, an example:

You purchase liability coverage of 15/30/10 which is $15,000 for any single injury claim, $30,000 total available for all injuries claimed and $10,000 for property damage claims against your policy or damage you cause to things like a car, a fence or even light pole and are determined to be at fault for.

You pay a premium and in exchange, your insurance company would step in and pay for damages you may cause up to the limits noted above. What if damages exceed my limits? Great question – your insurance company has a duty to defend you and attempt to settle all claims within the limits of your policy. In the event they are not able to do so, your insurance company would cover the legal costs to defend you and continue to attempt to settle claims within your policy limits. Your insurance company would cover the legal costs.

Why You Need Auto Insurance

Now, why exactly do you have to carry at least minimum liability coverage? Quite simply because all states except New Hampshire require you to prove financial responsibility and the simplest and most common way of doing so is to purchase insurance. There are other ways to prove financial responsibility and each state will identify how you can do so. As an example, in California, you can:

  1. Be self-insured and provide a certificate of self-insurance
  2. Purchase auto insurance
  3. Place a cash deposit with the state

Do You Need to Carry Collision or Comprehensive Coverage?

The state in which you live will not mandate that you purchase collision or comprehensive coverage. However, if you are financing or leasing your vehicle, the bank or leasing company will require you to purchase collision and comprehensive coverage to protect their asset, which is their car until you pay it off. We suggest you shop for and purchase these coverage's yourself as if you don’t the bank will “force-place” coverage on the car and you will have to pay the rate they provide, which is often very high.

Although you won’t be required to purchase collision or comprehensive if you own your vehicle outright, we do suggest you consider a few things before you decide to not to carry these coverage's:

  • The value of your car – if you are driving low dollar-value car then the cost of purchasing may or may not be worth it
  • Repairs – if you are to get into an accident and damage your vehicle, can you afford the repairs?
  • Total Loss – if you are driving a lower valued car and it is rendered a total loss (beyond repair), you will be responsible for replacing the car

Drivers – Who Has to be On Your Policy

We also wanted to share one additional auto insurance basic with you as many people may not be aware of this fact – if there is a licensed driver living in your home, they must be either added as a driver or excluded from your policy.

In this case, if you have a friend living with you that is a licensed driver or a sibling you will need to specifically add them to your policy or exclude them. The reason is that your rates are calculated on the drivers and vehicles being driven and if a licensed driver has access to an insured vehicle and is licensed, they represent an additional “insurable risk” or responsibility to your insurance company in which a premium would be charged to cover that risk.

So, don’t forget to add those drivers – you don’t want to be in a situation where someone drives your vehicle with permission and causes damage that wouldn’t be covered\xA6