Understanding Auto Insurance: The 3 Key Components Explained

Auto insurance is a contract between the policyholder and the insurance company. While the specifics of auto insurance policies can vary, they are usually made up of three parts: liability insurance for bodily injury, liability insurance for property damage, and uninsured/underinsured motorist coverage. Liability insurance for bodily injury protects you from the claims of others injured in an accident that you caused, covering medical bills, lost wages, and pain and suffering charges. Liability insurance for property damage covers the costs of other drivers' damaged property in an accident for which you are at fault. Finally, uninsured/underinsured motorist coverage protects you from having to pay for the damages to your vehicle out of your own pocket if you are involved in an accident with a driver who does not have adequate insurance.

Liability insurance for bodily injury

It is important to note that liability insurance for bodily injury does not cover the policyholder's own medical expenses or those of their passengers. It also does not cover damage to vehicles or property. For that, separate property damage liability insurance is needed.

Understanding Coverage Limits

When purchasing liability insurance for bodily injury, it is common to see coverage limits represented as a set of three numbers, such as "100/300/50". Here's how to interpret these numbers:

• The first number ("100" in this example) represents the maximum amount of coverage per person for bodily injuries, usually in thousands of dollars.
• The second number ("300") indicates the total coverage limit for all injuries in a single accident.
• The third number ("50") represents the coverage limit for property damage per accident.

State Requirements and Recommendations

Most states have minimum requirements for bodily injury liability insurance. For example, Illinois requires a minimum of $25,000 per person and $50,000 total per accident. However, experts generally recommend purchasing higher coverage limits to adequately protect yourself financially. It is suggested to have enough coverage to match your net worth, ensuring that your assets are protected in the event of a lawsuit.

Importance of Adequate Coverage

Opting for minimum coverage may not be sufficient to cover all expenses in today's litigious environment. If the medical bills of the injured party exceed your policy's limits, you will be responsible for paying the remaining amount out of pocket. This could result in a significant financial burden and even lead to asset forfeiture or bankruptcy. Therefore, it is advisable to purchase higher coverage limits to ensure adequate protection.

Liability insurance for property damage

Auto insurance is a contract between the policyholder and the insurance company. The policyholder agrees to pay the premium, and the insurance company agrees to pay for losses as defined in the policy. Auto insurance provides property, liability, and medical coverage.

Most states require drivers to have a minimum amount of property damage liability coverage. However, the required amount varies by state. Policyholders can choose to purchase higher limits for this coverage to increase their financial protection. The cost of damages that exceed the amount of coverage will be the responsibility of the policyholder.

It is important to note that property damage liability insurance does not cover injuries caused by the policyholder in an accident or damage to the policyholder's car. Separate coverage, such as comprehensive and collision insurance, is needed for those types of repairs.

Uninsured/underinsured motorist coverage

Uninsured motorist coverage comes into play when a policyholder or a designated driver is hit by an uninsured driver or is involved in a hit-and-run accident. This coverage will reimburse the policyholder for medical expenses and vehicle repairs resulting from such incidents. It is worth noting that uninsured motorist coverage for property damage may not be applicable in hit-and-run cases in some states, requiring collision coverage instead.

Underinsured motorist coverage, on the other hand, is applicable when the at-fault driver does not have sufficient insurance to cover the total loss of the other driver. This includes medical expenses and repair costs that exceed the at-fault driver's insurance limits.

Depending on the state, uninsured/underinsured motorist insurance may consist of up to four separate coverages:

• Uninsured motorist bodily injury (UMBI): This coverage pays for medical expenses incurred by both the policyholder and their passengers when involved in an accident with an uninsured driver.
• Uninsured motorist property damage (UMPD): This coverage reimburses the policyholder for damage to their vehicle caused by an uninsured driver.
• Underinsured motorist bodily injury (UIMBI): This coverage pays for medical bills when the at-fault driver's bodily injury liability limits are insufficient.
• Underinsured motorist property damage (UIMPD): This coverage pays for vehicle repairs or replacement costs when the at-fault driver's property damage liability limits are inadequate.

While not all states mandate uninsured/underinsured motorist coverage, it is highly recommended for all drivers. In some states, such as Illinois, both types of coverage are required, while others, like Massachusetts and South Carolina, only mandate uninsured motorist coverage.

Medical payments coverage

Auto insurance provides property, liability, and medical coverage. Medical coverage pays for the cost of treating injuries, rehabilitation, and sometimes lost wages and funeral expenses. Medical payments coverage, also known as MedPay, is an additional coverage option for auto insurance policies in most states. It is important to note that MedPay is not offered in every state, but states that don't offer it usually have Personal Injury Protection (PIP) coverage available instead.

While auto liability insurance covers the other driver's property damage or bodily injuries if you are at fault, it usually does not cover medical expenses for you or your passengers. By adding medical payments coverage to your auto policy, you can ensure that you and your passengers are covered for medical expenses resulting from an accident, regardless of who is at fault.

Determining your MedPay coverage needs will depend on the amount your health insurer will pay for accident-related injury expenses. If your health insurance does not cover the full amount of potential medical costs from a car collision, you may want to consider MedPay protection. It is worth noting that MedPay coverage does not include wage reimbursement if your injuries force you to miss work.

Comprehensive coverage

When deciding whether to opt for comprehensive coverage, consider the value of your car, your financial circumstances, and your personal preferences. If your vehicle has a low cash value and you can afford the repairs or replacement, comprehensive coverage may not be necessary. However, if your vehicle is valuable and repairing or replacing it would be a financial burden, comprehensive coverage could be a smart investment.

Frequently asked questions