Car Insurance Policy Basics

People buy auto insurance for two important reasons: to protect their car and to protect their finances.

All 50 states and the District of Columbia require automobile owners to meet certain financial responsibility requirements. These requirements help ensure that funds will be available to reimburse victims of auto accidents if another driver damages their car or property or causes them bodily injury.

While you can meet your financial responsibility requirements by posting a bond or self-insuring (generally used only by businesses or nonprofit organizations), the simplest and most practical way to meet your obligation is to buy an auto insurance policy.

Liability Limits. The states express minimum liability requirements with three figures, so your proof of auto insurance card will probably have a series of numbers that looks like this:

25/50/10

The first number refers to the per-person bodily injury limit, or the maximum a third party injured in an accident would receive from the policy, in thousands. The second number indicates the per-accident bodily injury maximum in thousands. This policy would pay a maximum of $50,000 for bodily injury claims per accident, regardless of how many people were injured. The final number indicates the property damage limit per accident, which in this case would be $10,000.

Protecting Your Family from Liability

In addition to being required by law in most states, your auto policy protects you and other covered drivers from potentially serious financial loss. An at-fault accident involving another vehicle, passengers or pedestrians can leave you responsible for vehicle repair or replacement costs and medical payments, if injuries occur. These damages can cost tens of thousands of dollars—or in the case of a fatal accident, even hundreds of thousands. If you are covered by an auto policy, your insurer will handle the claim and, if necessary, arrange for your legal defense.

Protecting Your Property

The most basic auto insurance policy provides liability coverage only — that is, it pays if you or a permitted driver causes property damage or injury to another person while operating your insured vehicle. It offers no protection to your own vehicle.

Comp and Collision. To protect your vehicle, you need collision and comprehensive coverage. These optional coverages will pay for property damage to your own vehicle. It covers damage due to impact with another car or object, regardless of whether you are at fault. It also covers your car from loss or damage due to other causes, such as theft, fire, vandalism, water or animals.

Whether you buy collision and comprehensive coverage should depend on the value of your car and your risk tolerance. Dropping collision and comprehensive coverage can save you money on premiums — but leave you unprotected in the event of an accident.

When you carry collision and comprehensive coverage, your insurer will generally limit any claims payment to the vehicle’s book value. Your policy’s deductible will further reduce any claim payment, so you might want to check the value of your vehicles before deciding whether collision and comprehensive coverages are worthwhile.

What about expensive stereo systems, GPS systems and other electronics? Generally, if these items are permanently installed in your vehicle, the comprehensive portion of your policy would apply. However, some insurers exclude coverage for these items — check your policy for details. Any items not permanently installed, such as iPods, cell phones or portable GPS systems, are personal property and covered by your homeowners policy.

Unfortunately, not all drivers are responsible. The Insurance Research Council estimates that about 16 percent of drivers nationwide fail to buy required liability coverage. Some states, however, have uninsurance rates as high as one-quarter. An accident with an uninsured driver could leave you with repair or medical bills, even if the accident was not your fault. Uninsured motorists coverage (UIM) protects you if this occurs. It’s optional, but it’s always a good idea to buy it. See Why You Need Uninsured and Underinsured Motorist Insurance for the details.