Car Insurance needed by Joan to buy a car so that she can commute to her sunny LA office. She’s watched our first two videos “Cars: Buy or Lease?”, and “How to Finance a Car”, so she knows exactly how to get a great auto loan at a great price. However, she’s still confused about one part of the car-buying process: car insurance everything from what it is to how to get it. What should she do? Well, her first step is simple: Understand insurance Like most insurance, car insurance reduces the costs associated with specific risk, in this case, the risk of a car accident, in return for a monthly fee called a premium, which is based everything from your credit score to your driving record.
As for how car insurance actually works, it operates through four components, typically bundled together. The first and most important coverage is liability coverage, which is required by law and covers any injuries or property damage Joan causes behind the wheel. For example, let’s say Joan’s liability coverage limit is 25/50. That means her insurer will cover up to, but no more than, $25,000 in total injuries and $50,000 in total property damage per accident. While that may sound good, liability coverage has a flaw: it only covers the expenses Joan causes the other driver, it does nothing to pay for her own.
Why Needed Car Insurance in Life
That’s why Joan will probably need the second component of insurance: collision & comprehensive coverage, which is required by almost any auto lender, though oddly enough not the state. So how does it work exactly? Well, the “collision element” covers collision damage to your own car, while the “comprehensive element” covers basically everything else: ranging from theft to natural disasters. As for the nitty-gritty of how they both work, they both operate through a deductible and limit. A deductible is simply the amount of money Joan must pay per accident before her insurer pays the rest, while the limit is the maximum they’re willing to pay, generally up to the market value of the car. For example, let’s say Joan’s insurance plan has a $500 deductible and she recently got into a car accident that caused $5,000 of damage to her car. Under the terms of her policy, Joan only has to pay the first $500 of her bill; her insurer will cover the rest. Pretty cool right? The third major component of insurance is uninsured motorist coverage.
This also works a series of limits, much like liability coverage, and covers your injuries and property in the event that you get into an accident with someone who is uninsured or underinsured. Finally, we have the fourth component, personal injury protection, also known as PIP. PIP covers the medical expenses of both you and your passengers, regardless of who is at fault, and operates through a series of limits, like liability coverage. And while you may think PIP may seem somewhat redundant, especially if you have good health insurance, PIP does cover the uninsured passengers in your car, plus is still a legal requirement in 15 states.
Hopefully, you and Joan now have a better understanding of how car insurance works. Be sure to check out our next video, where you’ll learn how to actually get car insurance, and be sure to check out our website, where you can find more educational material and free car insurance recommendations.