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Definition and Examples of Auto Insurance

Auto insurance is your financial protection for owning a car. It can cover the cost of damage to your car and the other driver's car. It may even cover associated medical bills, depending on the circumstances.

If you are never in an accident, it is possible that you will never have to file an insurance claim. But it’s likely that you will be in at least one accident in your lifetime.1

Let's say you are in an accident. Another driver hit you from behind at a red light. Both cars are damaged; you have whiplash as a result. The repair shop quotes $3,000 to fix your rear bumper and replace the rear windshield. The other driver, who is at fault, calls their insurance company to submit a claim, and you do the same. The other driver's policy covers the full amount of your car repairs and most of your medical bills. Yours picks up the rest.

But what if the other driver is uninsured? They may not be able to pay anything out of pocket. Luckily, your insurance policy covers damage caused by other drivers. That way, you are able to recover most of the costs.

Lastly, suppose neither of you is insured. You could try your luck and sue the other driver for damages. Or you could take the loss and pay out-of-pocket. Either way, the lack of insurance will cost you.

How Auto Insurance Works

Car insurance is a contract between you and the insurance company. It protects you from financial loss if there's an accident or theft. In exchange for your paying a premium, the insurance company agrees to pay the losses, minus the deductible, as outlined in your policy.

Types of Auto Insurance

Car insurance can pay to repair your vehicle after an accident, depending on what coverage you select. A vehicle is often a major expense, and you want to protect it. Comprehensive and collision insurance each offers coverage for physical damage. This comes with a lot of rules regarding what is covered and what is not.

Personal Liability and Property Coverage

Personal liability and property damage (PLPD) coverage is the minimum required coverage by law in most states. If that's all you carry, you will at least be off the hook for a portion of the costs of the damage you cause in the event of an at-fault accident. PLPD does not cover physical damage to your own car. It does, however, offer you protection for other types of losses.

These losses include:

  • Injuries, pain, and suffering to others depending on your state's laws
  • Property damage
  • Medical costs for you (if you live in a no-fault state)

Comprehensive Coverage

Comprehensive coverage is for anything other than a collision. Fire, theft, vandalism, deer, pests, and storm damage all fall under this category. In most cases, comprehensive insurance is required to get roadside assistance. It is also required in order to purchase collision coverage.

Collision Coverage

Collision coverage protects your vehicle against accidents. Collisions with other cars, mailboxes, light posts, trees, and other inanimate objects are covered. A deductible is often required to be paid before you can get your repaired vehicle back.

Collision coverage most often comes into play when you are at fault or do not know who damaged your vehicle.

Do I Need Auto Insurance?

Years without a claim may make you wonder whether you need car insurance at all. You may think that since you're a safe driver, and nothing ever happens, you shouldn't need to keep paying the premiums. However, if you have a car, it's at risk of damage from plenty of circumstances that have nothing to do with your driving ability. Plus, that's not to mention the risk to every other driver on the road. Auto insurance can provide compensation for damage from things you can't control.

If you are at fault in a car accident, the injured party will want compensation. Without car insurance, you will be held financially responsible. You could be forced to pay for all the damage out of your own pocket. Most people cannot afford to self-insure; this is why most states require at least PLPD to be purchased by all drivers. In short, PLPD can protect you against financial ruin.