Car Insurance 101: Common Terms You Should Know

A deductible is the amount you are responsible for if you file a claim with your car insurance company. Deductibles are common on many kinds of insurance policies, like car and homeowner’s policies.

By having a deductible, you share in the risk alongside your insurance company. This means that since you also face a potential financial loss if an accident happened, you may be more careful in avoiding damages.

In car insurance, a common deductible is $500. This means if you were in an accident or your vehicle was damaged, you would be responsible for the first $500 of the loss. If your damages were less than $500, your insurance company would not make any payment. If your damages were greater than $500, your insurance company would pay the damages minus your $500 deductible, up to your policy limit.

Your deductible does not usually reduce policy limits, but you should read your policy or check with your agent to be sure.

You could choose to purchase a car insurance policy with no deductible, but this will increase your rates. Adding or increasing your deductible is a common way to lower your monthly premium – this is because your insurance company does not pay on smaller losses that fall below your deductible. This saves them time and money, so your premium reflects that.

Your car insurance premium is the amount you pay for your car insurance for the policy period, often based on 6 months or a year. The premium can be broken down into monthly installments for your convenience.

Car insurance premiums are based on many different factors, like your driving history, age, where you live, how much you drive, and the kind of vehicle you drive, among other things. Some companies even use your credit score as a factor in determining the amount you pay for car insurance.

Ratemaking and determining premiums are complex, and specific formulas differ from carrier to carrier, making it important to shop around and compare premiums to find the best rate for you.

Proof of insurance is just what it sounds like – proof that you have complied with your state’s insurance laws and have purchased auto insurance for your vehicle. Proof of insurance is often the insurance card that your carrier sent you – new ones are sent at each renewal period, and some companies use digital ID cards through an app on your phone.

Carry your proof of insurance with you in your vehicle whenever you drive – this way, you can prove you have the proper coverage to drive legally in your state if you’re pulled over or involved in an accident. Many people put their proof of insurance in their glovebox, so it is always easily available.

Proof of insurance usually identifies you and your vehicle, the dates you are covered by the insurance, and your insurance company name, policy number, and contact details.

Liability coverage is a critical part of your car insurance policy. This coverage is meant for covering damages you cause in a car accident. If you are at fault, or even partially at fault, you may be liable for the injuries and damages to other people’s property. Depending on your state, you may be partially or fully liable for the damages caused in the accident if you are considered the one who caused the accident.

Bodily injury liability is part of your liability coverage. This coverage is designed to cover injuries you cause to other people in an accident. This could mean people in the other vehicle, passengers in your own vehicle, or pedestrians struck in the accident. Bodily injury liability could cover medical bills and lost wages resulting from injuries sustained in the accident, as well as damages for pain and suffering.

Property damage liability coverage is a part of your liability coverage. It applies to damages caused by you to other people’s property – it could include their vehicle, but also other property like fences, buildings, or walls.

Collision coverage is part of the property damage coverage of your car insurance policy. This coverage is designed to cover damages to your vehicle sustained in a car accident. This could be a single-vehicle accident or multi-vehicle collision.

If you have a loan on your car or if you lease your vehicle, your lienholder may require you to carry collision coverage. If you own your vehicle, you can decide if you want to carry collision coverage or not.

Comprehensive coverage is another part of the property damage coverage, but it covers different things than collision. Comprehensive coverage is meant for damages to your vehicle from hazards that are not collisions – this could mean hail or other storm damage, tree damage from falling limbs, or damages from hitting an animal while driving. It also covers things you may not expect to happen, like a fire or explosion or a flying object striking your vehicle. Even damage from riots or civil unrest can be covered under comprehensive coverage.

The term “full coverage” usually means carrying all of the car insurance coverages required by law in your state. This can be property damage, liability coverage, and personal injury protection coverage, as well as others. Deciding whether to carry full coverage depends on many factors, like how much you drive and the age of your vehicle. Most people use “full coverage” to include comprehensive and collision coverage on top of the state-minimum requirements.

Remember that having full coverage does not mean you have the highest limits of each coverage; it just means that you have all of the coverages required in your state. You could purchase maximum limits or lower limits, depending on your needs, and still have full coverage.

Property damage coverage is an important part of your car insurance policy. Property damage is designed to cover physical damage to your vehicle and includes both collision and comprehensive coverages.

Medical payments coverage, called MedPay, is a type of coverage that affords protection for medical bills resulting from injuries sustained in a car accident. It usually has a low policy limit and does not give any additional benefits, like lost wage coverage. Your state may give you a choice between MedPay or PIP coverage, or they may only offer one of the two.

Personal Injury Protection coverage is a type of no-fault coverage where a driver goes back to their own carrier for coverage of medical bills and injury loss after an accident. This means that even if the other person caused the accident, you would file your claim with your own carrier.

PIP coverage was intended to make it easier for an injured person to receive timely medical care without having to sue the at-fault party –and without waiting for a determination of who was at fault before seeking medical care.

PIP coverage provides help with medical bills, lost wages, essential services, and a funeral/death benefit. PIP coverage may be mandatory in your state.

Uninsured motorist coverage is important coverage to consider with your car insurance policy. Uninsured coverage is there to protect you if you are involved in an accident with a driver who does not have car insurance.

While most drivers are legally obligated to carry car insurance, this doesn’t mean everyone actually does. There are also some states in which drivers do not have to have car insurance, and there are some drivers who flee the scene of an accident. This means it is possible you may be in an accident with an uninsured driver – if they are at fault and do not have insurance, you can use your uninsured motorist coverage on your policy to recoup your losses.

Underinsured motorist coverage often accompanies uninsured motorist coverage. Underinsured coverage helps you when involved in an accident with another driver who does have insurance, but they have low limits – or lower limits than you.

A driver who only has minimal limits but causes a large accident with many injured people may not have sufficient coverage limits to pay for everyone’s injuries. In those cases, having your underinsured motorist coverage can give you additional coverage once the at-fault driver’s policy has reached its limit.

“No-Fault” insurance means that a driver goes to their own carrier to file a claim following an accident, regardless of who is at fault. This means it does not matter which driver caused the accident; both drivers make a claim with their own carrier.

If the driver was at fault or if the other driver was at fault is not relevant in determining which insurance company will pay out benefits in a no-fault state.

“At-fault” means an accident that you caused. This could be anything from failing to see a vehicle in your blind spot before changing lanes to being unable to stop and rear-ending the car in front of you. If you have an at-fault accident, you may be ticketed by the police, and your insurance rates may increase.

Some carriers offer accident forgiveness on their car insurance policies. Accident forgiveness may be worth it if you have a clean driving record and want some added security from increased rates. If your carrier offers accident forgiveness, it can mean they do not increase your rates after your first at-fault accident. Changing carriers or having another at-fault accident can raise your rates, though.

Usage-based insurance means rates are based on the amount you drive your vehicle. It is also called “pay-per-mile” coverage.

There is a base rate determined by your specific factors, like your driving history and location, and an additional per-mile charge that combines to form your premium each month. For drivers who do not drive often or far, usage-based insurance can save them a lot of money.

Specialty insurers are cropping up to provide usage-based insurance. Many major carriers offer their programs designed to meet the needs of drivers who may be commuting or traveling less frequently.

Rental reimbursement gives coverage for alternative transportation when your vehicle is being repaired following an accident. It is important to note this coverage is separate from your collision and comprehensive coverage, because sometimes people expect it will be included with those coverages.

Rental reimbursement coverage can help pay for a rental car when yours is not drivable after an accident. If your car can be safely driven, most policies will not pay for a rental car until repairs begin. If your car is too damaged to be safely driven, rental reimbursement should begin right away.

Towing and labor coverage is also commonly called Roadside Assistance coverage. This is helpful coverage for many drivers as it can offer assistance if you break down, have a flat tire, or run out of fuel while on the road. Remember that you may already have similar or identical coverage through your vehicle’s manufacturer, your credit card, or AAA (if you are a member).

Towing and labor is generally inexpensive to add to your car insurance, though, so if you do not have other coverage or are unsure if your coverage covers you, it is worth considering adding it to your car insurance policy.

GAP insurance stands for Guaranteed Asset Protection and can be an important part of your car insurance policy. GAP protects you when your car is totaled, but you owe more on the lease or loan than the car is worth. When your vehicle is totaled, the insurance company determines its value, and that is what is paid to you – or your lienholder if you owe money on your vehicle.

There is often a difference between what you owe on your vehicle and the value determined by the insurance company. If your vehicle is worth more than you owe, it is good news because you will receive the amount over what you owe. But if the value is less than what you owe on the vehicle, you will have to make up that difference to your bank or finance company. GAP Insurance protects you against the possibility of covering the difference in value.

SR-22 insurance actually does not exist. The SR-22 is a form that most states require a driver to file to show proof of financial responsibility. In other words, proof that they have sufficient insurance as required by their state. If you need to file an SR-22, your insurance company will do that when purchasing your car insurance policy.

There are several reasons why a driver may have to have an SR-22, like a DUI charge, driving without a license, or having a long lapse in insurance coverage. If your state mandates you to file an SR-22, you usually will have to do so for at least three years.

Many car insurance companies will sell you an insurance policy and file the SR-22 for you, but not all carriers will. Rates may vary greatly between SR-22 carriers, too, so you should compare rates to find the best option.

Umbrella insurance is a type of personal insurance policy that extends above the limits of traditional policies to give another layer of protection to the policyholder. Umbrella policies can cover things like property damage, medical claims, or personal liability claims.

If you cause a car accident and the cost of the damages exceeds your car insurance policy limit, you could be responsible for the amount over your policy limit. An umbrella policy could help you in that situation by providing another layer of coverage before your personal assets are at risk.

A claim is a report of your loss and damages suffered filed with an insurance company after an accident. It is what happens when you claim a loss on your policy. Claims may be for many different types of damages, like physical damages to your car or medical damages from injuries you sustained in the accident.

Filing a claim with your insurance company after an accident is easy – just call your agent or carrier or go online to submit the report. After you file your claim, your insurance company will follow up with you to gather more details, investigate, and settle your claim. Depending on the complexity of your claim, it can take your carrier a little time to resolve it.