What does auto insurance cover?

Auto insurance is an important protection for not just your car in the event that you get into an accident, but it also protects you from financial liabilities. Having auto insurance could potentially save you hundreds of thousands of dollars in damages and injuries down. Not only that, most states actually require you to have auto insurance. Given the importance of auto insurance, you’ll want to know how it works and the options available. 

What is auto insurance?

Auto insurance is a policy that vehicle owners purchase from an auto insurance company for protection against financial loss in the event of an accident or theft. Rather than paying out of pocket for these losses, you pay an annual premium to the auto insurance company, who will cover all or most of the costs. 

How does auto insurance work? 

In exchange for paying a premium, the insurance company agrees to cover your losses as outlined in your policy. Coverages include:

• Property, such as damage to or theft of your car

• Liability, which is your legal responsibility to others for bodily injury or property damage

• Medical, such as costs of treating injuries, rehabilitation, and sometimes, lost wages and funeral expenses 

Auto insurance is mandated by all but two states in the U.S., but insurance requirements will vary from state to state. This means that auto insurance that a friend or relative, who lives in another state, carries might not work for you in your state. Regardless of variations in insurance requirements, nearly all states require vehicle owners to carry: 

• Bodily injury liability, which covers costs associated with injuries or death that you or another driver causes while driving your car

• Property damage liability, which reimburses others for damage that your or another driver operating your car causes to another vehicle or other property, such as a fence, building or utility pole 

Some states also require vehicle owners to carry: 

• Medical payments or personal injury protection (PIP) reimburses medical expenses for injuries sustained by you or your passengers. It will also cover lost wages and other related expenses. 
• Uninsured motorist coverage reimburses you when an accident is caused by a driver who does not have auto insurance or when you encounter a hit-and-run. You can also purchase underinsured motorist coverage, which will cover costs when another driver lacks adequate coverage to pay the costs of a serious accident. 

Even if PIP and uninsured motorist coverage are optional in your state, you should still consider adding them to your insurance policy for greater financial protection. 

Furthermore, auto insurance will vary from person to person. Auto insurance premiums are priced individually, which means that it varies depending on your age, gender, years of driving experience, accident and moving violating history, and other factors. For instance, the cost of an auto insurance premium for teenagers and seniors tend to be significantly higher than all other drivers because they are at the highest risk of a car accident. 

Another reason premiums are priced individually is so that you can customize coverage amounts to suit your exact needs and budget. Premiums generally last six months to one year and are renewable. Your insurance company will typically notify you when it’s time to new your contract and pay your premium. 

Who does auto insurance protect and under what circumstances? 

An auto insurance policy will cover you and other family members on the policy, whether driving your car or someone else’s car (with their permission). Your policy also provides coverage for those who are not on your policy and are driving your car with consent. For instance, if your friend, to whom you gave consent to drive your car, gets into a car accident, your insurance company will likely pay for the costs associated with the accident. 

Personal auto insurance only covers personal driving. This means that it will not provide coverage if you use your car for commercial purposes such as providing ride-share services (i.e. Uber or Lyft) or making deliveries. However, some auto insurers now offer supplemental insurance products, at additional cost, that extends coverage for vehicle owners that provide ride-sharing services. 

Bottom line

Driving uninsured is not only against the law (in most states) but also extremely dangerous. Owning a car is a huge responsibility and puts you at a number of unexpected risks, such as accidents, thefts, and injuries. By getting auto insurance, you can be prepared for those risks, and ultimately save you tons of money and frustration down the road.