Understanding Car Insurance

By Rene Forster | Last Updated March 30, 2015

Car insurance policies can oftentimes be overwhelming to the uninitiated. Simple understanding gets lost with all the technical jargon, acronyms, and meanings. This article attempts to get rid of all the law-talk and lay it out in more easy-to-understand terms. The author also dissects the policy into chunks to facilitate comprehension. A car insurance policy need not be complicated after you’re done reading.

car insurance

Back in the days when cars were reserved for the elite and middle class workers could only dream of sitting behind the wheel, much less drive one, car insurance were unheard of. If you were of the affluent class, all you had to do was choose the type (there was hardly any other back then), pay for it and try your best to drive safely. Those were days when there was no roof to speak of nor wipers to clear your windshield. Those were deemed necessary as the car evolved.

Then someone thought of insuring a car. In the most simple of definitions, a car insurance covers the cost of any repairs sustained by the car in case of accidents. This functions much like a personal insurance wherein you pay a premium to cover your costs for any unforeseeable event in the future, including death. It is also the car insurer’s obligation to pay out any damages you may have caused other vehicles.

The details of the insurance policy you plan to get vary greatly from one insurance company to another and from one country to another but don’t be overwhelmed by it. They all have the same function and purpose.

What you probably have to learn about the car insurance industry is the various terminologies. I believe that everyone should be able to understand terms like premium, policy, deductible, and so on. What truly matters is that you know the various parts of a car insurance policy as well as how to determine the best insurance coverage for your car.

Car Insurance Terminology

To better understand the car insurance lingo, I’ve compiled a few relevant terms with their corresponding definition. Feel free to refer to the list at any time as you read through the article.

1. Multi-Car discount – This is a discount offered by some insurance companies for clients who have more than one vehicle insured on the same policy.

2. Deductible – The deductible is a predetermined amount a person with an insured car must pay before the insurance company doles out the remainder, which does not go beyond the policy limits, the covered loss.

3. Personal Auto Policy (PAP) – As the label suggests, it essentially covers the personal aspect of the insurance policy. This covers medical payments, liability, physical damage protection, and under/uninsured motorist coverage. This policy is also the most common policy being sold around.

4. Usage – This pertains to the main purpose or use of your vehicle be it for personal or commercial reasons.

5. No-Fault Insurance – This essentially allows car accident victims to collect hospital and medical expenses from their own insurance companies and whether they were at fault or not in the accident. However, this policy is selective since some locations have laws that permit this while others don’t.

6. Term – This refers to the length of time of the policy’s effectiveness.

7. Split Limit – This refers to any insurance coverage that has separately stated limits for various coverage types.

8. Motor Vehicle Record – The MVR is a written record of a particular driver’s traffic violations and accidents. It would most probably be reviewed by the insurance agent as he or she tries to give you a quote for insurance rates. Essentially, your premiums are bound to climb if a substantial number of accidents and violations are found in your MVR.

9. Drive-Other-Car Endorsement – The DOC is also known as an Other-Car Endorsement. This basically protects the endorsed individuals who do not own the car nor are mentioned in the policy.

10. Threshold – This is a term usually used together with a modified no-fault plan. Most no-fault plans set a point at which the insured may bring a legal action to recover for losses such as pain and suffering. Before the threshold is reached, tort actions are not allowed. Typically the threshold will be reached if medical bills reach a certain expense level, or if disfigurement or death occurs.

11. First-Party Coverage – This is compensation given to you by your insurance company instead of getting it from the insurance policy of someone else. This coverage includes collision insurance and comprehensive insurance. The latter means that under this coverage your own car insurance company will pay for the loss of your car.

12. Loss – For any insurance claim to be valid, there first has to be a loss. This includes any damages to your car.

There are many more insurance jargon out there and most of them are quite self-explanatory. The basics we’ve just covered will already be enough for an insurance dealer to know that you have done your research and have come prepared. Incidentally, before a purchase, you have to understand what insurance coverage you and your car needs. There is always a minimum requirement by law so its best to start from there and move up depending on the needs. Also, consider your willingness to pay as well as your capacity to do so for a chosen coverage. Bear in mind that these factors are on top of your driving history (like how often you’ve had a vehicular accident) and the value of your car.

Components of a Car Insurance Policy

I’ve scoured the net for the most useful tips on this subject and, along with my own personal experience, have come up with some of the most practical tips on a few ways to control your car insurance expenses to some extent. Apart from those required by law, consider the optional coverage carefully. There are essentially six separate policies you would need to consider, and is what you will use to gain control of your expenses. Remember that each one has its own premium. All you need to do is to add up your selection on top of those that the law requires, and you will have your total price. From there, I reviewed my total price and even managed to cull a few hundreds off even.

1. Collision coverage – quite self-explanatory. This covers the cost of any damage to your car in case you hit another car or other object for that matter. As is most often the case, you may opt for a deductible—what you have to pay out-of-pocket first for a claim before the insurance kicks in—to bring down your premium on this coverage.

2. Property damage liability – this covers you in the event you damage someone else’s property such as a car, utility poles, buildings and so on. Your local law designates the minimum amount you would need to buy here.

3. Bodily injury liability – this coverage covers you in the event you have hurt or killed someone in an accident. You would need to find out the exact amount the laws require you to buy. When deciding on this take into account how much you can afford to dole out.

4.  Comprehensive coverage – this covers you in case your car is damaged by general acts of nature or by theft that does not include any collision such as falling objects, earthquake, hail, fire, flood, explosion, wildlife encounters and so on. Again, with this coverage you may want to opt for a deductible too.

5. Medical payments coverage – also known as MPC or Med Pay, this serves as primary coverage for medical expenses you and your passengers incur in the event of a vehicular accident, whether or not you were at fault. Laws regarding this coverage can vary from one are to another so be sure to check your local area about it.

6. Uninsured/Underinsured motorist – this coverage covers any medical and other expenses incurred when another driver with no or inadequate auto insurance hits you. This may  or may not be required by your area’s laws so research into that. Incidentally, for an extra cost, you can also buy additional coverage to offset expenses for any damage to your car if hit by an uninsured motorist. Most car owners, however, simply opt for the collision and comprehensive coverage instead.

What a Car Insurance Policy document looks like

Since your car insurance policy is a legal contract, Its understandable that it can get quite an intimidating read. Here’s a simplified way to make better sense of the document. There are three standard parts to each car (and homeowners by the way) insurance policy:

Declarations Page – You’ll find your name, the policy period covered and the amount of premium you pay. It also includes a description of the insurance coverage provided as well as the limit you, the policy holder, have to pay for a claim under each coverage.

Insuring Agreement – The body of the policy, this part details the obligation of the insurance company to you for the premium you’re paying. Information of who is covered along with pertinent details such as the name/s of the insured individual/s, addresses and other individuals authorized by the insured to use the car be found here too. Inclusions and exclusions of each and every coverage are likewise detailed in here. Carefully go over these details to avoid any future misunderstandings when the need arises.

Conditions of the policy – This last section describes your responsibilities when you have a claim, for example how much time you have to report it and what documentation you must give to the insurance company. It also explains the terms for canceling your policy—both for you and the insurer. You can cancel your policy at any time, however your insurance provider may only cancel under certain conditions and with advance notice to you.

In A Nut Shell

Let’s sum up what a car insurance really entails but before that, you have to know what insurance policy best fits your car. To do this, make an assessment of your car. How much do you think its worth? Basically, if its less than 2,000 USD, it would be wiser to skip the comprehensive and collision coverage. If its about 30,000 USD however, than you would be better off with the said coverage. You need to ask yourself if whether you can replace your car if it becomes totaled in an accident. Otherwise, you would be paying more on the insurance than on a new car purchase. Naturally, this wouldn’t be right.

Next step, know what your local laws are. You would have to do a little research here but the knowledge you get will be very beneficial to you when you decide on a car insurance coverage.

Determine how much money you can afford for an insurance coverage. Consider the various worst-case scenarios in a car accident and try to figure out the coverage best suited for it. You could opt for a deductible in a liability coverage too, for instance. Remember that your assets can be used as payment for someone you injured in a car accident. Know what you’re willing to lose, as it were.

Other coverage apart from your car may also prove beneficial so don’t disregard them. At the very least, study what they cover. For all you know, you may one day end up needing health insurance to offset hospital bills or medications.  You may discover the need for extended coverage for repairs and parts. In this connection, be sure that you don’t end up having redundant coverage. In some cases, as I found out myself, the personal insurance may also cover vehicular accidents or injuries sustained during vehicular accidents. In this case, you need not add anything more to the compulsory Personal Injury Protection. Stick to the bare minimum required by law. 1, 2, 3, 4, 5, 6

Photo Credit: 123RF Stock Photo




Leave a Reply