How does auto insurance work?
This is Part 3 in our four part series on Auto Insurance. We have found that many insurance consumers have no idea how their auto insurance works and how it can be used to protect them. For that reason, we wanted to write a series to help make sure that people are making well-informed decisions when it comes to purchasing their auto insurance and choosing the coverage that best fit their needs.
Collision and Comprehensive Coverage
Our first two posts covered Liability Coverage and Uninsured/Underinsured Motorist Coverage on your auto insurance. The third key coverage of auto insurance is two-part and called 1) Collision Coverage and 2) Comprehensive Coverage. Unlike Liability, Collison/Comprehensive Coverage is not required by law. These are optional coverages that cover the damage done to your own vehicle in different scenarios.
While Liability Coverage pays for the repairs of the other party’s vehicle if you are at fault in an accident, Collision Coverage pays for the damages to your vehicle when you are at-fault. Whether you hit another vehicle, a fire hydrant, a tree, a house, etc. Collision is used to cover the damages to your vehicle when YOU strike another object. Collision Coverage has a deductible tied to it, which is typically $500, though it can be increased or decreased. If you were to increase your deductible it would make your auto insurance rate decrease, while if you decreased your deductible you would have to pay a higher rate. The deductible is the amount that you are responsible for before your auto insurance will pay to repair damages. So, if you are at fault in an accident and there is minor damage to your vehicle that only costs $500 to repair, then you would be responsible for the whole amount if you had a $500 deductible. If you were in an at-fault accident and it cost $2,000 to repair your vehicle, then your auto insurance would pay $1,500 after you paid your $500 deductible.
Comprehensive Coverage works in much the same way as Collision Coverage. It has a deductible attached to it that is also typically $500, but can be increased and decreased to as desired. Comprehensive Coverage is the part of your auto insurance that will pay for damages to your vehicle when you are struck by an object. A limb could fall on your car, a rock could fly from a truck on the highway and hit your windshield, hail could do damage to your vehicle. Each of these cases and any other scenario where something else strikes your vehicle are covered under the Comprehensive portion of your auto insurance. So, let’s imagine that you are visiting family and your vehicle is parked out in front of their house. That night, while you sleep, there is a hailstorm that dents up your car and cracks your windshield, causing $2,000 worth of damage. Like the Collision example above, your auto insurance would pay $1,500 after you covered the $500 deductible.
These are the two coverages that increase the price of auto insurance the most. If your vehicle is getting old and not worth as much, then it may not be worth it to pay more for these two coverages. You may not care to have the vehicle repaired if an accident were to happen. However, if you have a 5-year old vehicle that still has a decent value then it makes sense to insure the property damage to the vehicle. These are all things to think about and ask about when you are talking to your insurance agent. This is also why it is important to have, at the least, annual reviews of your auto insurance policy to make sure that the coverages are still fitting your needs.
Our fourth and final post will be up in a few days and will explain additional, optional coverages that are available on your auto insurance policies!