What Is the Definition of Car Insurance?

By Dayna Noffke

  • Overview

    Car insurance is required by law in almost every state, and provides a great benefit to consumers. Insurance is a system where auto owners pay premiums to an insurer in exchange for a promise that in the event that their car is damaged, the company will then provide restitution.
  • Definition

    Car, or auto, insurance is basically a contract that is entered into between the insured (insurance purchaser) and the insurer (company) wherein the insured pays money for a policy that will provide protection against financial losses in the event that the insured individual's car is damaged. There are many different types of insurance coverage, and the level of protection that is purchased is a matter of personal preference. Most states have laws requiring that motorists carry a minimal amount of liability coverage that will pay for damages to other parties in the event of a collision.
  • Types

    There are myriad different levels of insurance coverage that are available to consumers. Which policies you choose to carry is a matter of your budget, personal preferences and individual financial situation. Liability coverage is the most basic type of car insurance and is required by law in most states. This policy will pay for damages to other parties, but doesn't pay for personal losses. Collision coverage pays for repair or replacement of your vehicle if it is damaged in a collision. Comprehensive coverage, in contrast, will pay in cases where damages occurred in a non-collision incident, such as theft, vandalism, flood or fire. Lenders require auto owners to pay for both collision and comprehensive coverage throughout the term of the loan, until the car is paid in full.

  • Considerations

    Finding affordable auto insurance is much easier now than ever before, primarily because of the ease of accessing information via the Internet. There are many websites that can provide instant quotes for insurance rates based on your personal information. Some also provide side by side comparisons and reviews of different insurance providers. You will have to assess your financial situation to determine what kind of policy is right for you. If your car is paid off in full, you have a choice of whether or not to carry collision and comprehensive insurance. If you choose not to, you will be fully responsible for any damages, up to the cost of replacing your car. If you are in a financial position where you could comfortably purchase a new car, or your car is worth a very small amount, you might consider dropping these policies.
  • Benefits

    Carrying car insurance can help protect you against unexpected losses. If you depend on your car as your sole means of transportation, and could not comfortably purchase another vehicle, it is vital to carry both comprehensive and collision coverage. Many consumers drop comprehensive coverage after the car is paid off in full, mistakenly assuming that their collision policy will cover anything that happens. This is not the case. For example, if your car is stolen and is not recovered, collision coverage does not offer you any restitution. You can also purchase uninsured motorist coverage (UMI) to provide further protection. UMI will help to pay for damages to your car, as well as medical bills, in the event that you are involved in an accident with a driver who is not carrying insurance, or who has an insufficient amount of coverage to pay for your bills.
  • Deductibles

    When you purchase an auto insurance policy, you will have to decide on a deductible level. The lower the deductible, the higher your premiums (payments) will be. A deductible is the amount that the insured will pay on a claim before insurance begins paying. Most insurers offer deductibles of $200 to $1000, although some policies offer $2,000 options. For example, if you choose a policy with a $500 deductible, and damages to your car are $1,000, you will pay the first $500 after which your insurance picks up the rest. In this case, the insurer would pay $500. Your deductible should be an amount that you would be able to comfortably pay to fix your car in the event of an accident.
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