The Four Different Components of Automobile Insurance
By Jean Chatzky, Author of Talking Money, Everything You Need to Know about Your Finances and Your Future
Four different components make up the typical auto insurance policy:
Collision/comprehensive. Collision coverage pays to repair or replace your car after an accident while comprehensive pays for damage to your car that occurs in other ways. If your car is vandalized, in a fire, damaged by water from a major storm, or stolen, for example, comprehensive coverage kicks in. If your car is totaled, this coverage will only pay up to the amount that your car is actually worth according to the Kelley Blue Book. And it can be very expensive, usually encompassing about 40 percent of your premium. That's why as your car gets old and its value declines, you may want to consider dropping collision and comprehensive altogether. When should you make the move? According to the Insurance Information Institute, you want to start thinking about it when your car hits the five-year mark. Two caveats: You can't typically drop coverage if your 're still paying off your car loan; since the bank owns part of your car, it wants to make sure it's insured. And remember, if you're in an accident and don't have coverage, you'll have to pay repair costs yourself.
Liability. If you're in an accident and someone other than your passenger is injured, liability coverage will pay for medical expenses, lost wages, and any settlements (for pain and suffering) and legal expenses. It will also kick in to cover repairing or replacing property you may have damaged. most states require that you have at least $50,000 of coverage per person and $100,000 per accident. But that isn't enough. The Insurance Information Institute recommends at least $100,000 worth of coverage per person, $300,000 per accident, and $50,000 for property damage liability. If you're worth more than $300,000 that's still not enough. You'll want an additional liability policy--called an umbrella policy--as well.
Medical payments/personal injury protection. If you're involved in an accident where you or others in a car you're driving are injured, medical payments coverage will pay for your medical expenses and for the funerals of anyone who is killed. It's pretty liberal in that you don't have to be driving your won car; you can be at the wheel of someone else's (as long as you didn't run off with the car without permission). This protection also covers you or your family members if you're injured while walking. It can also pay for missed wages if an accident keeps you out of work.
Uninsured/underinsured motorists. If you're injured by a driver who doesn't have enough auto insurance or any at all, this component will pay medical and funeral expenses for you and your family. Like liability insurance, buying this component is required in some states. If it's not, buy it anyway. It's inexpensive--as little as $5 to $10 in some states for $100,000 of coverage--and it's crucial.
Other. Some policies also offer other add-ons like reimbursement for a rental car if yours is in the shop or stolen, broken glass coverage, or coverage for towing and other emergency road service. I've used the rental car reimbursement feature myself and think it's worth having (at a typical cost of $29 to $30). You don't need towing coverage if you're a member of AAA. Some luxury auto manufacturers are also throwing in a towing package, gratis.
Author Biography: Jean Chatzky, author of Talking Money, Everything You Need to Know About Your Finances and Your Future, appears weekly on NBC's the Today show, twice weekly on MSNBC, and writes a monthly column on the back page of Money magazine, the nation's leading personal finance magazine with nearly two million subscribers. She is also a frequent contributor to USA Today.