Back to the Basics: The Key Components of Your Auto Insurance Policy

So you’re about to buy a car—or maybe you just bought one today—and you need insurance (if you're renting instead, see Is Rental Car Insurance Worth It?). What do you need to know before you start looking for the best policy around?

This article explains some of the basic terminology and fundamental concepts related to auto insurance (for the components of insurance policies in general, see The Key Elements of an Insurance Contract). The goals are to help you read and understand an insurance policy, and to know what is essential when it comes to buying insurance.

Some Essential Terminology

Insured: a person who buys insurance (in this scenario, you!)

Insurer: an insurance company that sells insurance.

Coverage: a dollar amount of protection provided by an insurance policy.

Occurrence: an event—typically a collision—that causes injury, property damage, or both. Defined as "a cause of an injury, damage, or destruction of property that belongs to a third party."

Bodily Injury: an injury, either physical or emotional, to a person or persons. "Bodily Injury" is one of the parts of an insurance policy. It covers injury to people other than you, people who file a claim or lawsuit against you and are usually not occupants of your vehicle (find out what happens if you get sued in Insurance and Lawsuits). It is divided into two parts: one part if only one person is injured, the second part if more than one person suffers an injury from the same accident. So, if you have a 50/100 policy (referring to the maximum pay-outs) with respect to bodily injury, the insurer will pay up to a maximum of $50,000 if one person is injured in a collision (an occurrence) in which you are at fault, and up to a total maximum of $100,000 if more than one person is injured.

Property Damage: As the name clearly implies, this part of the policy covers damage to property, but only property belonging to other people, not your own, caused by a collision in which you are at fault. In collisions, this is usually damage to another vehicle but it's not limited to this—it could be damage to a fence, could be a farmer’s cow that you hit and killed, could be a computer in another person’s car that was destroyed. If you have a 50/100/25 policy, the third figure is the property damage coverage (in this case, $25,000 per occurrence).

Uninsured and Underinsured Motorist Coverage (aka UM and UIM): If you are injured or suffer property damage caused by another driver but that driver has no insurance (is uninsured), then you can file a claim against your own insurer under the Uninsured Motorist part of your policy. If you are injured or suffer property damage caused by another person and that person has less coverage than you have (is underinsured), after collecting what you can from them, you can file a claim against your own insurer under the Underinsured Motorist portion of your policy. In this second case, let's say you have a 50/100/25 policy and the driver that causes the collision has a 25/50/10 policy, you could collect, subject to proof of injury, $25,000 from the other driver’s insurer for your bodily injuries. If this was insufficient to compensate for your injuries, along with associated medical bills or lost income, you could file a claim against your own insurer for a maximum of another $25,000 (your $50,000 coverage minus the other driver’s $25,000 coverage).

Medical Payments: This coverage provides medical payments to you and occupants of your vehicle in the event of a collision. It doesn't matter who is at fault—whether it's you or the other driver. It's essentially no-fault insurance for medical bills and has no deductibles, copayments, or other limitations that are found in health insurance policies (see All The Ways You Pay for a primer on these and other concepts related to health insurance).

Collision: This coverage applies to your car and any property within your car that is damaged in a collision (as opposed to property damage coverage, which applies only to other people’s property).

Comprehensive: This covers damage to your vehicle due to causes other than a collision, such as fire, earthquake, flood, and vandalism.

The Essentials

Each state in America has its own laws with respect to minimum personal auto insurance coverage (see Why You Need More Than the Statutory Minimum When You Buy Auto Insurance for a list). At one end of the scale is Florida, with 10/20/10—$10,000 bodily injury coverage if one person is injured, $20,000 if two or more people are injured, and $10,000 in property damage coverage (find out what are The Top 5 States with the Highest Auto Insurance Rates). At the other end are Maine and Alaska, with a minimum of 50/100/25 (see The Top 5 States with the Lowest Car Insurance Rates).

Only bodily injury coverage and property damage coverage are required. Uninsured/underinsured motorist, medical payments, collision, and comprehensive coverage are not required under the law. If you take out a loan to buy the car, however, your financial institution might require you to buy collision and comprehensive coverage.

The minimum coverage under the law is not enough! In a serious accident your medical bills could easily reach several hundred thousand dollars—and could conceivably exceed one million dollars. If you are hit by an uninsured driver, and if your health insurance has high deductibles or copayments or limitations on what is covered, you could be left owing a huge sum to your healthcare providers. For this reason, a high amount of coverage for uninsured/underinsured motorist insurance is highly recommended. Since most insurance policies have the same amount of coverage for bodily injury as they do for UM/UIM, you will want a high level for bodily injury as well.

Medical payments coverage is not required but it's relatively inexpensive and collecting on it is easier and less of a hassle than collecting on a health insurance policy. Plus, if you or one of the occupants of your car don't have health insurance, it’s worth every penny spent.

When should you arrange your insurance coverage? If you buy a car from a used car dealer or from an individual through a newspaper ad, these sellers are not required to confirm that you have insurance. The best thing to do is meet with an insurance agent sometime before you go shopping and make all the arrangements short of actually beginning the coverage (but consult 5 Questions to Ask Before Choosing an Insurance Agent first). In any case, your coverage can't start until the agent knows what kind of car you have bought (see How Auto Insurance Companies Value Your Car). Make a plan with the agent to call them as soon as you buy the car and begin coverage immediately, which is to say that coverage should begin at 12:01 a.m. on the day you buy your vehicle (the agent can backdate the policy by a matter of hours).

For a more complete discussion of these and related issues, see The Ultimate Guide to Auto Insurance. Be safe; be insured!