5 misunderstood auto insurance policy terms

By Michele Lerner Posted : 11/07/2012

commonly misunderstood car insurance coverage termsDeciding which types of auto insurance coverage to purchase and how much coverage you need is sometimes driven by state insurance requirements or by your lender. While it may be helpful to know what mandated car insurance coverage you need to buy, you may still be mystified by some of the coverage you're purchasing.

To help, we explain five commonly misunderstood auto insurance policy terms.

1.Comprehensive. The word "comprehensive" means inclusive of a broad range of items. In auto insurance, the word actually refers to coverage limited to your vehicle. (See: "Something to hold on to: comprehensive and collision insurance.")

"Some companies call comprehensive coverage 'other than collision,' because essentially this covers damage to your car from most things other than a collision with another car," says Jann Samarzja, product design senior specialist with American Family Insurance in Madison, Wis. "Comprehensive coverage does not cover damage to another car or other property and doesn't cover any personal injury."

This coverage pays to repair or replace your vehicle if it's stolen, vandalized, damaged by fire, hail or a flood or if a bird damages your windshield.

"Most states don't require comprehensive coverage, but often a lender will require it in case they need to repossess your car and need to have it repaired," says Samarzja.

2.Bodily injury liability insurance. Samarzja says that most states require this coverage because it protects an innocent third party if you cause an accident.

"Bodily injury liability insurance kicks in if you're at fault in an accident and pays for the injuries of someone you hurt," says Samarzja.

This coverage does not pay for your own injuries or for your passengers' injuries even if you are at fault. Your injuries can be covered by optional medical payments insurance or your own health insurance. Your passengers' injuries would be covered by their own health insurance.

3.Property damage liability insurance. Most states require this coverage because it pays for damage to another vehicle or to other property caused by your car.

"Property damage liability insurance pays for damages you cause by hitting another car or by hitting something like a mailbox, a light pole or even a storefront," says Samarzja.

This coverage only pays for damages to another person's property caused by you. To protect your car, you need collision coverage. (See: "What does property damage liability coverage do?")

4.Personal injury protection (PIP). Twelve states (Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah) and Puerto Rico have no-fault insurance laws that require drivers to make medical claims with their own insurance company regardless of who is at fault in an accident. While regulations vary by state, drivers who live in a no-fault state are required to purchase PIP coverage. (See: "What is no-fault insurance and which states have it?")

Typically, in addition to medical expenses, PIP covers funeral expenses, lost wages and what is sometimes called "loss of essential services," which includes benefits if you need help doing household tasks due to injury.

"Generally, PIP pays for medical coverage for you and passengers in your vehicle along with things like loss of wages while injured," says Samarzja. "Sometimes it even pays for someone to clean your house while you are recovering. The details of PIP are complex, because it varies a lot by state."

Your PIP coverage limits set the maximum amount that will be paid per person for any combination of covered expenses. Some states allow you to choose your PIP limits and others set it to a certain amount, for instance at $10,000. In some cases, you may choose to buy additional PIP coverage.

PIP covers injuries only, not damage to cars or other property.

In states without no-fault laws, Samarzja says, medical bills are covered by health insurance policies or an optional medical expense reimbursement endorsement to your car insurance policy.

5.Deductibles. A deductible is the amount you will have to pay out of pocket for each car insurance claim before your insurance company pays the claim.

You can choose from a wide range of deductibles from $0 to $1,000 for your auto insurance, Samarzja says. Usually those deductibles are available in increments of $100 to $250.

"The higher the deductible, the lower your premium," says Samarzja. "Usually an insurance agent can recommend a deduction based on your individual circumstances."

For example, if you drive an older car, you may want a high deductible because you are less likely to repair every ding or dent. (See: "Calculate your savings on auto insurance.")

Your decision on your insurance deductible should be based on your personal finances and your ability to pay that deductible if you must make a claim.

Always ask an insurance company representative if you don't understand the terms of your policy.

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