Learning Center

Auto insurance protects you against financial loss if you have an accident. It

is a contract between you and the insurance company. You agree to pay the

premium and the insurance company agrees to pay your losses as defined in your


Auto insurance provides property, liability and medical coverage:

• Property coverage pays for damage to or theft of your car.

• Liability coverage pays for your legal responsibility to others for bodily

• injury or property damage.

• Medical coverage pays for the cost of treating injuries, rehabilitation and

• sometimes lost wages and funeral expenses.

An auto insurance policy is comprised of six different kinds of coverage. Most

states require you to buy some, but not all, of these coverages. If you’re

financing a car, your lender may also have requirements.

Most auto policies are for six months to a year. Your insurance company should

notify you by mail when it’s time to renew the policy and to pay your premium.

What is in a basic auto policy?

Your auto policy may include six coverages. Each coverage is priced separately.

1. Bodily Injury Liability

This coverage applies to injuries you, the designated driver or policyholder

cause to someone else. You and family members listed on the policy are also

covered when driving someone else’s car with their permission.

It’s very important to have enough liability insurance, because if you are

involved in a serious accident, you may be sued for a large sum of money.

Definitely consider buying more than the state-required minimum to protect

assets such as your home and savings.

2. Medical Payments or Personal Injury Protection (PIP)

This coverage pays for the treatment of injuries to the driver and passengers

of the policyholder’s car. At its broadest, PIP can cover medical payments,

lost wages and the cost of replacing services normally performed by someone

injured in an auto accident. It may also cover funeral costs.

3. Property Damage Liability

This coverage pays for damage you (or someone driving the car with your

permission) may cause to someone else’s property. Usually, this means damage to

someone else’s car, but it also includes damage to lamp posts, telephone poles,

fences, buildings or other structures your car hit.

4. Collision

This coverage pays for damage to your car resulting from a collision with

another car, object or as a result of flipping over. It also covers damage

caused by potholes. Collision coverage is generally sold with a deductible of

$250 to $1,000-the higher your deductible, the lower your premium. Even if you

are at fault for the accident, your collision coverage will reimburse you for

the costs of repairing your car, minus the deductible. If you’re not at fault,

your insurance company may try to recover the amount they paid you from the

other driver’s insurance company. If they are successful, you’ll also be

reimbursed for the deductible.

5. Comprehensive

This coverage reimburses you for loss due to theft or damage caused by

something other than a collision with another car or object, such as fire,

falling objects, missiles, explosion, earthquake, windstorm, hail, flood,

vandalism, riot, or contact with animals such as birds or deer.

Comprehensive insurance is usually sold with a $100 to $300 deductible, though

you may want to opt for a higher deductible as a way of lowering your premium.

Comprehensive insurance will also reimburse you if your windshield is cracked

or shattered. Some companies offer glass coverage with or without a deductible.

States do not require that you purchase collision or comprehensive coverage,

but if you have a car loan, your lender may insist you carry it until your loan

is paid off.

&nbsp&nbsp&nbsp6. Uninsured and Underinsured Motorist Coverage

This coverage will reimburse you, a member of your family, or a designated

driver if one of you is hit by an uninsured or hit-and-run driver.

Can I drive legally without insurance?

NO! Almost every state requires you to have auto liability insurance. All

states also have financial responsibility laws. This means that even in a state

that does not require liability insurance, you need to have sufficient assets

to pay claims if you cause an accident. If you don’t have enough assets, you

must purchase at least the state minimum amount of insurance. But insurance

exists to protect your assets. Trying to see how little you can get by with can

be very shortsighted and dangerous.

If you’ve financed your car, your lender may require comprehensive and

collision insurance as part of the loan agreement.

What if I lease a car?

If you lease a car, you still need to buy your own auto insurance policy. The

auto dealer or bank that is financing the car will require you to buy collision

and comprehensive coverage. You’ll need to buy these coverages in addition to

the others that may be mandatory in your state, such as auto liability


If you’ve financed your car, your lender may require comprehensive and

collision insurance as part of the loan agreement.

• Collision covers the damage to the car from an accident with another automobile

• or object.

• Comprehensive covers a loss that is caused by something other than a collision

• with another car or object, such as a fire or theft or collision with a deer.

The leasing company may also require “gap” insurance. This refers to the fact

that if you have an accident and your leased car is damaged beyond repair or

“totaled,” there’s likely to be a difference between the amount that you still

owe the auto dealer and the check you’ll get from your insurance company.

That’s because the insurance company’s check is based on the car’s actual cash

value which takes into account depreciation. The difference between the two

amounts is known as the “gap.”

On a leased car, the cost of gap insurance is generally rolled into the lease

payments. You don’t actually buy a gap policy. Generally, the auto dealer buys

a master policy from an insurance company to cover all the cars it leases and

charges you for a “gap waiver.” This means that if your leased car is totaled,

you won’t have to pay the dealer the gap amount. Check with the auto dealer

when leasing your car.

If you have an auto loan rather than a lease, you may want to buy gap insurance

to protect yourself from having to come up with the gap amount if your car is

totaled before you’ve finished paying for it. Ask your insurance agent about

gap insurance or search the Internet. Gap insurance may not be available in

some states.

Do I need insurance to rent a car?

When renting a car, you need insurance. If you have adequate insurance on your

own car, including collision and comprehensive, this may be enough.

Before you rent a car:

1. Contact your insurance company.

Find out how much coverage you have on your own car. In most cases, the

coverage and deductibles you have on your personal auto policy would apply to a

rental car, providing it’s used for pleasure and not business. If you don’t

have comprehensive and collision coverage on your own car, you will not be

covered if your rental car is stolen or if it is damaged in an accident.

2. Call your credit card company.

Find out what insurance your card provides. Levels of coverage vary.

If you don’t have auto insurance, you will need to buy coverage at the car

rental counter. The following coverages are available to you at the rental car


1. Collision Damage Waiver (CDW).

Sometimes called a Loss Damage Waiver (LDW), this coverage relieves you of

financial responsibility if your rental car is damaged or stolen. The CDW may

be void, however, if you cause an accident by speeding, driving on unpaved

roads or driving while intoxicated. This coverage generally costs between $9

and $19 a day. If you have comprehensive and collision on your own car, you may

not need to purchase this coverage.

2. Liability Insurance.

This provides excess liability coverage of up to $1 million for the time you

rent a car. Rental companies are required by law to provide the minimum level

of liability insurance required by your state. Generally, this does not offer

enough protection in a serious accident. If you have adequate liability

coverage on your car or an umbrella policy on your home/auto, you may consider

forgoing this additional insurance. It generally costs about $7 to $9 a day. If

you don’t own a car, and rent cars often, consider purchasing a non-owner

liability policy. This costs approximately $200 – $300 per year. Frequent car

renters sometimes find this more cost-effective than constantly paying for the

extra liability coverage.

3. Personal Accident Insurance.

This provides coverage to you and your passengers for medical/ambulance bills.

This type of insurance, usually costs about $3 per day, but may be unnecessary

if you are covered by health insurance or have adequate medical coverage under

your auto policy.

4. Personal Effects Coverage.

This provides coverage for the theft of personal items in your car. However, if

you have homeowners or renters insurance, you may be covered for items stolen

from the car, minus your deductible. You need to have receipts or other proof

of ownership. This type of insurance usually costs about $1.25 per day. Some

rental car companies combine personal accident and personal effects coverage

together as one type of insurance, while others sell it individually.

The cost of insurance at the rental car counter will vary depending on the

rental car company, state, and location of the dealer and the type of car you


Some rental car companies may check your credit and driving history and may

deny coverage. Check with the rental car company to find out its policy.

What’s the difference between cancellation and non-renewal?

There is a big difference between when an insurance company cancels a policy

and when it chooses not to renew it. Insurance companies cannot cancel a policy

that has been in force for more than 60 days except:

• If you fail to pay the premium.

• You have committed fraud or made serious misrepresentations on your

• application.

•  Your driver’s license has been revoked or suspended.

Non-renewal is a different matter. Either you or your insurance company can

decide not to renew the policy when it expires. Depending on the state you live

in, your insurance company must give you a certain number of days notice and

explain the reason for non-renewal before it drops your policy. If you think

the reason is unfair or want a further explanation, call the insurance

company’s consumer affairs division. If you don’t get an explanation, call your

state insurance department.