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Car Insurance 101

Insurance is a fact of life for anyone that's driving a car these days. The weather could be perfect, the conditions could be optimal. You never know what might happen be it on a beautiful country road or a crowded city street. As such, we all have to drive with insurance, which means we all want to obtain the most coverage for the least amount of money. It's a game of attrition and we hope the guide below will help you find the best Car Insurance coverage for your situation and lead you to a company that can provide the best rates! Here's a little more basic information about insurance.

The strict definition of insurance is a form of risk management primarily used to hedge against the risk of a contingent loss. In the cases we're talking about, the loss could be as small as a bumper or as large as a whole car. Instead of taking the risk directly, we buy insurance to transfer the risk of a loss from ourselves to an insurance company. In exchange for this risk transfer, we give the insurer a basic monthly fee to be a part of their insurance plan and (if there is an accident) a premium. This can be thought of a guaranteed small loss to prevent a large and possibly devastating loss. An insurer is a company selling the insurance. The insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Insurance companies have huge charts (called actuarial tables) that are mathematically calculated to factor in a large number of factors to determine exactly how much at risk you are of an accident (in the same way a Doctor may do for health insurance). The insurance company can then amortize hundreds or thousands of people into their tables and collect enough money such that if any one person got in an accident, they could pay that person's damages without bankrupting the company. If everyone in the company got into a wreck within a very short time, the insurance company could go broke. Considering this never happens (or at least, very rarely), the risk of insuring all these people is negligible. Now that you all know a little more about insurance as a whole, you might wonder what types of insurance there is for motorists specifically.

Liability coverage is the primary and mandatory part of the auto insurance equation. Liability means that your it saves your assets when you're liable for wrecking or injuring someone else's car or body parts, respectively. Liability is quoted as a three-part number like "50/100/50." This number means that means for any single incident, you're covered for $50,000 in bodily injury (per person), $100,000 in bodily injury total (for all people), and $50,000 in property damage. 100/300/50 is the actual minimum coverage recommended by the insurance companies. Whereas the companies that purport these numbers are in the business to make money, they are not a bad idea considering the possible ramifications if you are in a very bad accident; especially if you have a decent number of assets to lose (house, savings, etc.). Without the proper coverage, a seemingly small accident with multiple people involved could result in you being in debt hundreds of thousands of dollars, even if you don't have the money to pay.

Other types of insurance you may be asked about when signing up for a new or updating an existing policy are collision and comprehensive. The two types of insurance share only the fact that they are optional and not required by any state. Due to their nature, they are usually pretty expensive too. Whereas liability covers damage done to another person's property if there's an accident, collision pays for damage done to your own property. If you are hit by someone else, normally their insurance will pay for your repair costs. However, if you do damage to your own car or that person hits and runs, you are left with the bill. Collision insurance prevents this. So, if you're a safe attentive driver (as we ALL are), collision isn't necessary unless you don't own your car. Most times banks who offer loans for people who buy cars will require this. Because they own the car still, you're driving their property and should something happen to the car and it's not insured, the bank doesn't want to take a loss. It's just one of the down sides of driving a new car you do not own free and clear. Comprehensive is the same as collision except it covers everything that could damage your car when you're not driving it (robbery, vandalism, building collapsing and similar situations). Together, collision and comprehensive amount to a huge percentage of your total insurance. Removing them from your policy (again, if you own your car) can save you a huge amount of money (perhaps 50% or more). If you can't justify dropping them entirely, then at least keep your deductibles (the portion you pay in any claim) high.

The other types of insurance you can buy (and insurance companies will be more than happy to sell you) is:

Uninsured/Underinsured motorist coverage. This is also required by most states and is always a good to have. Statistics have shown that approximately 17% of drivers don't have any insurance and a many others do not keep the state minimum amount of insurance. Where as electronic systems have cut down on this significantly and real-time insurance reporting to the state, not all states keep track of this well. Since this part of insurance is mandatory and all people insured do have to pay for it, the cost is a negligible portion of your total insurance costs.

Personal Injury Protection (PIP) or Medical Payments (MedPay) provides reimbursement for medical bills of you and your passengers regardless of who's at fault, and for resulting lost wages. This is a sort of comprehensive for your body. If you have good health insurance that will cover such bills, then this is definitely something you can skip paying to the automobile insurance company. If you don't, then it's a GREAT idea to have. You never know what part of your body could be injured in an accident.

Towing and Rental reimbursement pays for the cost of renting a car should be in an accident. If you get stranded a lot, the cost might be worth it but in most cases, this is a cost that's unnecessary, especially if you have a new car where dealers will often provide cars while your car is being repaired or a second car you can drive in the mean time. If the costs are low and you have a used car and a mission critical job, you might want to splurge. It's usually less than $100 for the entire year.

The last type of insurance is GAP Insurance. This covers the difference between what the car is actually worth and what you owe. This might be an attractive proposition for a car that with heavy depreciation, which is a symptom suffered by young cars in general. As an example, you purchase a new vehicle around $27,000 new, but it might drop to $6,000 in market value after a year. If you total the car at that point, $21,000 is all you'll get from your insurance company, yet you're still obligated to the $23,500 in payments that still remains. Obviously, $2,500 is one gap you'll want closed.