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Understanding auto insurance—the basics

Auto insurance is a contract between you and the insurance company that protects you against financial loss in the event of an accident or theft. In exchange for your paying your premium, the insurance company agrees to pay your losses as defined in your policy.

Standard auto insurance typically provides coverage for:

• Liability – your legal responsibility to others for bodily injury or property damage you cause in an accident
• Medical – the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses��

Basic personal auto insurance (known as minimum coverage) is mandated by most states and Washington, D.C., and laws vary. Auto insurance coverages are priced individually (a la carte) to let you customize coverage amounts to suit your exact needs and budget.

Policies are generally issued for six-month or one-year timeframes and are renewable. The insurance company sends a notice when it’s time to renew the policy and pay your premium for other parties in an accident you cause

Who is covered by my auto insurance—and under what circumstances?

Your auto policy will cover you and other family members on your policy, whether driving your vehicle or someone else’s car (with their permission). Your policy also provides coverage if someone who is not on your policy is driving your vehicle with your consent.

Your personal auto policy only covers personal driving, whether you’re commuting to work, running errands or taking a trip. It will not provide coverage if you use your car for commercial purposes—for instance, if you deliver pizzas.

Personal auto insurance will also not provide coverage if you use your car to provide transportation to others through a ride-sharing service such as Uber or Lyft. Many auto insurers, however, now offer supplemental insurance products (at additional cost) that extend coverage for vehicle owners providing ride-sharing services.

Is auto insurance coverage mandatory?

Auto insurance requirements vary from state to state but it is mandatory in all jurisdictions except New Hampshire. If you are financing or leasing a vehicle, your lender or leasing company may also have its own requirements. Nearly every state requires car owners to carry:

• Bodily injury liability – Covers costs associated with injuries or death that you or another driver causes while driving your car.
• Property damage liability – Reimburses others for damage that you or another driver operating your car causes to another vehicle or a stationary object, such as a building, fence or utility pole.

In addition, many states require that you carry:

• Medical payments (MedPay)��—��MedPay covers medical and funeral expenses when a covered person — the policyholder, passengers or a member of the policyholder's family — if hurt in an auto accident no matter who is responsible.
• Personal injury protection (PIP)��— Also known as no-fault insurance, PIP pays for medical bills, lost wages and other related expenses for you and your passengers after a car accident, regardless of who is at fault. This also includes funeral expenses.
• ��— Reimburses you when an accident is caused by an uninsured motorist, including hit-and-runs. Underinsured motorist will cover costs when another driver lacks adequate coverage to pay the costs of a serious accident.

Even if Medpay and uninsured/underinsured motorist coverage are optional in your state, consider adding them to your policy for greater financial protection.

What other types of auto insurance coverage are typical?

While most basic, legally mandated auto insurance covers the damage your car causes, it does not��cover damage to your own vehicle. To cover your own car, you should consider these optional coverages:

• Collision��reimburses you for damage to your vehicle that occurs as a result of an at-fault collision with another vehicle or stationary object like a building, tree or light pole. While collision coverage will not reimburse you for mechanical failure or normal wear-and-tear on your car, it will cover damage from potholes or from rolling your car.
• Comprehensive��provides coverage against damage caused by an incident other than a collision, such as theft, vandalism, fire, flood, hail, falling rocks or trees, striking an animal and other hazards — even getting hit by an asteroid! Comprehensive policies also typically cover windshield repair and replacement, with some states having no deductible for this.
• Glass coverage��provides supplemental coverage for windshield damage as well as side windows, rear windows and glass sunroofs.

What is gap insurance and do I need it?

Collision and comprehensive only cover the market value of your car, not what you paid for it—and new cars depreciate quickly. If your car is totaled or stolen, there may be a “gap” between what you owe on the vehicle and your insurance coverage. To cover this, you may want to look into purchasing to pay the difference. Note that for leased vehicles, gap coverage is usually rolled into your lease payments.��Please note purchasing gap coverage is typically much more cost effective when you add it as an endorsement to your existing auto policy versus purchasing it as standalone coverage from a dealer or financing company.

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Next steps: Check out this on the types of required and optional drivers insurance coverages.