Understanding Your Car Insurance Policy

The most basic car insurance policy includes only liability coverage, which pays for the injuries and damages you cause another party in an accident that was your fault. Most states require drivers to carry certain amounts of bodily injury and property damage liability. However, your car insurance policy options extend far beyond just liability coverage, and most drivers choose to purchase more extensive policies.

Unless the insured vehicle is very old, most car insurance policies include physical damage coverage, which consists of comprehensive and collision coverage. In contrast to liability coverage, collision and comprehensive coverage pays for damages done to your own vehicle. The collision portion of your policy will pay for repairs to your vehicle if you have a collision with an object, such as an electrical pole, or another vehicle. In the event of severe collisions, this coverage will pay to replace your vehicle up to its actual cash value. For everything else that happens to your car, there's comprehensive coverage, which pays for damages not caused by a collision. For instance, if your car started on fire, the comprehensive portion of your car insurance policy would pay for the repairs or a replacement.

How Much Coverage to Buy

The amount of coverage you should purchase depends on your assets, your budget, and your state's laws. You will have the opportunity to set, within limits, the amount of liability protection included in your car insurance policy. Needless to say, you should purchase at least the amount of liability coverage required by your state's laws. Drivers with assets of significant worth should purchase auto insurance policies with larger liability limits. Otherwise, an accident-related lawsuit could force you to sell your home and clean out your savings and retirement accounts. Finally, your budget may also play a role in how much coverage you buy. Financial constraints may limit the car insurance policy options from which you can choose.

Choosing the Right Type of Policy

A one-size-fits-all car insurance policy works for many drivers, but it may not be the best option for you. When choosing among different types of car insurance policies, consider your needs. If you have an older vehicle that isn't worth much money, you can probably get away with a liability-only policy. If you do not have health insurance, you might consider adding medical payments coverage to your car insurance policy options. Medical payments will take care of your medical expenses and those of your passengers after a car accident. Even if you have health insurance, you may purchase medical payments in order to cover your policy's deductibles.