If you own and operate a vehicle, you are legally required to carry some sort of car insurance (or proof of financial responsibility) in almost every state.
While the laws regarding coverage types and limits vary from state to state, you’ll need to at least meet the state minimum coverage requirements no matter where you live.
Yet, with so many car insurance companies to choose from, it can be difficult for a new buyer to select the policy that is best suited to their needs.
Of course, navigating the world of car insurance can be a confusing endeavor for those who are unfamiliar with the terminology.
The problem is that the true value of your coverage resides in the details. Although the terminology may feel foreign, it pays to familiarize yourself with some of the most basic car insurance definitions so that you can properly compare different auto coverage policies. We’ve created a list of some of the most important terms to understand and watch out for when making your next car insurance purchase.
20 Car Insurance Terms You Need to Know
Let’s start with the basics, shall we? Here are a few terms that you definitely need to understand before purchasing any type of insurance product, including auto insurance.
Premium – This is the fee you pay to the insurance company for the right to be covered by their insurance product. With auto insurance, your premium is often listed as a 6-month cost for coverage. Typically, you can choose to make these payments monthly, quarterly, or in 6-month increments. Many companies will give you a discount if you decide to pay it all upfront.
Deductible – The deductible represents the amount of money you will need to pay out-of-pocket for any damages you incur. You’ll pay your deductible prior to any reimbursement from the insurance company. Typically, you’ll have several tiers of deductibles from which to choose. The higher the deductible, the lower your premium costs will be.
Named Insured/Primary Driver – This is the person (or persons) who are covered to drive the vehicle under the insurance policy. Most of the time, this includes all members of the household who are old enough to drive. “Occasional drivers” are drivers who drive the vehicle occasionally and are also covered under the policy.
Policy Period or Term – This represents the time period for which the insurance policy stays in effect.
Fault and Limits
The main reason you carry auto insurance is for protection against huge out-of-pocket costs due to an accident. However, the amount your insurance company will pay is determined by who is at fault and your liability limits.
At Fault – This definition is pretty straightforward. “At fault” describes the person (or persons) who were at fault for any accident. Typically, the individual found to be at fault (or their insurance company) will pay for the majority of damages to each vehicle.
Liability Limits – Although you may be covered by car insurance, your policy doesn’t include a blank check. Each policy sets a limit on the amount of money it will pay for damages and injuries.
These can vary from policy to policy (and from company to company). Most basic liability coverage is 25/50/25, which means that your insurance company will pay up to $25,000 per injured person, $50,000 per incident, and $25,000 for damaged property. Of course, you can raise your limits, which will also raise your premiums.
Types of Car Insurance Coverage
Not all car insurance policies are created equal. While the terms of insurance vary by company, the terms of coverage may vary within the company, as well. Most car insurance companies provide at least 3 levels of coverage. These are the most common.
Liability Insurance – Liability coverage is automobile insurance that covers property damage and injuries to another party that are result of an accident that was your fault. Essentially, this is required in every state in one form or another. While most states specifically require you to obtain liability insurance, other states require drivers to show “proof of financial responsibility,” effectively making liability insurance required everywhere in the U.S.
Collision Coverage – With collision coverage, your vehicle is covered for damages due to a collision or overturning your vehicle. Depending on your policy, this coverage may be in effect even if you are driving a rental car or another person’s vehicle (with their permission, of course).
Uninsured/Underinsured Motorist Property Damage Coverage (UMPD) – UMPD will cover your vehicle if your car is damaged due to the fault of an uninsured or underinsured driver. This is often used in place of collision insurance.
Comprehensive Coverage – Also known (erroneously) as “full coverage,” comprehensive insurance covers your vehicle from damages that occur not just from collisions, but from outside elements as well. This could include damage from events such as hail, wind, flood, fire, vandalism, and theft.
Injury Coverage Terms
One of the best things about car insurance is that it can help protect you against gigantic medical bills from injuries sustained in an accident. Depending on your coverage, this can be true whether you are at fault for the accident or not. Furthermore, this coverage applies to both you and other drivers, helping to protect you in the event you are sued due to an at fault accident. Be sure to check your state regulations as not all of these types of coverages apply to each state.
Personal Injury Protection (PIP) – If you carry PIP coverage, your car insurance company will pay for the costs of medical and funeral expenses (within specified limits) of the insured driver, passengers in the driver’s car, or pedestrians struck by the insured.
Medical Payments Coverage (MedPay) – MedPay is very similar to PIP coverage but is available in different states. It will pay for limited medical and funeral expenses that are incurred due to a car accident.
Uninsured Motorist Coverage (UM) – If another driver is at fault for an accident that results in injuries or death and does not have auto insurance, your uninsured motorist coverage can help you pay for those expenses. Covered persons include you, your passengers and relatives living with you. Limits may apply.
Underinsured Motorist Coverage (UIM) – This type of coverage is basically the same as UM, however it applies when the other driver who is at fault does not have enough insurance to cover the bills. UIM is also subject to the limits that you choose.
Here are a few other terms that could affect the premiums and payouts on your car insurance policy.
Depreciation – This means that the value of your car becomes less over time due to use. Your premiums should also decrease as the age of your car increases.
Continuously Insured – Like the term states, this means that your vehicle has been insured continuously without any break or lapse in coverage.
Rider – Also known as an “endorsement,” this is a written agreement attached to the basic policy that could either increase or decrease the amount of benefits that would typically be covered under the policy.
Roadside Assistance – This is usually an addition to your auto insurance policy that provides benefits such as towing, jump-starts, locksmith, and other services in the event that you need them.
Surcharge – A surcharge is an increase in premium charged by the insurance company which is typically due to at fault accidents or traffic violations.
Know Before You Buy
Understanding these car insurance definitions is an important part of shopping for auto insurance.
Once you know what these terms mean, you can compare policies based on cost and coverage options. Make sure your analysis compares policies with similar benefits and limits.
Only then will you be able to find the right type of coverage to fit both your needs and your budget.