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5 tips for reading your auto insurance policy

how to read your auto insurance policy When it comes to insurance, knowledge is power, experts say.

Yet a 2013 survey by Nationwide found that 57 percent of consumers said they knew more about their favorite television shows than their insurance policies. 

Not only that, but 43 percent said their policies were too complicated and 29 percent said they were confusing.

Such statistics highlight the need for the insurance industry, legislators and regulators to work together to simplify the insurance process, says Mark Pizzi, president and chief operating officer of Direct and Member Solutions at Nationwide.

But until that happens, here are five tips to make reading your policy easier.

1. Familiarize yourself with the structure.

There are three general parts to an auto insurance policy.

  • The Declarations Page provides the basics of the policy -- your name, type of vehicle, drivers in your household, the dates of coverage and the costs associated with your insurance. It also provides a summary of your coverage.
  • The Insuring Agreement is the bread and butter of your policy, and it includes detailed information about all of your coverages, as well as the exclusions -- expenses that are not covered by the policy.
  • The Conditions of the Policy is the portion where your insurance company explains your obligations under the terms of the contract. For example, you may be required to file a claim within a certain period of time after an accident or provide certain documentation when there is damage. The Conditions section will also provide instructions for filing claims and appealing decisions made by the insurance company.

2. Understand the different types of coverage.

Many people don't learn the difference between the various types of auto insurance coverage until they go to file a claim, says Carole Walker, executive director of the Rocky Mountain Insurance Information Association. However, if you don't have the coverages that you need, "by then, it's too late," she says.

  • Bodily injury liability coverage kicks in if you cause an accident that leaves someone else injured or killed.
  • Property damage liability coverage comes into play if you cause an accident that damages someone's property.
  • Collision coverage will pay for damage to your car if it's damaged in an accident.  
  • Comprehensive coverage protects your car if it is damaged outside of a collision. For example, damage caused by a hailstorm or an errant football that crashes through your windshield would be covered by comprehensive coverage, as would the theft of your vehicle. 
  • Uninsured/underinsured motorist coverage (UM/UIM) protects you if you get in an accident caused by someone who does not have enough auto insurance coverage to pay for the damage.  In some states, you can stack your (UM/UIM) t coverage, which means you can multiply the coverage limits based on the number of vehicles you have. For example, if you have $25,000 in coverage for one car, you could stack your coverage and have $50,000 in coverage for two cars and $75,000 in coverage for three cars.
  • Personal injury protection (PIP) covers medical expenses for you and your passengers that result from an accident -- no matter who's at fault.

3. Know your deductibles.

A deductible is an amount you must pay before the insurance company pays out on a claim. When it comes to auto insurance, deductibles are typically required when you buy collision and comprehensive coverage.

For example, if you file a claim for $5,000 in damage to your car and you have a $500 deductible, you would pay $500 before the insurance company paid out the other $4,500. 

Not only does understanding your deductible ensure you know how much you need to pay out of pocket, but it can help you save money. If you increase your deductible, you can lower your premium.

According to a September 2014 study, raising your deductible from $250 to $500 could save you up to 7 percent on your premium.  

4. Understand your limits.

Auto insurers set limits on how much they will pay on liability claims.

Typically, liability coverage limits on an auto insurance policy are written as two numbers such as $100,000/$300,000. The first number -- the $100,000 in this example -- refers to the maximum amount your insurer will pay in bodily injury liability insurance per person.

The second number -- the $300,000 -- refers to the maximum amount your insurer will pay in bodily injury liability insurance per accident.

Some policies include a third number that refers to the maximum amount the insurer will pay for property damage liability. In the example $100,000/$300,000/$50,000, the third number indicates that the policy will pay up to $50,000 in property damage liability per accident. 

It's important to make sure your limits aren't too low. Many experts recommend that your policy covers limits of at least $100,000 per person and $300,000 per accident.

If you have a limit of $100,000 per accident in liability coverage and you cause an accident and are sued for $150,000, you could be responsible for the $50,000 your insurer doesn't pay.

5. Know what's mandatory and what's optional.

Some auto insurance coverages are mandatory, while others are optional. For example, auto liability insurance is mandatory in every state except New Hampshire.

States vary on how much insurance they require. For example, Alabama requires $25,000 in body injury liability coverage while Pennsylvania only requires $15,000.

While collision and comprehensive coverages aren't required by law, some banks require drivers to buy them when they take out a car loan. Other types of coverage, such as rental car coverage -- which pays for rental car fees if your vehicle is damaged and needs repairs -- aren't mandatory, but may provide peace of mind.

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