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What Is Car Insurance?


If your vehicle gets smashed by a falling tree, stolen by a crook or totaled by a distracted driver, would you have enough savings to repair or replace it?

For most of us, the answer is a resounding “no.”

Thankfully, having car insurance means you don’t need a massive savings account to get back on the road. It gives you protection against six types of risk and potential financial losses:

1. Collision: Pays for damage to your car (minus your deductible) when you get into an accident, even if it’s your fault.

2. Comprehensive: Pays for damage to your car (less your deductible) caused by something other than a collision, such as fire, vandalism or a falling tree.

3. Property damage: Pays for damage you do to someone else’s property, like damaging that person’s car or destroying that person’s fence or landscaping.

4. Bodily injury: Pays when you hurt someone in an accident or get sued for the victim’s injuries.

5. Personal injury protection (PIP): Pays when you or your passengers are hurt in an auto accident and may cover lost wages, medical bills and funeral expenses.

6. Uninsured and underinsured motorist: Pays when you’re in an accident with someone who doesn’t have his or her own auto insurance, is underinsured or flees the scene.

States and lenders have different requirements for the types of auto coverage and minimum amounts you have to buy. For instance, Texas requires drivers to carry insurance that pays at least $60,000 for injuries and $25,000 for property damage per accident.

However, if your financial damages exceed your car insurance coverage, you could be sued for the difference. So always make sure you have enough auto insurance coverage to protect your assets.

How Much Does Car Insurance Cost?

When you buy car insurance, the amount you’re charged (the premium) varies depending on factors such as your age, vehicle make and model, driving record and credit score.

Yes, that means if you’re young, have been in a few fender-benders or have poor credit, insurers may consider you more risky and charge you more than average drivers in your area.

The vehicle you choose to drive also determines the cost of your car insurance. It probably won’t surprise you that family mini-vans cause fewer losses for insurers than fast, sporty cars. (Read “The 15 cheapest vehicles to insure” to learn more about cars and trucks with low insurance costs.)

Another important factor that insurers consider is where you live. For 2010, the average auto insurance premium in Washington, D.C., was $1,134. But in North Dakota it was only $529, according to the National Association of Insurance Commissioners.

Although car insurance can take a bite out of your budget, the good news is that many insurers offer discounts. If you have a good driving record or have several policies with the same insurance company, you typically get a break.

To get the most auto insurance for your money, it’s important to shop around and compare prices.

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