What is an auto insurance policy?

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Here's what you need to know...
  • An auto insurance policy is an indemnity contract that’s meant to protect you against losses that could potentially happen when you own a car
  • When you buy auto insurance, the price that you pay is determined by your risk class and the property that you’re insuring. Rates vary from person to person
  • Most states have laws in place that require vehicle owners to buy a minimum amount of insurance.
  • You can build a custom policy that includes all of the coverage options that you need along with the coverage that’s required by law

Buying a car and buying car insurance go hand-in-hand. Not only does car insurance provide you with a high level of protection, it’s also a mandated requirement in almost every state in the United States.

Since you’re going to have to prove that you have an insurance policy before you register your car, it’s best that you understand what a policy is and what it provides

While insurance is advertised like other consumer goods in your local retail stores, it’s more of a service than it is a tangible item.

Since you can only put your insurance to use when you have a loss, it’s important to build a comprehensive policy.

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What is the purpose of auto insurance and when are you required to buy it?

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When you buy an auto insurance policy, you’re entering into an indemnity contract. Since most states hold legal owners of vehicles accountable for the damage that their vehicles cause, buying insurance is a must.

By law, you’re only required to buy insurance when you’re the legal owner of a car and you live in a state with compulsory insurance laws.

While a majority of states have mandatory insurance requirements, there are a few that allow you to provide proof of financial responsibility instead. You can deposit cash, buy a bond, or file for a self-insurance certificate.

It’s up to you to decide if you would like to put your money at risk to avoid paying auto insurance premiums.

When you buy an auto insurance policy, you have a guaranteed amount of protection that will help you pay for third-party and even first-party claims. If you are contemplating insuring yourself, make sure to research your insurance options first.

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What type of insurance is required by law?

Insurance requirements vary by state. Since a majority of states operate under a tort law system, you will be required to buy third-party liability coverage. If you live in one of the dozen states that has a modified no-fault system, you’re also required to buy Personal Injury Protection.

Here’s a breakdown of what required coverage options pay:

  • Bodily Injury Liability — pays for medical treatment costs when you cause an accident and another party is injured
  • Property Damage Liability — pays for repair costs or replacement expenses when you damage or total someone else’s property
  • Personal Injury Protection — pays for your own medical expenses and other related expenses that are incurred when you’re injured in an auto accident as a driver, passenger, or pedestrian

Are there any other coverage options available?

Buying a basic policy will help you comply with state requirements, but that doesn’t mean that you have sufficient coverage.

If you really want to have a buffer of protection over your head while you’re driving your car, it’s best to build a custom policy. You can do this by raising your liability limits and adding optional forms of protection:

  • Uninsured Motorist Protection pays for your medical bills and immediate emergency expenses after you’re in a crash with an uninsured driver (required in some states)
  • Medical Payments — pays for reasonable medical expenses incurred no matter who’s to blame for an auto accident. You can be a passenger, a driver, a cyclist, or even a pedestrian
  • Comprehensive — pays for the cost to repair your vehicle if it’s damaged or totaled after a non-collision loss
  • Collision — pays for the cost to repair your car, up to its Actual Cash Value, after you collide with another vehicle or object
  • Rental Car — pays for a rental if your car is damaged in a loss. If you’re not at fault for the loss, the other insurer will pay

How much will my auto insurance policy cost?

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Insurance policies are sold in terms. You can buy a policy that lasts for either six months or a year at a time. Each policy is personalized.

The premium that you’re quoted is based on your personal rating factors that represent how likely you are to cost the insurer money.

Since everyone has different risk factors, you’ll find that your rate could be dramatically higher than someone else’s, even if you have a clean driving record.

Here are some of the personal factors that can affect your insurance rates after you’ve chosen the coverage options that you want to carry:

  • Age, gender, and marital status
  • Type of vehicle and vehicle safety rating
  • Occupation and vehicle use
  • Credit rating
  • Claims history for the past three years
  • Driving history for the last three to seven years
  • Annual mileage
  • Garaging zip code

Now that you have an understanding of how insurance works, it’s time to find out how much you’ll pay for coverage.

The first step to finding competitive rates is to get auto insurance quotes from several carriers. The quickest way to do this is to use an online rate comparison tool.

Enter your zip code below to search for personalized coverage today!

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