What Does a Car Insurance Policy Cover?

Most people think the main purpose of car insurance is to pay for your damages after an accident or to replace your car if it gets stolen.

While that is one benefit to auto insurance, it's not the main purpose.

The main purpose of auto insurance is to provide liability protection in case you injure or kill someone during a car accident or cause damage to other people's property.

All 50 states legally require you to carry a minimum amount of this liability insurance. They don't care whether you have insurance to protect damages to your own car.

There are 4 main parts to an auto insurance policy - not all of them are legally required. Let's take a look at them in detail.

1. Bodily Injury and Personal Property Liability (Required in All 50 States)

This insurance pays damages for other people's injuries or deaths caused by an accident that is your fault. It also covers any damages caused to property.

It will cover things such as medical bills, lost wages, pain and suffering. All 50 states require a minimum amount of liability coverage, however, these minimums are usually not adequate. If you cause more damage than what is covered, your personal assets will be at risk.

This type of liability coverage is usually presented in a series of 3 numbers such as: 100/300/50

In this example, your coverage would pay up to $100,000 for injuries caused to any one person. If there are multiple people injured, the insurance will pay out a maximum of $300,000. The final number indicates the amount that will be covered for property damage - $50,000.

It is recommended that you have at least 100/300/50 of liability coverage in your auto insurance policy.

2. Personal Injury Protection (Required in Some States)

This coverage pays for your own medical expenses and lost wages as well as your guest passengers if injured during an accident.

If you already have good medical and disability policies, you may not need this type of coverage (See: Should You Get Medical Payments Coverage?). Several states allow you to reject this type of coverage entirely.

3. Collision and Comprehensive (Not Required)

Collision provides coverage in case your car is damaged as a result of any kind of accident, such as crashing into another vehicle or into a utility pole.

Comprehensive covers your car in case it gets stolen or is damaged by natural disasters.

You can elect not to have collision or comprehensive in order to save money. This works if your car is not worth much and you don't mind taking the risk to cover any damages yourself.

4. Uninsured Motorist (Required in Most States)

Provides protection if you're involved in an accident where the other party does not have insurance or doesn't have enough to cover your damages.

It also protects you in the event of a hit-and-run accident.