Anyone who owns a vehicle will likely also own auto insurance. In fact, the most common auto insurance policy that is sold in the marketplace today is the personal auto policy, or PAP. These policies are written in plain, simple wording, and they provide coverage for liability, medical payments, uninsured / underinsured motorists, and physical damage.

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It is important to have a good understanding of how car insurance works, as well as what factors go into pricing these policies. Knowing how insurance works can help you if you ever need to utilize the policy. Knowing how much you pay will you find the best type and amount of coverage for your needs.

Types of Auto Insurance Coverage

Having auto insurance goes along with either owning or leasing a vehicle. In fact, in most states, it is required by law that before a license will be granted, you must purchase at least a minimum amount of coverage.

The premium that you are charged for this coverage - typically referred to as your auto insurance policy - will be dependent on several key factors. These include the type of vehicle that you drive, as well as your age and gender, credit history, and your past driving history - primarily in terms of accidents and any moving violations such as speeding tickets and / or DUIs.

One of the first steps to understanding how car insurance works is to learn the different types of coverage that can make up an overall policy. This is because in many cases, a person's auto insurance policy can be based on several different components. These may include the following:

  • Collision Coverage - Collision coverage is the part of your auto insurance policy that will pay for covered damages to your vehicle that are caused by a collision with either another vehicle or with an object.

  • Liability Coverage - Liability coverage will pay for covered accidental bodily injury, as well as for property damage to others. Covered injuries may include medical expenses, pain and suffering, and even for lost wages that are due to the inability to work that is caused from the accidental injuries. Covered damage to one's property may include both damaged autos and actual property such as fences and even homes. The liability coverage component of your auto insurance may also pay for defense and court expenses if you are sued by another driver or by someone else who is injured or involved in the accident in some way. This type of coverage can be important - especially if you have assets to protect that could be lost in the event of a lawsuit. Individual state laws will typically determine the minimum amount of liability coverage that must be purchased. However, drivers in each state can also purchase more than the state mandated minimums.

  • Comprehensive Coverage - Comprehensive coverage will pay for the loss or damage to your vehicle that does not actually occur in an auto accident. Some examples of what is covered in the comprehensive component of your policy may include loss due to vandalism or theft, as well as that caused by wind, fire, hail or flood.

  • Medical Coverage - You can also purchase medical coverage. This will pay for medical expenses - regardless of which driver in an accident is at-fault - when their injuries are caused by the accident.

  • Uninsured / Underinsured Motorist Coverage - Uninsured and / or underinsured motorist coverage is also available as part of your auto insurance coverage. Uninsured motorist coverage will pay for damages to your vehicle if an accident has been caused by a driver who does not carry liability insurance coverage, whereas underinsured motorist coverage will pay for damages to your vehicle when an accident has been caused by an individual who simply does not have enough liability coverage.

  • Rental Reimbursement Coverage - Rental reimbursement coverage will pay the costs of a rental vehicle if your own covered vehicle has been damaged due to an accident. In most cases, there is a daily maximum amount that will be paid for rental reimbursement coverage.

  • Personal Injury Protection (PIP) Coverage - In some states, but not all, personal injury protection coverage is required. This type of auto insurance will pay for medical expenses of the driver - regardless of who is at-fault for the accident.

Should you need to use your auto insurance coverage due to an accident, you will typically be required to first pay the policy deductible before the policy's benefits will be paid out. The deductible is the amount that the insured is responsible for paying before the insurance company pays the remainder of the covered loss. Most auto insurance policies have deductibles of $250, $500, or $1,000. Usually, the higher the amount of your deductible, the lower the amount of your premium, and vice versa.

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