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All About Car Insurance

Americans love cars. We didn't invent the automobile, but vehicle ownership is not only a rite of passage but also almost a necessity for life, especially if you live in the more rural parts of the country. There are nearly 250 million vehicles on the road in the U.S.[1] That's just slightly more than one for every two people.

Those numbers bring a few realities. First, people need to earn a license to drive a car. Second, not every driver on the road is going to be a good one. That's why we have insurance. Although car insurance in the U.S. dates back to the late 1800s, Massachusetts was the first state to make it mandatory.[2] Today it is mandatory in every state except for New Hampshire, where drivers can opt-out if they can prove they can pay for an accident out of pocket should one ever occur.

Anyone who has ever bought a policy knows that it can be an altogether confusing experience. To make matters worse, agents are not always helpful in clearing up what the terminology means, why your rates are what they are, and why you should buy one type of plan over another.

Let's try to clarify some of that confusion.

Terminology
There are a lot of words and phrases involved that aren't always intuitive. Here are the ones you'll need to understand what you're buying.

When thinking about your bill:

Rate: This is how much your insurance company determines you will pay for your policy. Many factors influence your rate, including your vehicle's age, its make, and model, your age, your gender, your accident history, your speeding ticket history, your geographic location, the average number of accidents in your area. Some of these make sense as factors, but age, gender and an average number of accidents in your area might be a bit unfair, especially if you're a good driver. Unfortunately, there's no way to avoid these factors, other than shopping around and asking your agent what factors are included in the rate decision (they usually don't tell you unless you ask them outright).

Premium: This is the actual amount you pay. Premiums and rates are not quite the same. Your rates may increase with a variety of factors, and you will then pay your premiums. Consider the premiums the actual bill, while the rate is the calculation that determines what your bill will be. Think of it this way: you pay your premium at a particular rate, determined by the company.

Claim: The report you file when you have an accident. You make a claim when you believe the accident that occurred is covered by your current policy. Be warned, however: filing claims can raise your rate, especially if you do it too often.

At Fault: As the term suggests, this means that you are the person responsible for the accident occurring.

Minimum Coverage: The minimum amount of coverage you can purchase in your state, which will vary and will include some terminology that we'll cover in this list as well. Just note that purchasing the bare minimum may be the cheapest option, but you may regret it if you have an accident.

Collision: A policy that includes damage to your vehicle should your vehicle roll over or hit an object, such as a light pole, tree or deer. This is optional, but highly advisable, especially if you live in an area where accidents are common. It often covers accidents whether you're at fault or where someone else is at fault.

Comprehensive: This provides you with the needed funds when something happens to your car that isn't collision, and which is also not your fault, including storm damage, theft, fire, and many other instances.

Liability: There are various forms of liability coverage. In general, a liability policy covers your legal responsibilities for damages and injuries in accidents where you are at fault. Liability coverage comes in two forms: Property Damage and Bodily Injury. As you might expect, in both cases, the policy is designed to cover you when you're responsible for someone else's property damage or bodily injuries after an accident.

Deductible: The amount you pay out of pocket when you file a claim. Although having a higher deductible means you'll have a lower rate and therefore a lower premium, it's not always a wise choice. If for example, you have an accident with a deer, while carrying an insurance plan with a $1,000 deductible, you're more likely than not going to have to pay the extent of the cost of the repair. If you're only covered for the expense of a repair, bodily injury or property damage claim exceeds your deductible.

Endorsement: Additions you can make, such as adding insurance for other drivers or allowing you to drive someone else's vehicle with limited coverage.

Exclusions: This will include types of accidents and other occurrences that your policy will not cover.

Does this help clear up some of the confusion? We hope so! You'll need that knowledge for the next few sections.

How does car insurance work?
Insurance is a legal requirement in most states is for the times when you're at fault, not when something bad happens to you. When you get into an accident, and you're determined to be at fault, your policy pays the other driver for any losses, including bodily injuries and property damage. More coverage tends to be better. If you get in an accident where you're at fault and lack adequate coverage, you're looking at a very expensive bill.

Most states have a minimum coverage law. The Insurance Information Institute provides information on minimum coverage requirements for each state.[3] State laws and your company will write that out in a way that can sound confusing, such as 25/50/25. What does that mean?

The numbers represent the dollar value of your coverage for bodily injury of one person, of two or more people, and of property. In the example using 25/50/25, that means your policy covers up to $25,000 if you're responsible for the injury of one person in an accident, up to $50,000 if you're responsible for injuries for 2 or more people, and up to $25,000 if you're responsible for property damage. Those amounts are paid out to the other parties, not to you. However, if other parties are at fault in an accident and you are injured, or your property (your vehicle included) is damaged or destroyed, their insurance pays you.