What Is Car Insurance?

Car insurance is a form of financial protection for owners of a vehicle. Auto accidents can be very expensive due to the costs associated with property damage as well as bodily injury. Most people are unprepared to handle this type of sudden expense. What insurance companies do is collect a relatively small amount money from a group of people to use when any of those people are involved in an accident.

The basic idea here is that the risk is spread among a number of people, many if not most of whom may never benefit directly. In other words you may pay your insurance, called premiums, for many years and never be involved in an accident. Is that money wasted? Of course not. The alternative would be for you to have had tens of thousands of dollars sitting untouched in a bank account just in case.

Liability Insurance

Liability insurance is a type of insurance that covers what you, the vehicle owner, are liable (responsible) for as a result of an accident. When you are at fault in an accident, you are responsible for paying the damages. Suppose you crash into a brand new Mercedes and push it into a someone's yard. You would be responsible for the damage to the Mercedes, the damage to the yard, and any people injured as a result of the accident.

If you did not have insurance, your entire savings could be wiped out and your future earnings garnished to pay the debt. When choosing property and bodily injury limits, be careful not to choose too low of an option. Whatever the insurance doesn't cover is your responsibility.

Collision Insurance

This insurance covers damage to your car when it hits or is hit by another vehicle or object. When you buy this type of protection, the deductible is the amount for which you are responsible. The higher the deductible, the lower the premium. The coverage limit is set by the policy.

This type of insurance is not usually required by the state. The state is okay if you lose your car. They are just worried about you damaging someone else's vehicle. If you have a loan on your car, though, the lender will probably require collision insurance to protect their investment.

Comprehensive Insurance

This type of insurance covers your vehicle (and possibly other vehicles you may be driving) from damage other than that covered by collision. For example, it would cover your vehicle being stolen or damaged by flood, fire, or animals. Again, the higher the deductible, the lower the premium, so choose accordingly. Remember, though, that if your vehicle is old and worth much, this insurance may not be right for you.