Car Insurance

What is car insurance?

Car insurance, simply put, is a promise made between an insurance company and an individual.  The individual (insured) promises to pay the insurance company a certain amount of money.  The insurance company, in return, promises to pay out on behalf of the insured, in the event of a loss.

Let’s say an insured person (Alex) gets involved in an accident.  Alex failed to brake early enough at a stop sign, and accidentally ran into the car in front of him, thus causing property damage to the other’s vehicle.  The amount of damage done to the other vehicle is $7,000.  Alex realizes that this amount of money is too great to be able to pay at the current moment, so a claim is opened.  Alex’s insurance company agrees to pay the $7,000 to fix the other vehicle.

What is a deductible and when does it apply?

A deductible is an amount of money that an insured person will have to pay before the insurance company will pay for the physical damage done to his car.

Ex. Let’s say Alex crashes his car into a brick mailbox.  The damage done to his car is roughly $4,000, and he wants to have his car fixed but cannot afford to pay the $4,000 to fix his car.  So, he decides to have the insurance company pay for the damage done to his car. Before the insurance company will pay to fix the car, an amount of money (the deductible) will have to be paid (which is determined when purchasing the policy), before the company will pay the $4,000. 

What is full coverage car insurance?

Full coverage simply means that an insured has purchased an insurance policy, which promises to pay for the physical damage done to the insured’s car, if the insured is in an at fault accident.

Ex. Alex merges over into another lane on the highway without looking for other vehicles. He runs into another vehicle causing damage to both to his vehicle as well as the other vehicle.  Physical damage coverage is a promise made by the insurance company to pay for the damage done to the insured’s vehicle.

What is liability only car insurance?

Liability only car insurance, means the insurance company providing the policy will only pay for the damage you have caused to others property and bodies.  The insured’s own vehicle will not be covered by the policy if the insured is found to be at fault in an accident.

Ex. Alex is driving to burger king for a quick $1.50 chicken nugget dinner.  He was texting a girl he just went on a date with the night before, when, while at the stop light he started moving before the light turned green.  Bang! he hits the driver in front of him because he wasn’t paying attention to traffic.  In this situation, because Alex has liability only, he will not receive money from his insurance company to fix his own car, but he will receive money to fix the person’s car in front of him, who he hit.

Should I have full coverage on my car?

To determine if full coverage is the right fit, it’s important to understand what it will cost you out of pocket if you end up totaling your car in a wreck.  Can you afford to go purchase a car if yours is no longer drivable after an accident? If it costs X amount of dollars to fully insure your car you can compare how much money you can save by carrying liability only, and determine how long it will take to save enough of the difference to set aside money in an emergency fund to “self-insure” for that amount.

Ex. Alex is trying to figure out if he should carry full coverage on his car. He drives a 2002 Honda accord which he determines would cost $4,500 to replace.  He determines it will cost $40/month to carry liability only and $80/month to carry full coverage.  If he elects to have liability only and set aside the extra $40 in savings, it will take over 9 years for him to have enough money to buy a new car of the same value.  In this case, Alex chooses to carry full coverage on his car until he can set aside more money in an emergency fund.  

What does “comp” and “collision” mean?

Collision, otherwise known as collision coverage insurance is coverage that comes into play in the event of a physical collision.

Ex. Alex is driving on a wet road during a rainstorm and while turning the corner his car slides into the curb.  Damage is done to his cars left front tire.  Collision coverage applies in this situation, as it is the act of his car colliding into the curb which caused the damage. 

Comprehensive coverage insurance is often shortened to “comp”.  “Comp” is referred to as “anything other than collision”. This type of coverage is applicable to losses resulting when in non-driving instances.

Ex. Alex is getting an Uber downtown to go pick up his car after a fun Friday night out on the town.  When he gets to his vehicle he realizes the back window has been smashed in, and he’s missing a few things from within the car.  His comprehensive coverage would cover this claim, since it’s unrelated to an accident but still a covered loss under his policy.

What is roadside assistance, and does it come standard on a policy?

Roadside assistance is best defined as reimbursement for claims arising from certain car troubles.  Each company may differ slightly, but generally this will include a jump start, tow, lock smith etc.

Ex. Alex is leaving work heading to his car when he realizes he locked his only set of keys in his car.  He doesn’t have any other way of getting home or inside of his car for that matter. He calls the number provided to him by his insurance company and they schedule to send someone out to unlock it for him so he can drive home after a long day’s work.

What is glass coverage?

Many companies offer an additional coverage onto the standard insurance policy, which includes glass coverage. Glass coverage, is either a separate, lower deductible for a glass-only claim, on an insureds vehicle, or sometimes the deductible can be waived entirely.

Ex. Alex is making the long drive from Kansas City to Denver over the weekend.  While filling up for gas at the last stop before reaching his destination, he notices a crack in the windshield.  He didn’t notice this crack before and determines it must have happened while driving on the highway behind a semi that was kicking up rocks. He calls his insurance company and tells them what happened, and they get his windshield repaired with him not having to pay anything out of his own pocket.

How is fault determined in an accident?

Fault is usually determined at the scene of the accident by the police.  If the police are not called to the scene of an accident, a statement of what occurred will be recorded by the insurance companies of both parties.  They will state what happened leading up to the accident and these stories will be compared to one another by both insurance companies and they will be the ones to ultimately decide which of their insureds was at fault in the accident.

Ex. Alex is involved in an accident.  Neither he nor the driver of the other vehicle can determine who was at fault.  The police are called to the scene and the other driver is issued a ticket for failure to yield.  In this instance, fault is usually determined from the police report and the other driver’s insurance company will pay out for the damages done. 

When is a claim opened?

A claim is opened when an insured chooses to contact his or her insurance company to report a loss or potential loss.  Often an insured may just want a representative to come out and inspect the potential hail damage to their roof after a hail storm, only to realize that there is not damage.  That would be an example opening a claim, but no money is paid out, so the claim is closed.

Ex. Alex calls his insurance agency to let them know that his car was broken into overnight, and his laptop was stolen.  At this point the claim is opened, Alex will be contacted by an adjustor to walk him through the process for what will happen next.

How is a premium different than a deductible?

Premium is the amount of money an insured is charged to keep an insurance policy in force. A premium is the set amount of money that the insured pays either on a 6-month basis or a 12-month basis, depending on the insurance company and agreement.

Ex. Alex pays $890 for the year for his car insurance policy on his 2012 Toyota Camry.  He has elected to carry a $1000 deductible for both comp and collision.  Alex is involved in an at fault accident, which will cost $4,500 to fix his car. He understands he first must pay $1000 to his insurance company at the time of opening a claim, and then the insurance company will pay the remaining amount to fix his car.

What is gap coverage?

Gap coverage applies only in circumstances where a loan exists on the insured’s car. Gap coverage kicks in when the loan amount is greater than the current value of the car, and the insurer agrees to payout the full amount of the remainder of the loan.Ex. Alex has secured a loan for $35,000 to buy a car.  He goes to the car dealership and purchases a brand-new Toyota 4Runner.  He drives it off the lot and the car immediately depreciates in value, and is now only worth $29,000.  Alex crashed his car at the gas station on his way home from the car lot.  He’s wrecked the car to the point where it is not drivable anymore so he will need a completely new car.  The problem is, Alex owes more on the car loan than what the car is now worth due to depreciation.  With Gap coverage, Alex’s insurance company pays the full amount it will take to purchase the like kind and quality car he had previous.

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