Defining the Auto-Insurance Terms You Should Know
The car-insurance industry is full of jargon. Here's some help demystifying it.
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Even the most knowledgeable car owner may not be familiar with the terminology and industry jargon used in the car-insurance business. If you're having a difficult time decoding the car-insurance terms your potential future provider uses, the following glossary might help you understand the coverage you have, the coverage you don't have, and what your policy means for your budget.
Actual Cash Value
In the event of an accident that results in your car being totaled, the actual cash value is what your insurance company may pay you as compensation, which is the current market value of your vehicle. This value is determined by subtracting depreciation from your vehicle price based on its perceived life expectancy and original value.
Car-Insurance Deductible
Your deductible is the portion of a car insurance claim you are required to pay before your insurance kicks in. Choosing a low deductible typically means you will have to pay less after a covered event, but it could also mean higher monthly payments. Alternatively, a high deductible could mean low monthly costs but more out-of-pocket expenses after an accident.
Car-Insurance Premium
This is the monthly cost you pay to maintain car-insurance coverage. Your insurance premium may change based on policy factors such as coverage types, amounts, and claims or personal factors such as your vehicle type, driving habits, age, and location. Car-insurance premiums are directly related to your deductible, with one generally going up as the other goes down.
Collision Coverage
Collision coverage is designed to protect your car when you're hit by another vehicle or object or if you hit another vehicle or object. Your coverage may vary based on policy regulations and limits.
Comprehensive Coverage
Comprehensive coverage is a type of vehicle-insurance coverage that protects your car from non-collision-related damage. This wide-ranging form of insurance can cover theft, vandalism, damage from fallen debris, animal-related damage, fires, and damage from severe weather.
Full-Coverage Car Insurance
While truly "full coverage" insurance that safeguards you from any foreseeable event isn't feasible, the term full-coverage car insurance is used to describe insurance policies that go above and beyond basic liability coverage. The phrase can be used to refer to any car-insurance policy that covers a wide variety of scenarios.
Liability Coverage
Liability insurance is the part of your auto-insurance policy that covers any injuries or damage that you may cause if you are at fault in an accident. Your policy will likely outline your liability limits to help you understand your responsibility in the event of an accident. Potential responsibilities often concern medical or legal bills.
Personal-Injury Protection
Also known as no-fault insurance, personal injury protection (PIP) is a type of coverage that pays for a portion of your, your passengers', and the other driver's medical bills after an accident. This coverage is required by some states, with varying required coverage limits as well. PIP can also compensate drivers for lost wages, funeral costs, and rehabilitation costs associated with an accident.
Uninsured-Motorist Coverage
If you are in an accident and the at-fault driver does not have car insurance, uninsured-motorist coverage is meant to help pay for your bills — up to your set limit. More than 20 states require their drivers to carry this type of insurance.
Underinsured-Motorist Coverage
Similar to uninsured-motorist coverage, this type of car insurance protects you from any gaps in another driver's insurance. For example, if your car gets hit by another driver and your repair bills exceed their coverage limits, your underinsured-motorist coverage could pay for the remaining balance — up to your chosen limits.
