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How to Buy Auto Insurance

An auto insurance policy is actually a package of different coverages. Most states require you to purchase a minimum amount of certain kinds of coverage. But if you're interested in protecting yourself from a lawsuit or from wicked repair bills, then it makes sense to buy more than what's required.

Liability coverage is the foundation of any auto insurance policy, and is required in most states. If you are at fault in an accident, your liability insurance will pay for the bodily injury and property damage expenses caused to third parties in the accident, including legal bills. Bodily injury expenses include medical bills and lost wages. Property damage expenses pay for the repair or replacement of things you wrecked. The third party may also decide to sue you in order to collect "pain and suffering" damages.

Liability Lingo: Insurance types usually refer to liability coverage limits as a series of three numbers. For example, your agent might say that your policy carries liability limits of 20/40/10. That stands for $20,000 in bodily injury coverage per person, $40,000 in bodily injury coverage per accident, and $10,0 00 in property damage coverage per accident.

Collision coverage will pay to repair your vehicle. You usually can't collect any more than the actual cash value of your car, which is not the same as the car's replacement cost. Collision coverage is normally the most expensive component of auto insurance. By choosing a higher deductible, say $250 or even $500, you can keep your premium costs down. However, keep in mind that you must pay the amount of your deductible before the insurance company kicks in any money after an accident. Insurance companies often will "total" your car if the repairs the company must pay exceed what the car is worth.

Comprehensive coverage will pay for damages to your car that weren't caused by an auto accident: Damages from theft, fire, vandalism, natural disasters, or hitting a deer all qualify. Comprehensive coverage also comes with a deductible and your insurer wi ll only pay as much as the car was worth when it got wrecked.

Because insurance companies normally will not pay you more than your car's book value, it's helpful if you have a rough idea of this amount. Most insurance adjusters use the Kelley Blue Book. The National Automobile Dealers Association also publ ishes the Official Used Car Guide, which is updated each month. If your car is worth less than what you're paying for the coverage, you're better off not having it.

Replacement Cost vs. Actual Cash Value: Replacement cost is the amount it would take to replace your vehicle or repair damages with materials of similar kind and quality, without deducting for depreciation. Depreciation is the decrease in vehicle value because of age or wear and tear. Actual cash value (ACV) is the value of your property when it is damaged or destroyed. Claims adjusters usually figure ACV by taking the replacement cost and subtracting depreciation. For example, an auto that costs $5,000 may have a reasonable "life" of 5 years. If it is destroyed after 10 years, its actual cash value will be substantially less than $5,000 because of depreciation.

Medical payments will pay for your and your passengers' medical expenses after an accident. These expenses can arise from accidents while you're driving your car, someone else's car (with their permission), and injuries you or your family members incur when you're pedestrians. The coverage will pay regardless of who is at fault, but if someone else is liable, your insurer may seek to recoup the expenses from them.

Personal injury protection (PIP) and broader "no-fault" coverages are expanded forms of medical payments protection that may be required in your state. Some states have optional PIP or no fault. Expanded features include lost wages and payments for child care.

Uninsured motorists (UM) coverage pays for your injuries if you're struck by a hit-and-run driver or someone who doesn't have auto insurance. It is required in many states.

Underinsured motorists (UIM) coverage will pay out if the driver who hit you causes more damage than his or her liability coverage can cover. In some states, UM or UIM coverage will also pay for property damages.

Supplemental auto coverages include rental reimbursement (covers vehicle rentals required because your car is damaged or stolen), towing and labor charges and auto replacement coverage (guarantees your car will be completely repaired or replaced, even if that exceeds its depreciated value).