UNDERSTANDING AUTO INSURANCE

Auto insurance protects you against financial loss if you have an accident. It is a contract between you and the insurance company. You agree to pay the premium and the insurance company agrees to pay your losses as defined in your policy.

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• Property coverage pays for damage to or theft of your car.
• Liability coverage pays for your legal responsibility to others for bodily injury or property damage.
• Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.

An auto insurance policy is comprised of six different kinds of coverage. Most states require you to buy some, but not all, of these coverages. If you're financing a car, your lender may also have requirements. Most auto policies are for six months to a year.

The 6 Parts of an Auto Policy -- Your auto policy may include all 6 coverages or some of them. Each coverage is priced separately.

1. Bodily Injury Liability -- For injuries the policyholder causes to someone else.

2. Medical Payments or Personal Injury Protection (PIP) -- For treatment of injuries to the driver and passengers of the policyholder's car. At its broadest, PIP can cover medical payments, lost wages and the cost of replacing services normally performed by someone injured in an auto accident.

3. Property Damage Liability -- For damage the policyholder caused to someone else's property.

4. Collision -- For damage to the policyholder's car from a collision. The collision could be with another car, a light post, fire hydrant, etc.

5. Comprehensive -- For damage to the policyholder's car that doesn't involve a collision with another car. Covered risks include fire, theft, falling objects, missiles, explosion, earthquake, flood, riot and civil commotion.

6. Uninsured Motorist Coverage -- For treatment of policyholder's injuries as a result of collision with an uninsured driver. Underinsured motorist coverage can also be included in an auto policy. Underinsured motorist coverage comes into play when an at-fault driver has auto liability insurance, but the limit of insurance is inadequate to pay for your damages.

Each state requires that you have certain types of coverages with minimum liability limits. The insurance industry recommends that your bodily injury liability limits be $100,000 per person and $300,000 per occurrence.

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Some content courtesy of the Insurance Information Institute.