A Glossary of Important Car Insurance Terms You Should Know
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The world of car insurance can seem daunting, but it doesn’t need to be. From deductibles and declarations to financial responsibility, and thresholds, we’re breaking down all the car insurance terms you need to know to understand your policy.
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Terms to give you confidence about your policy
Despite what the naysayers say, you can be confident about car insurance. Not all policies are created equal, and not all drivers need full coverage (though it’s a good idea).
Without further ado, here are all the car insurance terms you’ll ever need to know—in alphabetical order—to help you understand what you need and what you can live without.
Additional insured refers to other people in a policyholder’s household who are covered to drive under the policyholder’s insurance policy. Usually, this means all licensed drivers in the home.
An at-fault accident is one you partially or fully cause. In such a case, your liability insurance will pay out to cover the other driver’s medical bills and/or property damages. Your liability insurance would also cover any legal bills if the other driver sues you.
Auto insurance claim
An insurance claim is a request to your insurer to pay bills for any car repairs, medical treatment, or other damages stemming from a car accident.
Car insurance quotes
A quote is essentially an estimate of how much an insurer will charge you to provide insurance. Yes, Jerry supplies competitive quotes from more than 40 top insurers—in case you forgot.
Your collision coverage will cover damages to your car if you cause an accident or collide with a fixed object, such as a telephone pole. Collision coverage is usually required if you’re taking out a car loan.
Comprehensive coverage covers you in accidents not involving another vehicle or fixed object—things like animal collisions, damage from extreme weather, falling trees, vandalism, theft, and more. This type of coverage is typically required when taking out an auto loan.
Each state sets its own minimum requirements, so be sure to ask your insurer about your state’s minimums.
Car insurance minimums are expressed in a three number format, typically XX/XX/XX.
- The first XX refers to the maximum bodily injury liability for one person hurt in a collision
- The second XX refers to the maximum bodily injury liability in an accident for all injuries in an accident (this number is usually higher than the first one)
- The third XX refers to the property damage liability for an accident
For example, in California, the minimum coverage required is 15/30/5. This means one person’s bodily injury liability is $15,000 for one accident; $30,000 for bodily injury liability for all persons involved in a single accident; and $5,000 in property damage liability for one accident.
While insurance covers you in case of any injuries or property damage you cause, it is also meant to shield your financial assets. Many people only carry the minimum requirements, but if you cause an accident, your assets could be vulnerable to legal action if your insurance doesn’t cover the required medical or property bills.
For more protection, it’s always a good idea to buy more than the mandatory minimums from your insurer.
A covered incident is something your policy covers (and that you won’t have to pay for).
This is the page in your policy listing its most important details, including:
Your car’s vehicle identification number (VIN) Your address All drivers insured on the policy Liability limits Included coverage on the policy
Your deductible is a pre-specified amount that your insurer will deduct from any collision or comprehensive settlements. So, if your car damages cost $5,000 to repair with a $1,000 deductible, you’ll get a cheque for $4,000.
As a rule, the higher your deductible is, the lower your rates will be. Deductibles don’t apply to liability claims.
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In the insurance world, economic benefits refer to out-of-pocket expenses like medical bills, essential services, and lost wages.
On the flip side, non-economic benefits refer to intangibles such as pain and suffering, impairment to quality of life, inconvenience, and stress.
Your effective date is the exact day your car insurance policy starts covering you.
Financial responsibility law
The financial responsibility law requires drivers to carry car insurance. In lieu of carrying insurance, most states allow drivers to pay a cash deposit or bond as evidence that they can pay damages in the event they’re in an at-fault collision.
It is illegal to drive without proof of insurance in 47 states and the District of Columbia.
Full coverage car insurance
Full coverage refers to a policy carrying both collision and comprehensive insurance, in addition to liability insurance.
If you’re in an accident and the car is totaled or stolen, gap insurance pays the difference between the car’s total value and the amount remaining on your auto loan if the balance is higher than the car’s worth.
Liability coverage is the portion of your insurance that covers another driver’s bodily injury costs and/or property damage if you’re in an at-fault accident. Liability coverage is required on almost all car insurance policies.
A component of liability insurance that covers any medical bills resulting from injury or death that you cause in an at-fault accident. This may cover loss of income, medical bills, and pain and suffering damages that can result from you being sued.
Keep in mind that bodily injury liability coverage will not cover your medical bills.
Property damage liability
Property damage liability is another component of liability insurance, covering any damage you cause to another person’s property, such as another driver’s car, someone’s home, or other property.
Not all states require this kind of coverage and it does not cover your own car or property.
Key Takeaway Liability coverage is divided into bodily injury and property damage—and it’s required on almost every insurance policy.
This is the maximum amount of money your policy pays for in an accident. There are different limits for various kinds of coverage.
Medical payments coverage (MedPay)
This coverage pays for treatment for you and your passengers up to your limit, no matter who was at fault in the accident.
MORE: Understanding MedPay
A 1945 law passed by Congress that allows the states to tax and administer the insurance industry.
In no-fault states, a monetary threshold is a specified dollar figure for injury expenses that needs to be reached before a lawsuit can be filed for non-economic benefits in an at-fault accident. These include pain and suffering, quality of life degradation, inconvenience, and stress caused by you.
No-fault insurance means that each driver in an accident goes to their own insurance providers to recover monetary losses, without the need to prove anyone is responsible. No-fault insurance is applicable in 12 states and Puerto Rico.
Drivers can only sue other drivers if their injuries or property damage meet certain minimum thresholds.
Personal injury protection (PIP)
PIP pays for injury treatment for you or your passengers resulting from an accident, no matter who is at fault. It goes beyond MedPay in some respects, such as covering income loss and physical therapy sessions.
This denotes the main use of your vehicle—for business, personal use, or commuting.
The premium is the cost of your car insurance. You may pay it on a monthly or yearly basis, or every six months.
Rate is the cost of $1,000 worth of insurance, or a unit of insurance. This is usually based on the history of other drivers with similar risk profiles, as well as factors such as your age, marital status, sex, driving record, and the make and model of the car you’re driving.
Rental reimbursement coverage
If your car is damaged or stolen, this provision in your policy provides you with a rental car.
SR-22 insurance form
This is a form filed by your insurance company to demonstrate proof that you have car insurance. Your state may require this if your license is being reinstated or if you’re being allowed to keep your license after committing grave or repeated traffic violations, such as driving without insurance or a DUI.
MORE: What is SR-22 insurance?
State-required minimums are car insurance coverage minimums demanded by your state, and they differ across state lines. Minimum coverage is usually insufficient if you are at fault in a major collision.
A third party is anyone other than the primary policyholder that is covered under one specific policy. In an insurance contract, the primary holder is deemed the first party, while the insurer is deemed the second party. Anyone else is considered a third party.
A threshold is a limit that, if met or exceeded, allows an injured party to sue another driver for damages (such as pain and suffering) beyond what the at-fault driver’s insurance originally covered.
A tort is a wrongful action that causes injury or damage. Civil actions are based on torts.
Towing and labor coverage
This coverage will cover the cost of having your car towed to a mechanic if it breaks down. Towing and labor coverage also tends to include roadside repairs, such as restarting a dead battery or handling a flat tire.
Underwriting is the process by which an insurer decides how risky you are to cover. They base this on factors such as your age, sex, marital status, make and model of the car you drive, and, of course, your driving record.
Once the underwriting process is finished, the insurer calculates your rate based on its underwriting conclusions.
Uninsured motorist coverage
This type of coverage will cover you and/or your passenger’s medical bills if you’re injured in an accident by an uninsured driver.
Uninsured motorist coverage will also pay for damages to your vehicle if it sustains damage from an uninsured driver.
Verbal or descriptive threshold
A verbal or descriptive threshold is a type of severe injury a person must suffer before they are allowed to sue or seek damages from an at-fault driver in an accident.
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