Quick Guide to Five Leading Types of Auto Insurance in 2022
When it comes to auto insurance, you don't immediately think "Oh, it's there to protect my financial well-being!" but the reality is - it can.
Car accidents are expensive, and it's not just the price of fixing a bumper or headlight. Accidents can incur medical bills, repair costs, and even lawsuits. If you're not protected, you could be on the hook for all the costs—especially if you’re the one found at fault. Not to mention theft, other collision damage, and much more. It's not just about being a good driver! When you plan ahead and get the right coverage, you'll be able to commute, road trip, and joy ride without worrying about what a mishap could cost you.
Now, to be clear - we aren't insurance agents. Copper State Credit Union is a financial institution, and we don't provide driving insurance. We just know a little bit about the business, since we provide thousands of people with auto loans. We'd like to break auto insurance down in a way that's easy to understand, so that you trust you're getting the info from an unbiased 3rd party.
Types of Auto Insurance Coverages
Think of auto insurance as ordering off a fast food menu: You have lots of components that you can choose to make your perfect meal—or policy. Most states require at least some type of insurance coverage before you're legal to drive, but available add-ons or additional coverage can give you even more protection. It's important to understand each of the components separately before asking your insurance agent to help you "order." All of the below types of insurance apply to
1. Bodily Injury Liability Insurance
Bodily Injury Liability Insurance is usually required by your state as the minimum coverage you must have in order to legally be on the road. It's meant to protect you financially in an accident where someone is seriously injured or killed and you were the person at fault.
Real-Life Example: If Dave runs a red light and hits Ron's car, and Ron is rushed to the emergency room for surgery, Dave's bodily injury policy will be responsible for Ron's medical bills, up to the covered amount, minus Dave's deductible (more on this later). What bodily injury liability insurance does not cover is Dave's medical bills if he were injured in the same accident; this would fall to his health insurance.
The amount of personal liability coverage you have is usually calculated based on your assets (value of things you own plus amount of money in your accounts). Your insurance agent can help make sure you have the right level of coverage to meet state requirements and protect yourself. Arizona requires at least $25,000 of coverage if one driver is on the policy, and $50,000 if two or more drivers are on the policy. However - many people find that they need more coverage than this, and your lender may require more if you have an auto loan. Bodily Injury Liability coverage limits can reach up into the $300,000-$500,000 range, as needed.
2. Property Damage Liability Insurance
Another common type of coverage required by states, this covers you in case you're at fault and damage someone else's stuff. In most cases, the property is a car, but it'll also cover you if you damage something like a fence or utility pole, too.
Real-Life Example: As per the previous example, when Dave ran that red light, he also caused damage to Ron's car and the adjacent convenience store's wall. This version of liability insurance would cover damages to others' property for up to the policy covered
amount because Dave was at-fault for the damage.
Arizona's minimum for property damage liability insurance is $15,000. It's important to note that if the damage you cause costs more than your policy covers, you're responsible for paying out-of-pocket to cover the rest. If Dave's red-light-running causes $45,000 worth of damage and Dave only had $15,000 of property damage liability coverage, he'd be on the hook for repaying the other $30,000 to the appropriate parties. It's worth asking the question: "Do I have enough liability insurance?" Again, an insurance agent can help you determine how much auto liability insurance you need.
3. Collision Insurance
Car accidents don't always involve another driver. If you have damage to your car that was caused by a collision with a parked car, a wall, or anything else where you're the only driver, collision insurance covers you. If you have an auto loan, your bank might require you to carry collision insurance to protect them in case you do serious damage to a car they technically own. Once the loan is paid off, you could drop this coverage.
Real-Life Example: Holly is driving on AZ Loop 101 when a stray tire rolls across the freeway in front of her. It's too dangerous for her to swerve out of the way on a busy highway, so she hits the debris and damages the undercarriage of her vehicle. If she has collision insurance, this damage would be paid for (minus her deductible).
Next up - a less fun type of auto insurance.
4. Uninsured Motorist/Underinsured Motorist Insurance
Wait, this 👆 is another type of insurance I'd be paying for?? Yes. According to the Insurance Research Council, 1 in 8 drivers are uninsured. You hope that everyone is as diligent as you when it comes to choosing the right level of auto insurance but, unfortunately, that's not always the case. That's why insurance companies offer un/under-insured liability insurance. It covers you if the person at fault doesn't have insurance or doesn't have enough insurance to fix your car and pay for your medical expenses.
Real-life example: One of our employees was leaving her house on a Saturday morning when she got in the way of a guy who was running from the cops. He was driving a stolen vehicle and hit the employee's vehicle twice in his escape attempt, causing $7,000 worth of damage. So who pays for that? Not the stolen vehicle's owner, and not the gentleman now in prison (having since been caught) because he certainly didn't stop to take out an auto insurance policy before he hijacked the car. To the rescue = Uninsured Motorist Insurance (Both Bodily Injury and Property Damage options). The employee's own auto insurance company covered the cost of the damages because she had Uninsured Driver Insurance.
That brings us to our final type of auto insurance.
Not all auto mishaps are crashes. Comprehensive insurance protects you against other issues, including theft, fire, weather-related incidents, falling objects, vandalism, and even damage done by animals. It fills the gaps to ensure you're covered even if your car damage isn't the result of a collision. NerdWallet calls it "bad luck coverage." 😅
Real-Life Example: A tree falls on your car as a result of a monsoon. What's your plan? Comprehensive coverage. As the final piece of the 'complete meal' of auto insurance, many people add this to their plate if they can afford it.
Once your vehicle loses a decent amount of value, it may no longer make sense to carry comprehensive insurance, unless your lender requires it and you still have a loan.
Aren't we missing something?
At this point, many will stop and think "Wait...what if I'm in a multi-vehicle accident and ANOTHER party is at fault? Who fixes my car?" It's not collision insurance, and it's not liability insurance (property or personal), and it doesn't sound like comprehensive covers it either. The answer is - the OTHER person's insurance policy/company. If that person is at fault for the incident, they will be the ones who have to file a claim to recoup your expenses and damage.
Paying for Coverage - Types of Auto Insurance and Pricing
Once you've determined what coverage is required by your state and what coverage you'd like to add onto your "order," you'll need to understand the difference between your premium and your deductible.
Premium = The amount your insurance costs per year (annually).
It's determined by a combination of the types of coverage you want and the information from your driving record. If you're what's seen as a "risky" driver by your insurance company (think previous accidents or tickets), your premium will likely be higher than someone seen as less risky.
Interesting note: Although your insurance premium is calculated as a yearly amount, most people pay on a monthly basis. Talk to your insurance agent to see if this is an option for you (It makes creating a monthly budget plan easier!)
Deductible = An amount you pay when an incident happens, before your insurance covers the rest.
Another way to think about this is: your 'skin in the game.' Insurance companies don't want you filing a claim for bumping your car with your elbow. A deductible is a good way around this. They range from as low as $100 or $250 per incident up to $1000 or more per incident.
Sometimes, you can score a lower premium by choosing a higher deductible. But it also means that you run the risk of paying a higher amount out of pocket if you have an accident. A lower deductible usually means a higher monthly premium, so it's definitely worth talking to your insurance agent to choose the best option. You might also be eligible for discounts if you have more than one car or you have a stellar driving record, so there are ways to make insurance more affordable.
With a giant menu of car insurance coverage in front of you, it can definitely be confusing. You need injury protection, but would you like to add a "side" of collision or comprehensive with that? The trick is to choose the coverage you can afford to feel protected before you hit the road—or the drive thru.
Looking to buy a car after an accident, or ready to trade your current car in for an upgrade? We have a couple resources for you:
- Check out Happy Car Buying: Your Ultimate Guide to Getting the Best Deal - a free eBook download from Copper State Credit Union.
- Looking for a used car? Our free pdf checklist How to Buy A Used Car with Confidence will be helpful as you preview your options.