What is an insurance policy?

The world is a complicated place and most of us survive on a wing and a prayer — never completely sure what all the legal jargon means but hoping for the best. Too often, big business hides behind this complexity and gently takes advantage of all the mistakes we make. So, the simple answer to the question is that a policy is nothing more than a contract between you and an insurance company. Think of it as like a bet. The insurer calculates the odds of you having an accident and quotes the stake (called the premium). You pay the stake and, if the insurer is proved wrong, it pays out the amount of your loss. Except, of course, there are always exclusions and limitations. So read the contract before you accept it. Do your best to buy the best range of coverage at an affordable price.

Is auto insurance mandatory?

In all but three US states, it is mandatory to carry a minimum liability insurance. So, if you are unlucky and injure someone in an accident, there will be some money to pay out compensation to that person. Otherwise, auto insurance is not compulsory. You decide how much protection you want to buy.

What is a liability policy?

This policy protects you against any claims made by third parties for any loss or damage to property, or personal injuries you may have caused. This is fault-based, i.e. you only have liability if the accident was due to your negligent driving, and covers the cost of repairing any property and all the medical expenses involved in treating the injuries. If the victims also lose pay or there are other financial losses flowing from the accident, this is included in the damages you have to pay. Given the rising costs of medical treatment, it is always worth buying more than the minimum if you have assets. With the economy in recession and the probable loss of your housing equity, there may be less pressure now. But, as the economy recovers, you should review how much coverage you have in place.

What is a collision policy?

This pays for the repair of your own vehicle if it is damaged in a collision, no matter whether another vehicle or a tree.

What is a comprehensive policy?

This pays for the repair of all damage not caused by a collision, e.g. a tornado dumps a tree on your vehicle or a violent rain storm washes it away in a flash flood. Less excitingly, it covers you if your vehicle is stolen or someone vandalizes it.

Medical coverage or Personal Injury Protection (PIP)

No matter who is at fault, this pays for all the medical treatment necessary for those injured in the accident. In some states, this is mandatory.

Uninsured or underinsured driver

Sadly, as insurance premiums have risen, more drivers are choosing to drive without any insurance in place. If you are injured or your vehicle is damaged in an accident with an uninsured driver or a driver who does not carry enough insurance to pay out on your claim, this policy will cover your losses.