BASIC TERMS YOU NEED TO KNOW TO UNDERSTAND AUTO INSURANCE
Not too sure what a term means when it come to auto insurance? If you’re speaking to an agent, you may hear them throw out words like “no-fault” and “collision coverage," and have no idea what they're talking about. Insurance terminologies can be confusing, but it's not as complicated as it sounds. Understanding your auto insurance doesn’t have to be difficult. We've put together some of the basic terms, jargon, and acronyms used in auto insurance to help you out.
1. Additional insured: A person or household member of a policy owner that is insured by the policy. For example, if you get a car as a teenager, you’re most likely additional insured under your parents’ coverage.
2. At-fault: You’re considered “at-fault” if you get into an accident that was caused by your wrongdoing. It could be with another vehicle or an object. After an at-fault accident, your liability insurance pays out up to the chosen limits for other people's injury and property damage bills, plus your legal defense costs if you're sued.
3. Actual cash value (ACV): The actual value of your vehicle, based on its current cost to replace it minus depreciation.
4. Claim: An official request for payment you file with your insurance company to cover vehicle repairs, injury treatment, and financial compensation generally if your vehicle is damaged, or you are hurt, after an accident. It can be for property damage, bodily injury, or both.
5. Collision Insurance: It covers your car when it collides with another car or object. It pays to repair or replace your vehicle if you cause a crash or have a one-car accident or hit something else and no one else is at fault such as hitting a tree. It does not include collisions with animals. This insurance is optional.
6. Comprehensive Insurance: Also optional, and covers damage to your car caused by several causes other than a collision. It pays to repair your car after animal collisions, and also covers a specific list of non-collision issues, such as theft, vandalism, natural disaster, and animal-related damage.
7. Deductible: It is a predetermined amount of the loss you’re required to pay until your insurance kicks in. The insurer subtracts it from your settlement for collision and comprehensive claims. If your deductible is $1,000 and you need $3,000 worth of repairs after a car accident, you’ll only be required to pay the first $1,000 and your insurance will cover the rest. Choosing a higher deductible means cheaper rates, but your insurer pays less if a claim occurs. Deductibles do not apply to liability claims.
8. Declarations page: An important document given to you by your insurance company that breaks down the most important details of the policy including how much your premium costs, term length, the vehicles and driver covered, mailing address, effective dates, agent's name, liability limits, included coverage and a lienholder if you’re financing.
9. Diminished value: The difference in your car’s market value before and after the accident.
10. Exclusions: Anything that an insurance policy will not pay for, which is usually listed explicitly on a declarations page.
11. Full coverage: Though there is no such thing as “full coverage,” it is a common term used to describe the amount of auto insurance coverage someone has, which includes a combination of liability, comprehensive, and collision coverage.
12. Gap Insurance: Optional coverage that helps pay the difference between the actual cash value of the vehicle and the amount still owed on the lease or loan if your car is totaled or stolen.
13. Liability Insurance: The minimum type of auto insurance required at the state level. It protects you and your assets if you’re held legally responsible for an accident that led to another’s injury or a loss. Bodily injury liability covers other people’s bodily injuries or death for which the insured is responsible. Property damage liability covers the insured if the insured’s car damages someone else’s property.
Liability limits often appear in shorthand numbers — for example, 100/300/50 means you have up to $100,000 bodily injury coverage for each injured person, up to $300,000 bodily injury coverage per crash, and up to $50,000 property damage coverage per crash.
14. Lienholder: The person or entity that has a legal claim on your vehicle. If you’re financing your vehicle, then the lienholder is your lender until the auto loan is completely paid off.
15. Limit: The maximum dollar amount your auto insurance policy will pay after a covered accident. Each coverage type has its limits.
16. Loss: Direct and accidental loss or damage to a person or property.
17. Personal Injury Protection (PIP): This type of coverage, also known as “no-fault insurance,” pays up to a certain amount on medical bills and lost earnings for you and your passengers in the event of an accident regardless of who caused it. It also pays for some costs such as lost income and physical therapy in some states. It is required to carry in certain states, like Michigan and Kentucky, and optional in other states.
18. Premium: The amount of money an insurance company charges to provide coverage. Depending on your coverage and payment plan, you pay your premium either monthly, per six-month, or yearly.
19. Quotes: An estimate of how much a company will charge you for car insurance.
20. Replacement Cost Value (RCV): The cost to replace your car without subtracting depreciation.
21. Underwriting: The process an insurance company uses to evaluate how risky you are, based on factors such as your vehicle, location, accident history, credit, and age. An insurer uses its underwriting findings to decide to accept or reject your application and also calculate your rates.
These are some of the most common terms used in auto insurance. Think of it like a cheat sheet that you can always refer to if you ever hear an auto insurance term you don’t know. There’s more going on with this common auto insurance coverage than most people think, and a little bit of knowledge will make you a more savvy shopper and potentially save you hundreds of dollars a year.