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Auto Insurance Definition
Auto insurance is the contract taken between the insurer and the insured to protect the insured against any financial loss caused by accidents or natural causes. If any of those events happen, the insurance company will save the insured from taking up finances from his pocket to cover the loss. Auto insurance covers damages against;
Property; such as a car damages due to accidents.
Liability; it takes liability for bodily injuries or the property damages.
Medical; it takes liability for any costs incurred when treating any injuries caused in accidents.
How Does Car Insurance Work?
Cars can be expensive, and accidents can be even more expensive to cater for. If the car is heavily damaged, and there are people injured, then it will be required to cover the medical costs and the car repair. Auto insurance comes in; it covers all medical costs for the people injured and takes liability for any other financial costs needed.
What Does Car Insurance Cover?
A car insurance policy has several standard coverages they are required to cover. These include;
1. Auto liability coverage
This type of coverage covers damages made to other vehicles, objects, or property. In case of a lawsuit due to an accident, it covers any damages done. It is a requirement for only 49 states and not everywhere.
2. Comprehensive coverage
A comprehensive coverage covers any damages to your car that are far beyond your control. These events include theft, vandalism, and other damages caused by natural causes like earthquakes and floods.
3. Collision coverage
Covers any damages caused by your vehicle colliding and crashing with another vehicle or an object. These may include poles, trees, and walls.
4. Medical coverage
Covers any personal injury encountered during the accident. It covers the medical of both the owner and his passengers injured.
5. Uninsured motorist coverage
Uninsured motorist coverage is taken when you have an accident with someone who doesn’t have insurance. His cover is insufficient to cover the damages done. It is taken to repair your damaged vehicle in such a situation.
What Can Car Insurance Cover?
A car insurance policy will not cover damages by people who regularly use the car but aren’t listed in the policy. However, an individual can take a separate policy to cover any other thing that one may think is a risk. Other insurance policies that drivers could take include the gap coverage and roadside assistance coverage.
Factors Affecting Car Insurance Premium
Different insurance companies offer different premiums, and the pricing is based on the following listed factors. [1]
1. Age and gender
Age is a massive determinant in determining the rate a person will be paying the insurance. The younger and more inexperienced a driver is, the higher the insurance rates because they are more prone to causing and being involved in accidents. Compared to the older generation, who have more experience in driving and are more careful, the rates will be much lower. In addition, the female gender is less likely to take risks than the male gender hence the different rates between the two.
2. Driving history
It is also a huge determinant of how an insurance policy will be rated. The driver’s history in driving creates an accurate prediction of his future performance. Therefore, if his past is full of speeding tickets and violations, the rates will be higher than if he is a conservative driver.
3. Location
The location a person lives and often parks his car greatly affects the car insurance premium. Urban neighborhoods and towns are more at risk of thefts and accidents, increasing the premiums.
4. Engine type
Vehicles that run on diesel are costly than those that run on petrol. The higher the cost of the vehicle, the higher the premium. Therefore, cars that use diesel will have a higher premium than those that run on petrol. [2]
5. Safety fittings
The more safety fittings installed in the vehicle, the lower the premium rates will be. These fittings include GPS, airbags, and gear locks, among others.
6. Credit score history
Credit history is an essential factor yet the most overlooked factor. Research shows that the drivers with a poor credit score often file more claims than the drivers with a good credit score.
7. Car model and type
Insurance against a more expensive car will be higher than an insurance policy taken against a cheaper vehicle.
8. Insurance company
Insurance policy rates range from one company to another. Therefore, it is up to drivers to decide what company to go with.
Why Do You Need Car Insurance?
1. It is a requirement
Car insurance is a mandatory requirement by the state for every vehicle. The states usually have a minimum limit coverage every vehicle should have. It, however, does not mean you are limited to just the state’s limit. As a driver, you could take up additional coverage to protect yourself financially from any damages. [2]
2. It compensate an accident you caused
If you happen to have caused an accident and you are sued, then car insurance will significantly save you from medical costs of the other person and the vehicle damages.
3. Compensate an accident caused by someone else
If somebody else causes the accident and he is not insured, then the uninsured motorist coverage will save you from unnecessary financial liability.
4. For repairing and replacing a car
A comprehensive auto liability coverage covers any damages caused by other vehicles or by natural causes such as an earthquake. It may cause heavy destruction of the vehicle, which may require replacement or repair, which the insurance company will cover.
5. Protecting yourself and your passengers
A car accident can be fatal, and the passengers in the car may be injured. Taking up the medical coverage covers both the driver and the passenger’s medical costs for the injuries acquired.
6. Peace of mind
It would be for everyone peace of mind if everyone who owns a vehicle got insurance. It creates assurance that the costs will be catered for regardless of what happens.
7. Assets protection
Car insurance helps protect a person’s assets and net worth. Let’s assume that you are involved in an accident that you caused. The damages caused by accident are more than $100,000, while you only have thirty thousand dollars in your account as liquid assets. If you don’t have insurance, your assets, including your house, will be seized to pay for the damages caused. However, the existence of car insurance prevents that kind of financial liability and protects your net worth.
Summary
Insurance may seem unnecessary, considering the events insured against are just an expectation and not an assurance that it will happen. However, it exists and keeps the economy running and stable. Considering all the benefits we’ve discussed above, I believe we can safely say that insurance is worth taking up.
Related Articles:
- Marine Insurance Definition, Importance and Marine Losses
- Homeowners Insurance Definition, Types and Covers
- Benefits of Insurance and Functions of Insurance
- Life Assurance and Life Insurance Definition
- Insurance Definiton, Mechanism and Requisites of Insurability
References
1. ALLSTATE. (2017, December). What Factors May Affect Your Car Insurance Premium?
2. Lynch, A. (2022, April 18). What factors are most important for car insurance rates?
