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Car insurance basics

Car insurance -- it's a necessary evil. Going a day without it can have disastrous financial consequences. Similarly, not having enough coverage can spell monetary doom in the event of an accident or theft. Although there's no such thing as a standard guideline to proper insurance coverage, understanding how each part of your policy works can help you prevent a financial wreck the next time you make a claim.

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There are six parts to a basic insurance policy, as defined by the Insurance Information Institute in New York City:

  • Bodily injury
  • Personal property liability
  • Personal injury protection (PIP)
  • Collision
  • Comprehensive
  • Uninsured motorist
  • Bodily Injury and Personal Property Liability
    Two major components of an automobile insurance policy involve liability coverage. These areas insure the policyholder against injuries caused to another person and to property. All 50 states and the District of Columbia require minimum liability coverage amounts. These requirements are typically listed as a series of three numbers that define how much, in thousands of dollars, the policy will cover in the event of an accident.

    For example, California requires its drivers to carry minimum liability coverage of 15/30/5. This means that the insurance company will pay up to $30,000 for all people injured in an accident, not exceeding $15,000 on any one person and $5,000 for property damage.

    However, the Insurance Information Institute warns that state minimums nationwide do not provide sufficient coverage in the event of a serious car accident.

    "We always recommend higher limits, especially with today's expensive cars and hospital prices," advises Jayna Neagle, Institute spokeswoman.

    "Nowadays, with litigation, the minimums are not enough to cover in the event of a huge judgment against you," adds Kirk Hansen, director of claims for the Alliance of American Insurance in Donners Grove, Ill.

    Neagle suggests that drivers have liability coverage that is no less than 100/300/50. That way, you'll be able to provide $300,000 worth of injury coverage to all passengers, $100,000 to one individual and $50,000 for damage to property.

    People with assets to lose in the event of a lawsuit, such as a house or financial portfolio, should consider a supplemental umbrella insurance policy, says Neagle. Umbrella coverage protects you in any kind of liability situation, whether the accident is in your car or in your home. For $150 to $200 a year in premiums, you can shield yourself with $1 million worth of protection.

    "If you have assets, it makes a lot of sense," says Eric Swan, an insurance attorney and partner for Galfand Berger in Philadelphia.

    Personal Injury Protection (PIP)
    PIP coverage pays for both medical expenses and lost wages to the policyholder and any passengers injured in the vehicle in the event of an accident.

    Swan says that people with good medical and disability policies might not need to maximize PIP coverage. Instead, he recommends that drivers with good health and disability insurance only take on the lowest limit of PIP coverage required by their state. Some states, such as New Jersey, allow drivers to reject PIP entirely.

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