Auto insurance is a contractual agreement between you andyour insurance company. To acquire an insurance policy, you must pay an what iscalled a yearly "premium" to your insurance company. In exchange forthe premium, the insurance company agrees to pay for certain types of financiallosses when you are involved in an auto accident while driving your car. These financiallosses include items such as property damage, medical coverage, and legal fees.
Driving without auto insurance is not only risky; it isagainst the law. If you are caught driving without auto insurance, you may haveyour license suspended, face severe fines, or - in the case of an auto accident,you can potentially go to jail if your car is not properly insured at the timeof the accident. Car insurance is a necessary evil, and although we may getfrustrated with having to pay for it, the fact is we need it. Auto insurance isa "cost of driving" that simply cannot be avoided.
The absolute minimum auto insurance coverage you arerequired to carry varies from state to state. This minimum coverage isgenerally referred to as "liability insurance". This insurance coversbodily injury and property damage.
When quoting or discussing liability insurance, there arethree numbers that are used to describe the policy limits. The first numberrefers to bodily injury limits, the second refers to total medical liability coverage,and the third number refers to property damage limits. For example, a 15/50/20liability policy is defined as: fifteen thousand for personal medical liability per person, fifty thousandmaximum medical liability coverage, and twenty thousand maximum property damageliability.
Bodily Injury Liability covers injuries that occur to you orany other person involved in an accident when it has been determined that youare the "at fault" driver. Typically, this also covers you while youare driving another person's car (with their permission of course) or when someoneelse is driving your car (with your permission).
Property Damage Liability covers the cost of damage youcause (or a person driving your car with your permission) to someone else'sproperty in an accident when it has been determined that you are the "atfault" driver. This refers to damage caused directly to someone else's carand also covers damage to city property (light posts, telephone poles, fences,etc) and other structures such as houses, apartment buildings, etc.
The minimum liability limits set by your state are low. Itis highly recommended that you purchase a liability limit that is much higherthan the state minimum in case a third party sues you for amounts above and beyondyour insurance policy's maximum coverage. Although purchasing your state'sminimum liability insurance allows you to legally register and operate yourcar, it is recommended that you acquire at least five times the minimumliability limits set by your state. This helps protect your assets such as yourpersonal savings, your home equity, your personal property, etc. Depending onyour total assets, you may wish to purchase even higher liability limits. You shouldcheck with a licensed insurance agent to determine the proper liability limitsfor your insurance policy. He or she can help you determine limits based onyour assets and lifestyle.
Liability insurance can be costly for young drivers orfor drivers with a poor driving record (accidents, speeding tickets, etc.) Whenacquiring insurance for a teenage driver or for someone with a poor drivingrecord, you should check with your state's Department of Insurance. They mighthave programs to help drivers purchase liability insurance at a discountedrate. For example, at the time of this writing, the State of California's Department of Insurance has alow-income, liability insurance program that can be purchased for approximately$400 per year.
