Car insurance is coverage that protects you from financial losses if your vehicle becomes damaged or stolen. A minimum level of auto insurance coverage is mandatory for motorists in most states, so it's important to understand car insurance and the terms associated with it. Car insurance providers often use these terms in their marketing and contracts. Knowing common car insurance definitions can help you choose the right auto policy for your needs. Your term knowledge can also help you understand your car insurance coverage, including your entitlements and its limitations. Reviewing these terms and definitions can improve your auto insurance knowledge.

Key Car Insurance Definitions

Here are the definitions of some key terms associated with car insurance:

Comprehensive Coverage

Comprehensive coverage pays to repair or replace your vehicle if it's damaged by something other than a collision. According to NerdWallet, this coverage is often compulsory if you take out a car loan. As comprehensive coverage varies between insurers, read your policy carefully to learn exactly what you're covered for. Comprehensive coverage may cover you after the following events:

For Sale Near You

See all results for used cars for sale near 60323

  • Fallen trees.
  • Flooding.
  • Fire.
  • Other severe weather events.
  • Vandalism.
  • Theft.

Collision Coverage

Collision coverage pays to repair your vehicle after an accident, regardless of the cause. It will cover the damages after a collision with another vehicle or objects, such as utility poles, guardrails, or trees. It also covers vehicle damage resulting from rolling or hitting potholes.

Liability Coverage

If you cause a car accident, liability coverage helps pay damages to anyone else involved. It doesn't cover any of your expenses. According to USA Today, every state except Virginia and New Hampshire requires motorists to have minimum liability insurance. Liability coverage has two parts: bodily injury liability coverage and property damage liability coverage. Bodily injury liability coverage pays for expenses related to the other drivers' and passengers' injuries, including:

  • Medical bills.
  • Ambulance fees.
  • Lost income.
  • Pain and suffering.

Property damage coverage pays for repairing or replacing any innocent party's personal property damaged by the accident. This may include:

  • Other vehicles.
  • Landscaping.
  • Real estate.
  • Personal items.

Uninsured and Underinsured Motorist Coverage

Money Under 30 notes that uninsured and underinsured motorist coverage pays your bills if you're involved in an accident without insurance or with insufficient coverage to cover your damages. Uninsured and underinsured motorist policies usually include both property damage and bodily injury coverage. While it's an optional coverage, it's a great idea for drivers in the states that the Insurance Information Institute says have the highest number of uninsured motorists:

  • Mississippi: 29.4%.
  • Michigan: 25.5%.
  • Tennessee: 23.7%.
  • New Mexico: 21.8%.
  • Washington: 21.7%.
  • Florida: 20.4%.
  • Alabama: 19.5%.
  • Arkansas: 19.3%.
  • District of Columbia: 19.1%.
  • California: 16.6%.

Auto Medical Payments

Auto Medical Payments is add-on medical coverage for car insurance that covers gaps in your health insurance if you're involved in any car accident. According to Investopedia, MedPay will cover medical expenses for you, your passengers and injured pedestrians. MedPay also covers you as a passenger in another vehicle involved in an accident or injured by a vehicle while walking, cycling, or taking public transport. It covers copayments, coinsurance, and deductibles. MedPay is a requirement for motorists in New Hampshire and Maine.

Personal Injury Protection

Personal Injury Protection covers all expenses related to auto accident injuries. This includes medical expenses for yourself and your passengers, as MedPay does, along with extras, such as lost wages, child care fees, and funeral expenses. According to Forbes, PIP coverage is mandatory in the following states:

  • Delaware.
  • Florida.
  • Hawaii.
  • Kansas.
  • Kentucky.
  • Maryland.
  • Massachusetts.
  • Michigan.
  • Minnesota.
  • New Jersey.
  • New York.
  • North Dakota.
  • Oregon.
  • Pennsylvania.
  • Utah.

Actual Cash Value

Actual cash value is the fair market value for an asset, such as a vehicle, at the time it was damaged or stolen. Insurance companies use the ACV to determine how much they'll pay in claims for a totally damaged vehicle. To calculate the ACV, insurers evaluate the vehicle's exterior, interior, and accessories and compare it to similar models in your local area.

Gap Insurance

If you total a financed vehicle when owing more on the loan than the car's ACV, gap insurance may pay the difference. This coverage effectively pays out your loan, so you can buy a new vehicle. Insurance companies sometimes call gap insurance an umbrella rider.

Deductible

The deductible is the dollar amount paid out of pocket when filing an auto insurance claim. Increasing your deductible is a common way to reduce the price of your car insurance premiums. For example, Money Under 30 reports that you could save 20% by raising your policy deductible from $500 to $1,000 and 50% by raising it from $250 to $2,500.

Policy Limit

Your policy limit is the maximum amount the insurance company will pay for a claim. Your policy limit is stated in your auto insurance policy documents. If you need to claim for a higher amount than your policy limit, you'll pay the difference out-of-pocket.

Premium

The premium is the amount you pay for your car insurance every policy period. Car insurance companies charge higher premiums to customers they believe are the greatest risk. They assess several factors to determine your risk, including your age, driving and claims history, and vehicle's make and model.

Act of God

An act of God is a surprising or sudden event beyond human control. Natural disasters, such as heavy storms, wildfires, and earthquakes, are common acts of God. Insurance companies often stipulate whether they will cover acts of God in their policies. Read your policy carefully to check whether you can claim such damage.

Types of Car Insurance Policies

When applying for car insurance, the insurance agent will probably ask you to select from one of the following policy types.

Standard Car Insurance

Most drivers can get a standard car insurance policy, covering people who are low to medium risk for insurance companies. Premiums for standard car insurance policies are lower than premiums for non-standard policies. All companies offering car insurance offer standard car insurance.

Non-Standard Car Insurance

Non-standard car insurance, financial protection for high-risk drivers, is more expensive than non-standard car insurance. It's only available through selected insurers. According to Bankrate, you might need non-standard car insurance if you:

  • Are a new driver.
  • Have had multiple accidents and claims.
  • Have let your insurance lapse.
  • Have a foreign driver's license.
  • Need to carry an SR-22 certificate after having your license revoked or suspended.

Temporary Car Insurance

Temporary car insurance is financial protection lasting less than six months, the minimum term of a standard car insurance policy. You might want this kind of policy, also known as short-term car insurance, if you drive during vacations only, you're borrowing someone else's vehicle, or you bought a car you plan to resell quickly. Major insurance companies don't offer temporary car insurance, but some smaller companies do, according to Forbes, including:

  • American Hallmark Insurance Co. of Texas.
  • Apollo Insurance.
  • Dairyland.
  • Direct General.
  • First Chicago Insurance Co.
  • National Unity Insurance Co.
  • Old American County Mutual Fire Insurance Co.
  • Young America Insurance Co.

Classic Car Insurance

Classic car insurance is financial protection for vintage and antique vehicles that may appreciate in value over time. Along with standard inclusions such as liability and collision and comprehensive coverage, classic car insurance often covers spare parts, vehicles under construction, and disabled vehicles. Only selected insurance companies offer classic car insurance, according to Forbes, including:

  • Allstate.
  • American Family.
  • American Modern.
  • Chubb.
  • Erie.
  • Farmers.
  • Geico.
  • Grundy.
  • Hagerty.
  • The Hartford.
  • Progressive.
  • State Farm.
  • USAA.

Common Car Insurance Discounts and Add-Ons

Car insurance companies use specific terms to describe their discount programs and insurance add-ons. Understanding the following terms can help you save money and customize your policy to suit your needs:

Bundling Insurance

Bundling insurance means obtaining different types of insurance from a single provider. As an example, you might bundle your car insurance with home and life insurance. Insurance companies typically reward customers who bundle with multi-policy discounts. According to Business Insider, bundling insurance can usually save you between 5 and 20% on your policies.

Safe Driver Discounts

Safe driver discounts are savings available to people who haven't had any accidents, insurance claims, or traffic violations for a set period. Some insurance companies call these offers good driver discounts. Forbes says qualifying drivers can save between 10 and 40%.

Low Mileage Discounts

Low mileage discounts are price reductions for people who drive fewer miles than average motorists. According to MarketWatch, qualifying drivers usually drive less than 7,500 or 8,000 miles a year. These discounts apply to standard insurance policies rather than usage-based or pay-by-mileage policies. Some insurance companies offering low-mileage discounts include:

  • USAA.
  • Safeco Insurance.
  • American Family Insurance.
  • Farm Bureau.
  • PEMCO.

Roadside Assistance

Roadside assistance, an optional add-on available through many insurance companies, helps if your vehicle has mechanical issues while on the road. Roadside assistance plans vary, but Forbes states they may include:

  • Vehicle towing.
  • Service calls.
  • Minor onsite repairs.
  • Winching.
  • Replacement keys.
  • Accommodation, meals, and transport on interrupted trips.

Rental Reimbursement

Rental reimbursement, an optional add-on pays for hiring a rental vehicle while your car is repaired. Some insurance companies also reimburse policyholders for public transport costs during this period. You'll usually need comprehensive and collision coverage to qualify for rental reimbursement.

While car insurance jargon can be confusing, understanding these policy terms is simple once you examine them. If you encounter any unfamiliar terms, don't hesitate to ask your insurance agent. They're always happy to help you understand your policy and insurance options better.

Headshot of Idalia Garcia
Idalia Garcia
Insurance Editor

Idalia Garcia is a licensed insurance agent with extensive knowledge of various insurance lines. She has more than 12 years of experience in auto insurance and 10 years in property insurance.Â