Auto Insurance Definitions & Key Terms: Understand your policy
Be in the loop when it comes to your auto policy.
Editor’s note: When I was first shopping around for my own insurance policy, I had no idea what the heck I was doing. At the time, I was 19 and figured I just needed “basic insurance” whatever that was… I ended up with a policy that cost me in the ballpark of $180-200 a month, just for MYSELF. This seemed a little pricey, and at the time, I was ballin’ on a budget to say the least. I rolled with it because I didn’t understand what I needed in a policy. I also blindly trusted that the insurance agent would handle everything and have my best interest in mind. It wasn’t until I got into my first fender bender that I realized I probably should understand exactly what my policy truly covered and what everything means. Knowing some basic information about auto insurance would’ve been a lot more helpful prior to my fender bender.
Do you have questions related to auto insurance or the specific terms used in the industry? This page serves as a glossary that defines the most common and most important terms you should know and understand.
Definition of auto insurance
Auto insurance is simply a written agreement between you and an insurance provider that safeguards you from monetary loss in the event of a collision or damage due to theft.
With a better understanding of the terms, you’ll be able to more effectively evaluate car insurance quotes and remove the mystery from your policy.
Key terms for car insurance
Feature of some auto insurance policies that may prevent your rates/premiums from increasing if you are involved in an at-fault accident.
Actual Cash Value
After an accident, an insurance adjuster may determine the actual cash value or your vehicle based on details like the age and condition (prior to the accident) of the vehicle, as well as the prices of similar models in your local area.
Someone aside from the policyholder who is also covered or insured through the policy. Many policies cover all licensed drivers living in the home of the primary driver.
The person employed by the insurance company that is responsible for settling claims. The adjuster will evaluate the claim and make a determination on what should be paid, based on the details of the policy.
A crash that you cause. The insurance company of the at-fault driver pays for bodily injury, property damage, and legal defense costs based on the details and the limits of the policy.
Bodily Injury Liability Policy
An insurance policy that covers you for bodily injuries to other drivers or pedestrians that result from an accident determined to be your fault. Your insurance company will pay for medical costs, pain and suffering, and lost income as a result of the accident, based on the details and coverage limits of the policy.
Car Insurance Quote
An estimate of the rates or premiums that you will be charged for insurance coverage.
A request for payment from the insurance company. After an accident, damage, or theft, you’ll file a claim with your insurance company to request payment for repairs, replacement, or costs related to injury. The claim will be reviewed to determine what and how much will be covered.
The person submitting the claim for assistance from the insurer.
Covers damages to your car caused by an accident with another vehicle or an object (like a tree, for example). Collision insurance will involve a deductible that will be your responsibility to pay. For example, if your policy has a $500 deductible and the damages total $1,200, you’ll pay the $500 deductible and the insurance company will pay the remaining $700. Collision insurance is typically required if you have a loan on the vehicle (to protect the lender).
Combined Single Limit
A combined single limit (CSL) policy will specify a single limit to the liability payments that will be made for property damage and bodily injury, as opposed to having separate limits for each.
Covers damage caused by things other than a collision. This can include things like hail damage, fire, vandalism, theft, damage caused by animals, floods, falling objects, and more. Comprehensive coverage is optional and will involve a deductible.
Part of the insurance policy document that includes details like your name, address, drivers insured through the policy, your car’s VIN, the period of the policy (the dates it is in effect), amount of coverage, deductible, premium, and more.
The amount that must be paid by you in the case of a claim. For example, if your policy has a $500 deductible and there is $2,500 of damage, you will be responsible to pay $500 and the insurance company will pay $2,000. The deductible amount will impact the premiums. A lower deductible will result in higher monthly/annual premiums. A higher deductible will mean that you’ll pay less each month for your premiums, but you’ll pay more in the case of an accident.
The day your policy coverage begins. The policy is not actually in force until the effective date.
Specific things that your policy will not cover. Some common exclusions for auto insurance include normal wear and tear, any damage done while the vehicle is being used for illegal activity, or damage caused intentionally.
Fair Market Value
The price at which the vehicle could be exchanged between a willing buyer and a willing seller with both parties having reasonable knowledge of the relevant facts.
Insurance companies are often measured in terms of their financial strength (such as the A.M. Best Financial Strength Ratings). A higher score represents a stronger ability to meet ongoing insurance obligations. Financial strength may be a concern when you are choosing an insurance company because if the company is not able to meet its financial obligations, you may have trouble getting paid for a claim.
Policies that include liability, collision, and comprehensive insurance are often referred to as “full coverage”.
Covers the difference between the actual value and the amount you owe on the car. If you owe $11,000 on a car that is totaled and is determined to be worth $10,000, gap coverage will cover the $1,000 difference. This type of coverage may be required by the lender.
Covers damage to the windshield or windows of the car.
An insurance professional who is not an employee of a particular insurance company and may be able to represent multiple companies. An independent agent will earn a commission from the policies that the agent sells.
A break in coverage during which you are not insured. The policy could lapse because of cancellation, non-renewal, or missed payments. Lapses can cause your premiums to increase.
Covers property damage or bodily injuries to others as a result of an accident that you caused. The policy may also cover your costs for legal defense.
The maximum amount covered by the policy for an accident or claim. There will be specific limits for bodily injury and property damage.
Medical Payments Coverage
Part of a policy that covers medical and funeral costs for you or other passengers in your vehicle, regardless of who was at fault for the accident. Medical payments coverage is sometimes called MP or Med Pay.
Insurance coverage limits that are required by the state for drivers. Most, but not all, states require drivers to be insured at least to meet the minimum requirements. Policies that provide only minimum coverage will offer the lowest rates, but the coverage may be insufficient if you are involved in a serious accident.
A discount that may be available if you hold multiple policies with the same insurance company. For example, you may be eligible for a discount if you hold policies for car insurance and homeowner’s insurance with the company. Many insurance companies offer multi-policy discounts, and the discount amounts can be significant.
Some states require insurance companies to cover damage for their customers regardless of who is at fault for causing the accident.
Personal Injury Protection (PIP)
Similar to medical payments coverage, PIP provides coverage from your own insurance company for medical and funeral costs regardless of who is at fault for the accident. PIP covers additional costs that may not be covered by medical payments coverage, such as lost wages and loss of essential services like childcare.
The main use of your vehicle (business, commuting to work, etc.).
The cost you pay for insurance coverage to remain in force. Premiums are usually quoted for six months or one year, although they are typically billed and paid monthly.
Property Damage Liability Coverage
Aspect of the policy that covers you for damage to someone else’s personal property, like their car. Coverage will be provided up to a specific limit and is required by most states.
The amount that you pay for insurance (shares the same definition as “premium”).
The cost to replace or repair personal property (like a car, for example). The replacement cost may be higher than the fair market value. Some policies include guaranteed replacement cost coverage for new cars during the first year when the replacement cost is likely to be higher than the fair market value.
Some insurance policies will assist you in the event of a breakdown, flat tire, if you run out of gas, or something similar.
Safe Driver Discount
You may be eligible for reduced premiums if you meet requirements related to a safe driver discount. This discount may be for divers who have not had an accident or filed a claim in a certain number of years, or it may be earned by tracking your driving habits. Many insurance companies are now using mobile apps to track driving habits and reward safe drivers with discounts.
A document that may be required by your state to prove that you have insurance coverage. The SR-22 is not needed by every driver, however, it may be necessary to provide proof of coverage after a DUI or other offenses. Your premiums may increase significantly if a form SR-22 is needed.
An optional policy that provides excess liability coverage if you are sued for damages that exceed the coverage of your auto insurance policy. An umbrella policy is not specifically an auto insurance policy and may provide coverage for other types of personal liability aside from what is related to an auto accident.
Insurance professional who evaluates and analyzes risk related to insuring drivers. The underwrites will be responsible for evaluating risk related to your driving and claim history, location, age, credit, and more. Your rates will be determined based on the results.
Uninsured and Underinsured Motorist Coverage
Provides coverage for bodily injury and/or property damage if you’re involved in an accident with an uninsured or underinsured driver. This coverage is not required in most states but is commonly included with a lot of auto insurance policies. Without this coverage, bodily injury and property damage may not be covered due to the other driver’s lack of insurance.
Feeling like you are in the dark about something you’re spending a considerable amount of money on isn’t fun. If you’re here on this blog, you probably care about where your money is going on a monthly basis. Knowing these basics terms and definitions before you go shopping around for an insurance policy will help you be confident that you understand what you want and need.
How well do you know your auto policy? Were any of these terms new to you?