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Car Insurance: What is It?

Written by Todd Clay. Posted in Definitions Last Updated: 10/05/2010

What is auto insurance, a short history, its components, and how it’s priced

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Drivers need car insurance for financial protection.

Most US and Canadian drivers know they need car insurance, but what exactly is it? Simply put, car insurance is a financial protection used to cover losses caused by auto accidents and other vehicle-related mishaps.

Without auto insurance, people would have to pay for these losses themselves. That could easily bankrupt most drivers on the road in a serious accident. Car insurance protects your financial assets by covering physical damage and bodily injuries for auto-related incidents.

A Short History of Auto Insurance

Car insurance is considered part of the “property/casualty” family of insurance. In addition to automobile insurance, this includes homeowners, renters, and various forms of business insurance.

The roots of property/casualty insurance in America date to before the American Revolution. Originally these companies didn’t include auto insurance for a simple reason: there were few cars prior to the 20th century. There were even fewer serious vehicle accidents. Remember, 35 miles-an-hour speed would have been inconceivable until well into the 1900s.

Auto insurance dates to the early 20th Century. As cars on the road increased, car accidents incidents. Insurance companies soon discovered it could compensate drivers for their auto accident losses, but also make money while doing it. Some established property/casualty companies expanded into the market, while many others began as auto insurers.

Car Insurance Policy Components

In its most basic form, auto insurance consists of two components: liability and full coverage. Liability coverage covers both bodily injury and property damage to another vehicle if you’re found at fault in an accident.

In a “no-fault” state, each insurance company pays for its own insured’s losses, while only the insured found at fault sees a rate increase. In both cases the liability is defined by a pre-determined limit. All 50 states require all liability insurance at certain minimums.

Full coverage is further divided into comprehensive and collision sections. As the name implies, collision coverage covers your car for damages regardless of fault after a certain deductible is paid by the policyholder. Comprehensive, or “other than collision” covers other damage to your car. Common claims under comprehensive coverage include auto glass repair and replacement or damage caused by vandalism.

Other coverage commonly found in auto insurance include medical payments or personal injury protection (PIP), which covers bodily injury for you and people in your car if liability coverage isn’t applicable. There’s also uninsured and underinsured coverage (UM/UIM) which covers gaps in coverage if you’re hit by someone with inadequate insurance or no insurance at all.

How Auto Insurance Is Priced

Insurance is a business of statistics. Those drivers more likely to cause a claim pay more in premiums. Those with recent claims and tickets pay more than those who don’t. Gender and age are also taken into consideration. On the whole women pay a less than men. Drivers under 25 generally pay the most in premiums. Boys 18 and younger are usually the most expensive demographic.

However, after drivers turn 25, premiums usually drop until they bottom out in their 50s. Premiums start to creep up slightly again in the 60s. By age 74 a driver may once again be considered higher risk. As a reward, many companies will keep older drivers who have been with them for a long time at relatively low premiums.

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Todd Clay

Todd Clay is a former insurance agent with the largest insurance company in the United States. He earned his Bachelor’s from the University of Texas. He's worked in several fields but has specialized in insurance, financial-related information, and technology. He blogs at Car Insurance Guidebook. Connect with Tood on Google+

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