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How exactly does car insurance work?

It should all be so easy. You get into a car, learn to drive and then you are as free as a bird. Except all but three US states have laws that say you have to carry a minimum amount of insurance before you can drive. What exactly does this mean?

 
   

The problem is simple. You might believe you will never get in an accident, that your driving skills are superb and nothing can touch you. Less flattering, you might not care what happens to you or the vehicle you are driving But never forget the way you drive may injure other people and total their vehicles. Morally, the law says there should always be some money available to pay for their medical expenses and the repair of their vehicles. If you do not have this money in your bank account, it should come from somewhere else.

The solution is simple. Every driver pays into a fund and that money is held ready to pay out for personal injuries and property damage. This is not big government. Private insurance companies are licensed by each US state to administer this basic protection. It is called liability insurance and the money you pay is called a premium. If the insurance companies do the math properly, there is always enough money in the fund to pay out on the claims. To make the arithmetic easier to do, the states set minimum levels of coverage every driver should carry. These amounts vary from state to state, but the maximum you are required to carry is $50,000 for personal injuries to one person ($100,000 shared between two or more) and $50,000 for property damage. Sharing out these maximum numbers among every driver makes for low premiums. Most people do drive safely and avoid accidents, so a lot of small premiums go a long way.

If you do not have a home in your name, no assets or savings, you can probably get by with just the minimum insurance. But if you do have capital, anyone who is injured will sue to recover the difference between the minimum sum insured and the actual cost of treatment, loss of earnings, and so on. Think about it - even the maximum $50,000 does not cover a lot of medical treatment. In such a situation, you will only be financially safe if you bought more than the minimum policy. Then there are your own medical bills and the cost of repairing or replacing your own vehicle.

There are different types of policy to cover all the major losses that might result from a traffic accident. You have to judge whether paying the premiums on each level of cover represents good value for money.



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