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Auto insurance coverage: a breakdown

February 12, 2016
Auto insurance protects you against the enormous costs associated with an accident.

Buying your first car can be exciting, but it also means taking on the daunting task of selecting the right auto insurance coverage. As you sift through the different options, there are probably a lot of terms you've never heard, and you may not be sure what is and is not necessary.

Terms to know

Before you can choose the right policy, you'll need to have a basic understanding of each type of coverage. Investor Guide explained that all types of auto insurance can fall into two categories:

  1. Third-party liability:  covers the damage done to other people's vehicles as well as medical expenses for other people's injuries
  2. First-party expense: covers damage and medical expenses for you and your passengers when no one is at fault, or the driver at fault cannot provide coverage

Within these categories are a host of different coverage options, and CNN Money expanded on what each option entails:

  1. Uninsured motorist: covers the cost of damages and medical expenses when the driver at fault cannot pay
  2. Collision: covers cost of damages to or replacement of your own vehicle after an accident
  3. Comprehensive coverage: covers cost of damages to or replacement of your own vehicle if it is stolen or destroyed in a flood or fire
  4. Bodily injury:  covers medical costs of anyone injured in an accident you cause as well as your legal fees; most states require this coverage
  5. Property damage: covers damaged property of other drivers

Uninsured motorist, collision and comprehensive coverage are considered first-party expenses, and the latter two fall under third-party liability.

Which ones are necessary?

Each state has its own minimum coverage requirements, so what is absolutely necessary depends on where you live. These minimum requirements, however, are rarely enough to cover the costs of an accident, and it's a good idea to get more than the minimum if you can afford it.

"Minimum coverage requirements are rarely enough to cover the costs of an accident.”

Both CNN Money and Investor Guide recommended obtaining a bodily injury policy that covers at least $100,000 per person and $300,000 per accident. In addition, most states require a minimum of $15,000 in property damage coverage, but CNN Money recommended a policy of at least $35,000, as the average new car costs $30,000. While comprehensive and collision coverage are extremely important, one exception may be if your car is worth less than $5,000, as the premiums will probably end up costing you more than the price of the car.

The more coverage you get, the more protected you'll be. Car accidents can cost you an exorbitant amount of money, so it's best to do everything you can to protect yourself.

How to cut costs

To reduce the price of your premiums, Consumer Reports recommended maintaining a good credit score and reassessing your policy on an annual basis. Taking some time each year to compare your auto insurance rates to those of other insurance companies will help ensure you are saving as much as you can. Another way to cut costs:  Report any change in driving habits to your insurance company. If you are driving significantly less than when you obtained the policy, your premiums could be reduced.

In addition, CNN Money suggested raising your deductible and combining your auto and home insurance policies. Many insurers will reduce premiums by as much as 15 percent when the two policies are bundled.