Auto insurance is defined as a contract between the insured and the insurance company that protects the insured against financial loss in the case of an accident or theft. The insured person or the policyholder has to pay premiums for the coverage set forth in the insurance policy.
All states have regulations that set the minimum amounts of insurance or other financial security the vehicle owners have to pay for the loss caused by their negligence behind the wheel if an accident occurs. An individual has to select the coverage limits and deductible while buying an auto insurance policy. In this blog, we will discuss these two terms that are widely used in an auto insurance policy; Coverage limits and deductibles.
What do the coverage limits mean in auto insurance?
It’s important to understand the common types of coverage available on an auto insurance policy while purchasing auto insurance. There are different types of car insurance coverage available to protect the insured, passengers, and the vehicle that is involved in a car accident. For example, a car insurance policy includes liability coverage, collision coverage, and comprehensive coverage. All the coverages have their separate coverage limits.
A coverage limit is one of the most important concepts to understand when you’re considering an insurance policy. An insurance coverage limit is defined as the maximum amount of money an insurance company will pay for a covered claim. A typical insurance policy holds a collection of coverages — and each coverage has a limit.
Car Insurance Coverage Limits
- Auto liability coverage limit:- It is mandated by state law. Each state sets its minimum liability limits that a driver has to purchase. Keep in mind that it is just a starting point and you may want to increase your liability limits by purchasing more coverage, depending on your circumstances.
- Comprehensive and collision coverage limits:- These coverage limits are typically the actual cash value of the vehicle(original value of the vehicle minus depreciation) at the time of the accident. In other words, if your car is totaled in an accident, your policy may pay up to the vehicle’s current value, which takes into account depreciation.
What does the deductible mean in an auto insurance policy?
A car insurance deductible is an amount that you have to pay toward repairs or other damages before your insurance policy kicks in. For example, a policyholder chooses a $1000 coverage deductible. Later, his/her car gets damaged in an accident. If the damage costs $2,500, the insured has to pay his/her $1000 deductible, and the insurance company pays the remaining $1,500.
Deductibles are the way in which risks are shared between the policyholder and the insurer. Usually, the larger the deductibles are in an auto insurance policy, the less premium you have to pay for the insurance policy.
Most of the drivers sometimes feel that they should not pay a deductible in a situation where they were not in any way responsible for the damage to the car, as is often the case in comprehensive claims. The use of the deductible system is one of the methods through which car insurance companies keep the rates of insurance premiums lower for everyone. It also lowers the impact of such claims and also makes people not file small claims that take more resources to process than they are worth.
How to choose your coverage deductible?
The most important thing to consider when choosing a coverage deductible is that an individual must think about how much he/she has to prepare to pay out of pocket if the claim is required after an incident. That means an insured has to find the right balance between what fits the budget for insurance and what he/she can reasonably expect to be able to afford in the case of a claim.
It should always be remembered that if you choose a higher deductible in the account for lower premiums and don’t have a claim for many years, the money you saved over that span can put you ahead of the game. On the other hand, if a claim is required during the policy period, you must be able to handle the out of pocket amount.
Typically a deductibles range varies from $100 to $2,500. A car insurance deductible choices may also vary depending on the state laws and the guidelines of insurers.