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An auto insurance policy actually consists of several different coverages.
Required in most states, it is something all drivers must posses.
Liability Insurance
This coverage is the basis of all auto insurance policies, and the minimum required in most states. If you're found at fault in an accident, liability insurance pays for the injury and property damage expenses of the third party involved in the accident. Property damage pays for the replacement or repair of anything that was damaged. Bodily injury expenses cover lost wages and medical bills. If you cause a major accident, your current or potential coverage may not cover you sufficiently. It is a safe bet to buy more than the minimum required by your state.
Collision
If you're found at fault in an accident, collision coverage will cover expenses needed to repair your vehicle. Collision coverage is usually the most expensive component of an auto insurance policy, although it isn't required. Insurance companies might proclaim your car a “total loss” if the repairs exceed the market value of the car. When this occurs, the insurance company will pay you the actual cash value, minus the deductable. From there your car is off to an auction where it will be sold for parts or scrap.
Replacement Cost:
The amount required to replace your car or repair damages without considering depreciation.
Depreciation:
Decrease in value because of age/wear on vehicle.
Actual Cash Value (ACV):
The value of your car when it is damaged or destroyed. Insurance companies figure the ACV by subtracting the depreciation from the replacement cost.
Tip:
In most cases, it’s better to choose replacement cost coverage. Although higher in price, the protection may be worth it.
Comprehensive:
Comprehensive coverage will pay for damages to your vehicle that were not caused by an accident. This includes fire, vandalism, theft, natural disaster, and even animals. Depending on the damage, the insurance company will pay the cars worth right before the incident. This is also optional coverage.
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