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Car insurance basics | Insurance | Financial Literacy | Khan Academy


4m read
·Nov 10, 2024

So cars are something that usually involves some type of insurance. One, cars are a pretty expensive asset that many of us own. The other issue is cars are driving around pretty fast, and they can actually cause a lot of damage to property or to people.

So for the first thing to think about of any type of insurance is what's the premium? What do you pay for that insurance? And then, um, what's the deductible? Remember in other videos we talked about that deductible. If you have a five thousand dollar deductible, that means you have to spend the first five thousand dollars yourself. People will often say that's out of pocket, and then the insurance kicks in. Usually, the higher the deductible for a given amount of coverage, or depending on the different dimensions of coverage, the lower the premium is going to be because the insurance company feels like, well yeah, it's going to be less likely that we're going to have to pay for something.

But then, above and beyond premiums and deductibles, there's a lot of different dimensions of automobile insurance. The first dimension is that of liability. Liability really matters because a car might cost tens of thousands of dollars, but if, heaven forbid, you were to run into someone or cause damage to someone else, especially if they could get really hurt or worse, you could be liable for hundreds of thousands of dollars. So it could be much more expensive than the car itself.

Many states actually require you to have liability insurance. Even if you aren't required, I highly recommend that you have liability insurance no matter how carefully you drive, and I do recommend you drive carefully. Accidents do happen. People clearly get hurt on the road, and if someone were to sue you and you were to lose a lawsuit, that would cost a lot of money. Even if you don't lose the lawsuit, the legal expenses can be a lot, so having liability insurance can help out there.

Now, beyond liability, obviously what most people think of when they think of car insurance is your car gets into an accident. There is some damage involved. How do you repair that damage? So that is collision insurance. Many car insurances, they'll say, okay, we're going to cover liability for this much, we're going to cover collision for this much, and that's pure if you get in an accident. You are covered for that.

Now sometimes there's another little piece called uninsured insurance, or if someone is underinsured or uninsured and your car gets damaged. Well then, and really they were at fault. Some states don't try to say who is at fault, and different people's insurance just cover their own stuff. But in other states, they say, okay, who is at fault? If, let's say, I get into a car accident with you and if I was at fault, and if they decide that I was at fault, then my insurance would have to cover not just the damage to my car, but to your car as well. But then if I wasn't insured, then you would have a situation where you have the underinsured or uninsured policy.

Where if you get into an accident with someone who's not insured, even if they were at fault, that it will still cover it. So you have the liability, you have the collision if you actually get into an accident and there's damage. We could talk about if it covers the, uh, you know, the uninsured or underinsured side of things.

But then what if a situation where you didn't get into a car accident? A tree falls on your car, or hail damages your car, or someone steals your car? Well, that's comprehensive coverage. So collision is an accident; comprehensive covers all of these other things. It is literally comprehensive.

Then the last dimension is medical expenses. Obviously, none of us want to fall into one of these situations, but if you get into a car accident, it's not just your car that might get damaged. You or other occupants in your car or someone else's car might get hurt as well. As you know, medical expenses, or maybe you don't know, medical expenses could easily be tens of thousands of dollars. It could be more costly than the value of the car itself, so once again, that's another piece of insurance.

So when you get into a policy, look at what you're paying. Look at the premium, but not all insurances, and look at the deductible. But not all insurances are equivalent. Obviously, you have different deductibles, but they all have different amounts. Some you should see whether your policy even covers liability versus collision versus comprehensive versus medical expenses. What are the different deductibles? Do they have limits under those? Do they have certain restrictions where it might not apply? Does it apply if only you're the driver or someone else is the driver?

So these are all the details that it's really good for you to know about when you're making, uh, insurance purchasing decisions.

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