Used Car Insurance – How Does It Work?
Used car insurance policies work the same as new car insurance policies. If this is your first time insuring a car, you’re in the right place. Today we’ll discuss how car insurance works with used car owners and first-time car owners in mind. We’ll introduce you to concepts like liability, full coverage, comprehensive and collision coverages, and deductibles.
First, know that car insurance regulations vary from one state to the next, the basic concepts are the same everywhere.
Used car insurance is built on two primary notions:
- Liability Coverage
- Physical Coverage
Liability Coverage – The Most Important Part of Used Car Insurance
The International Risk Management Institute (IRMI) defines liability as: “any legally enforceable obligation.” In the realms of insurance, we’re talking about the obligation to pay a monetary award for injury or damage caused by one’s actions.
In other words, this coverage will pay for damage you might cause to others, whether to their body or to their property.
Most states require drivers to carry a minimum amount of liability coverage. In Ohio, for instance, the state minimum is:
- $25,000 bodily injury liability per person
- $50,000 bodily injury liability per accident
- $25,000 property damage liability per accident
Imagine you’re an Ohio driver commuting to work. A wild spring storm leads to puddles on the highway. Your vehicle hydroplanes and you lose control of it. You crash into another vehicle with a family inside.
The accident causes $10,000 in damage to the other vehicle and the three people in the other vehicle have minor injuries. Your state minimum insurance will cover the damage to the car, up to $25,000 for one person’s injuries, and a total of $50,000 for the entire family. Hopefully, they aren’t hurt too badly.
However, that minimum liability coverage will not repair your vehicle. Nor will it pay for any injuries to yourself. And, if the damage to the other vehicle is beyond the $25,000 property damage coverage, you will be responsible to pay it out of pocket, unless the other driver has uninsured / underinsured motorist coverage. We’ll talk about that in a moment.
Remember, every state has different requirements for minimum liability, and they change from time to time. Contact your state department of motor vehicles form the most current requirements. But you might want more coverage than the minimum.
“How much liability insurance do I need?”
Both medical bills and vehicles are more expensive than they once were. Ambulance rides can cost $5,000 to $15,000 dollars. So many used car owners feel comfortable buying more liability insurance than their state requires.
Imagine yourself as that Ohio driver again. What if you total the other vehicle completely, but only have the minimum $25,000 property damage coverage? What if the other vehicle is a $90,000 GMC Denali with all the bells and whistles? Hopefully that driver has uninsured / underinsured motorist coverage. Otherwise, you’ll get sued.
And what if that family of three has serious injuries? $50,000 sounds like a lot of money until you tally up three ambulance rides, three emergency room visits, operations and X-rays, plus ongoing medication and physical therapy for three injured people. You might be on the hook to pay hundreds of thousands of dollars in medical expenses.
The court can garnish your paycheck and make you sell real property. People lose their homes because they’re underinsured.
That’s why many insurance-savvy people buy insurance with much higher limits of liability, and high-net-worth individuals or those with a lot of assets buy an umbrella policy, which gives them even more coverage.
Now that you understand liability, let’s think about coverage for your used car.
Other Coverage for Used Cars: Full Coverage / Comprehensive and Collision
Used cars can be quite expensive. And if you have a lienholder (the bank that loaned you the money to buy a car usually) they may require you to keep full coverage on your used car until it’s completely paid for. Let’s take a closer look.
Understanding Full Coverage: Comprehensive and Collision Insurance for Used Cars
Every car insurance company has a package called full coverage, which will include both comprehensive and collision insurance for your used car.
Collision insurance covers any type of collision: whether you crash into a building, a vehicle, or the side of a mountain.
Comprehensive coverage is for everything else. Cars get stolen, a tree limb might fall on one, or they can be damaged by hailstorms.
- One standard exception on full coverage used car insurance is glass.
- Windshields are not usually covered by insurance, unless you buy an “endorsement” that covers them.
Now, let’s think back to the Ohio driver again. That accident caused $10,000 to your car. Your collision coverage will pay for most of the damage, but you’ll be responsible for a deductible.
Used Car Insurance Deductibles Explained
A deductible is a set amount of money that a driver will pay out of pocket, to pay for repairs. Modern deductibles range from $500 to $5,000, but most lenders request that you maintain a deductible of $1,000 or less.
If you own your car “outright” and don’t make a payment, you can save a lot on your used car insurance by selecting a high deductible on your insurance policy. However, when accidents happen, you’ll need to pay that money to get your car fixed. So, choose a deductible that you’re comfortable paying in an emergency.
Now that you understand the basics of used car insurance, let’s think about some valuable add-ons that might be an excellent choice for you.
Used Car Insurance Add-Ons and Endorsements
Some insurers offer extra coverage options. These “endorsements” or “riders” come at an extra cost. And depending on your situation, they might be a sound investment.
- Glass or windshield coverage – windshields are both expensive and delicate. Glass coverage will pay to have your windshield professionally replaced, and sometimes there is a small (usually $50) deductible involved.
- Uninsured / underinsured motorist coverage – helps to pay for damage that another driver should be responsible for, but doesn’t have enough coverage, and is essential for high-dollar used cars.
- Towing coverage – pays for towing to a nearby auto garage after a covered accident.
- Roadside assistance – can help you with a flat tire or dead battery.
- Rental car coverage – helps to pay for a rental car after an accident, while your car is getting repaired.
Ultimately, used car insurance can be more affordable than new car insurance. Just remember to maintain a reasonable amount of liability coverage, even if your state doesn’t require it.