Auto Insurance Basics
The auto insurance policy is a contract between you and your
insurance company. You agree to pay a premium and the insurance company
agrees to pay for specific losses as defined in the policy.
Most auto insurance policies are for six months to a year. By the time
the contract term ends, you have to renew the policy or buy a
new one.
The auto insurance policy is a package of different coverages.
You decide what type of auto insurance you need and what amount of coverage
to buy for each type you select. Your decision usually depends on:
- Legal requirements: Most states require that you purchase
a minimum amount of certain types of coverage or be able to provide
evidence that you have enough resources to pay for losses you may
cause others.
- Your risk aversion: Other things equal, the more risk averse
you are, the bigger the amount you’ll be willing to pay to protect
yourself from repair, replacement, legal, or medical costs.
- Car financing terms: Lenders usually require that you insure
your car against damages.
There are three main types of auto insurance:
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