Choosing A Car Insurance Policy: What Does That Word Even Mean?

Vehicle insurance protects you after an accident or other mishap. Policies tend to be long, involved, and difficult to read. Insurance terms can be confusing. See our question-and-answer segment about some common terms that everyone should understand when reading through a car insurance policy.

Q: What is an “insurance premium?”

A: An insurance premium is the payment that you pay monthly, quarterly or annually for an insurance policy to be considered valid.

Q: What is a “claim?”

A: A claim is filed by the insured for payment of benefits, as written in an insurance policy.

Q: What is a “deductible?”

A: The deductible is the amount of “loss,” or amount of money that the insured must pay before the insurance company pays.

Q: Who is the “insured?”

A: The insured is the person who owns the insured vehicle or other insurance policy.

Q: What is “liability coverage?”

A: Liability coverage is known in some states as “no-fault” insurance. It covers only the other vehicle in an accident, not your own. It sometimes includes some medical coverage.

Q: What does “comprehensive coverage” mean?

A: Comprehensive coverage insurance fully covers the insured vehicle for physical damage or theft, except for collision, which is a separate policy.

Q: What is “full coverage car insurance?”

A: When your vehicle is fully covered by insurance, it is covered by physical damage, collision, certain repairs, medical expenses and property damage that might occur as the result of an accident. This is also called comprehensive coverage.

Q: What is “collision coverage?”

A: Collision insurance covers you above and beyond your comprehensive vehicle insurance, in the event your vehicle comes into contact with an inanimate object, such as a garage or fence.

Q: Why should I have “Property Damage Liability” insurance?

A: Most states require that you purchase a minimum of $5,000 property damage liability insurance, so that you will be covered if you damage someone else’s property. Uninsured drivers who damage property must pay the damages out of pocket. Insurance companies recommend that you buy as much property damage liability insurance as you can afford–$50,000 usually is the target figure.

Q: What is “medical payments” insurance?

A: This insurance is above and beyond the usual vehicle insurance. Check your regular policy to see if you are fully covered for medical expenses arising from an accident (for yourself or for the other driver). If not, you can buy this supplemental insurance which will cover expenses, regardless of who is at fault.

Q: What is “bodily injury liability?”

A: If you cause an accident that injures someone else, this insurance covers the medical and legal expenses you may sustain.

Q: What is an “uninsured or under-insured motorist (bodily injury)?”

A: This insurance covers you in the event someone is injured in a collision and they are either not insured or are under-insured—that is, they do not have liability insurance at minimum.

Q: What is “rental car coverage” or rental car reimbursement?”

A: Should you need to rent a car after an accident, this insurance will provide coverage for the rental or reimburse you after you file a claim.

Q: What is “personal injury protection coverage?”

A: Known in the industry as PIP, personal injury protection insurance covers medical and hospital expenses for the insured. This may include income while you heal, child-care or funeral expenses. This insurance is not yet available in all states.

Q: What does the term “work loss” mean?

A: This insurance will pay up to 80 percent of your lost wages, should you be incapacitated by an accident. Coverage varies depending on company.

Q: Is “towing and labor” part of most vehicle insurance policies?

A: No. Most companies consider it additional insurance. It covers towing costs and roadside labor. There are limits, so you will need to check the policy regarding those limits.

Q: What is an “accidental medical protection plan?”

A: Also known as accidental death and dismemberment insurance, the accidental medical protection plan (AAMP) compensates you for medical expenses that you or your passenger may incur during an accident, regardless if you have a deductible or not. Towing, tires, car batteries and gas are usually included in the plan. An AMPP plan usually covers up to one year of hospitalization or more.

Q: What is “accidental death” insurance?

A: This coverage pays your beneficiary, should you or your passenger die, resulting from an accident. (See “accidental medical protection plan” above)

Q: What is meant by “customized parts or equipment?”

A: Covered under Comprehensive or Collision insurance—usually around $1,000. More coverage may be purchased. It covers custom parts that aren’t original manufacturer installations on your vehicle.

Q: What is “depreciation?”

A: As soon as you drive your vehicle off the car lot after purchasing it, it begins to depreciate, or lose value. This is calculated into your vehicle insurance policy. It states that your vehicle will not be depreciated above and beyond ordinary depreciation for up to two years, depending on the policy.

Q: What is an “earned premium?”

A: An earned premium is the amount of money payed to an insurance company which is considered to have been earned by that company, and will not be reimbursed if the policy holder decides to cancel the policy. For example, if your policy is good for 6 months, but you would like to cancel after only 2 months, the insurance company should reimburse you for the 4 months of unused insurance, keeping the ‘earned premium’ for the 2 months that the car was insured by them.

Q: What are “endorsements?”

A: Endorsements are another name for an insurance ‘rider’—optional provisions added to your insurance to expand your coverage.


Q: What is “gap insurance?”

A: Gap insurance covers the gap between what you owe on your vehicle and what your vehicle is worth.

Q: What is a “good student discount?”

A: A good student discount is a discount that some insurers provide for young drivers still in school who maintain a certain GPA.

Q: What is a “lien holder?”

A: The bank or finance company that you make payments to, for the purchase of your vehicle, is called the lien holder.

Q: What are “limits?”

A: Limits are amounts capped on your insurance policy or deductible.

Q: What is a “personal auto policy?”

A: A personal auto policy is your vehicle’s insurance, as opposed to a multi-holder policy.

Q: What is a “non-owners policy?”

A: It’s illegal in every state to drive a car without insurance. This type of policy covers you if you rent a car, or if you plan to drive a vehicle that is not your own.

Q: What is a “policy period?”

A: A policy period is the amount of time that your policy is in force.

Q: Who is the “primary driver?”

A: The primary driver is the person listed as the one who will be usually driving the vehicle.

Q: What is meant by “state minimum?”

A: The minimum amount of insurance required by each U.S. state to be legal.

Q: What is “term?”

A: Term insurance is not maintained indefinitely. When the term is up, you must renew it.

Q: What is a “VIN (Vehicle Identification Number)?”

A: This is the serial number found on the inside of your car door. Cars may be checked with the VIN to see if it has been stolen or been in an accident before.

Q: What is “usage?”

A: Usage is how much your car will be driven. Low-usage vehicles may be insured at a lower premium.

Q: Why should my vehicle have continuous coverage?

A: Insurance companies look at whether you can document at least six months of insurance coverage before they will consider insuring you. If you cannot show having continuous coverage (due to letting a policy lapse or are simply driving uninsured), then you are considered high risk. High risk insurance can be very expensive.

This article is a free resource created by Cheap Car Insurance meant to educate the general public. Sharing is permissible. Please contact us if you have any questions. Get a car insurance quote in your area.