It's a very unwelcome surprise when you find out after a car accident that your policy didn't cover what you thought it did, or worse, what you were told it did. Much confusion springs from the fact that people do not take the time to learn what the various terms and policy details actually mean, in practice as well as in the dictionary. In this age of do-it-yourself, Chinese-menu-style, online insurance policy purchasing, it is more important than ever that you know what your coverage actually covers!

Every term, every condition and every exception to your policy is important. Not only do you need to read and retain your initial policy, every subsequent "codicil" or "addendum" needs to be filed with the original, as insurers make changes routinely, but on a "policy class" basis. In other words, they are not going to single you out for special treatment, good or bad, that is not applicable to everyone else in your situation. Bottom line - you need to know all the details.

Perhaps you're thinking about getting a new auto policy. Or maybe you just want to make sure what your present policy covers. Either way, it is critically important that you understand your auto insurance. You don't need to become an expert in insurance or contracts, but you will at least want to discover exactly what your insurer is going to pay, and under what particular circumstances, if and when you need to make a claim, or (heaven forbid) there is a claim made against you.

Definition of "deductible"

The deductible is simply that portion of the repair or replacement cost that is going to come out of your own pocket. If you have a $1000 deductible, then you will pay the first $1000 of the collision repair if you are responsible, rather than another insured driver, for the damage. Be aware that the first thing that goes up, when policy premiums come down, is the deductible. You have to carefully crunch all the numbers when rating your policy, because a low premium is no great deal if you have a high deductible.

When attempting to determine the deductible that makes sense for your policy, you need to consider what amount of money you could comfortably pay if you need to make a claim. Some people will set aside that deductible amount, in an interest-bearing account of course, toward the time they will need it after an accident. If you want to save money by choosing a higher deductible policy, you will need to do a little "self-insuring" by having the money available when you need to pay it.

Limits of liability

Auto insurance policies have widely varying "limits of liability". A $300,000 limit of liability on collision coverage, which is common, collision damages will be covered up to this amount. After an accident for which you are covered, your insurance company is on the hook for the difference between the deductible and the liability limit. Naturally, if damages exceed $300,000, you will have to pay the overage yourself.

If you think you can simply lower your policy premium by decreasing the limits of liability figure, you could be courting several kinds of disaster. If you seriously damage other people's valuable property, you may have insufficient coverage to protect yourself, and could lose a substantial sum. Further confounding matters is the fact that the liability limits can differ depending on circumstances, and fluctuate quite a bit from one kind of "covered incident" to another. You have to ensure that your liability limits are enough to protect you, no matter what happens, so you have to be very careful when making this determination.

Exclusions, options

If you want to protect yourself from specific dangers and otherwise fine-tune your policy, this will naturally add to your cost. There are a variety of common options in auto insurance, but most underwriters will consider special coverage if it can be adequately "quantified" and holds to insurance laws and regulations in your state. You don't really have to go to Lloyd's of London for unique or personalized insurance coverage, as any full-service insurance firm has the expertise to advise you on optional coverage definitions.

One thing overlooked by many people who are shopping for new or improved auto policies is the number of situations and incidents that are excluded from coverage. Besides the usual criminal behavior and "acts of God", insurers can exclude and deny claims if the wrong person was driving, the car was improperly operated, drugs or alcohol were involved, the car was parked in the wrong place and all sorts of other circumstances. These are spelled out in the policy documents at least as clearly as the situations that are, in fact, covered. This is just another reason (if anyone needs another) to read all the fine print - and the big print, too.

Mandatory coverage

In states where you are required to have auto insurance, the portion that is generally mandatory is liability coverage, which safeguards the interests of other people whose cars (and bodies) may be damaged in a collision or other incident that is determined to be your fault. As stated above, you are doing yourself no favors and precious little to protect yourself, your interests or your auto if you opt for bare minimum coverage to keep your cost down. And, no matter where you live, if you are the registered owner but not the legal owner - for example, you are still paying the bank - then you will likely be required by the lender to have comprehensive and/or collision coverage, too. It's a good idea, anyway, if you really want to be fully protected.

After a little study, when you understand some basic facts and definitions about car insurance, you will be able to make an educated decision and get the best policy for your particular needs. Never buy auto insurance based on premium amount alone. Your decision should factor in the realities of your "life behind the wheel", as well as your financial situation and the other important factors discussed here. Don't forget the old saw about insurance: You can never buy it, at any price, if you wait until you need it. By then it's too late, so study up, get some good advice if you need it (from unbiased sources) and get the most coverage, and most appropriate coverage, that you can afford.