Auto Insurance

The most important terms in auto insurance, and what they really mean

By: Lisa Coxon on January 29, 2020
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Auto insurance is no simple concept, is it?

Riddled with terminology that can sometimes sound like an altogether different language, the world of auto insurance is one that often needs decoding. You sign up for a policy and suddenly terms like “deductible” and “liability” start getting thrown around and you wonder what you’ve gotten yourself into.

That’s why we’ve broken down some of the most important terms in auto insurance, and are here to explain what they mean — in plainspeak.

Insurance premium

The monthly or annual amount of money you agree to pay your insurance company for your policy. Some companies require customers to pay in an annual lump sum, and others allow them to pay on a monthly basis.

Your premium is determined by a number of factors, including age, postal code, driving history, vehicle model/make, and how long you’ve had insurance coverage for in the past.

Collision coverage

A mandatory form of insurance (if you lease or finance a vehicle) that helps cover the cost of replacing or repairing your vehicle in the event of a collision with another vehicle, or an object on the ground. If you own your vehicle, then you can remove collision coverage, but that would mean you’d have to pay out of pocket for any damage.

Comprehensive coverage

An optional form of insurance that helps cover the cost of replacing or repairing your vehicle in a non-collision-related incident.

For example, let’s say your vehicle is damaged in a hailstorm. Comprehensive coverage would take care of this. It also covers things like theft, falling or flying objects, fire, natural disasters, an animal, and vandalism.

Insurance deductible

The amount of money you agree to pay the insurance company before it begins to pay for the costs related to your claim. For example, let’s say you have a deductible of $1,000 and are found at-fault for an accident with a claim worth $4,500. Your insurance company is only going to pay out $3,500. Choosing a higher deductible will lower your premiums.

Liability limit

The amount you’re covered for if you’re found liable for injuring somebody or damaging someone’s property while driving. At a minimum, it’s recommended that you have $200,000 worth of liability coverage but experts encourage getting a policy that covers you for $500,000 to $1 million.

No Fault

No-fault insurance refers to a system where, regardless of who is actually at-fault for the collision, each driver deals only with his or her insurance company. In the past, drivers had to deal with each other’s insurance companies directly, which made the claims settlement process much lengthier and complicated. But now each driver makes a claim with their respective insurance companies, and then the insurers hash it out behind the scenes and figures out who needs to pay who.

The no-fault insurance system exists only in Quebec, Ontario, Nova Scotia, New Brunswick, and PEI., The name is a bit of a misnomer, though, because you can still be found at-fault or partially at-fault for an accident.

Additional driver

Anyone else besides you listed on your insurance policy who can drive your vehicle. It’s important to list them on your policy or else you might not be covered if they get into a collision while driving your vehicle.


The institution or lender that’s allowing you to finance your vehicle. This might be a bank or another lender that’s provided you with a car loan. Technically, they own the vehicle, so they’re listed on your policy.


An optional add-on to your existing policy, also known as a “rider.” For example, you might want to add an endorsement for rental car coverage in the event that you get into a collision and are without your vehicle for some time while it’s getting repaired. Chances are adding an endorsement will raise your premiums. Endorsements can also be used to limit or restrict coverage, too.

Limited waiver of depreciation

The second you drive a new vehicle off the lot, it begins to depreciate in value. A depreciation waiver is a type of endorsement that ensures if you were to total your vehicle, your insurance company has to reimburse you the cost of what your vehicle was worth when you purchased it, instead of the depreciated value. This waiver is typically only good for a set period of time, however (anywhere from one to three years usually), depending on the insurance company.

Accident Forgiveness

An endorsement that protects you against an increase in premiums after your first at-fault (or partially at-fault) collision — sort of like a Who Wants to be a Millionaire lifeline.

Accident forgiveness might ensure that your first at-fault collision is a “freebie” but it’s important to know that if you use this endorsement and then decide to switch auto insurance companies, it doesn’t guarantee that the next insurer won’t charge you higher premiums for having had an at-fault accident in the past. You might have been “forgiven” by your old insurer but that won’t carry over to your new insurer.