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Modern automobile insurance coverage has been around for more than 100 years and first became mandatory in Connecticut in 1925. However, most states did not require car owners to insure their vehicles until the mid-1950’s. Currently 48 states and the District of Columbia require proof of valid insurance to register and operate an automobile.
Car accidents are expensive. According to the most recent data, car crashes cost an estimated $871 million a year. Fatal accidents alone cost around $44.4 billion. Without the resources of insurance company lawyers and adjusters, uninsured individuals would no doubt have incurred much higher costs.
While most Americans understand that car insurance is important, most people aren’t sure how their insurance works. This auto insurance guide is here to teach you the fundamentals.
What is auto insurance?
The simplest explanation of auto insurance is that it agrees to pay all or part of the costs associated with an accident, theft or other cause of damage to your car. In exchange for this coverage, you pay an insurance premium to your provider.
The phrase “auto insurance” is a general term that refers to various types of insurance protection for cars. The Insurance Information Institute explains that an auto insurance policy can include up to 6 different types of coverage:
- Uninsured Motorist
- Underinsured Motorist
- Personal Injury Protection
To get auto insurance, you’ll need to provide some information about yourself and your vehicle. Expect to provide your age, marital status, state of residence, insurance claims history, the type of car your drive, how old it is and its safety features.
Auto insurance – What’s covered
The six types of auto insurance cover different problems. To become a savvy auto insurance consumer, you need to understand exactly how each type of coverage works. Here’s a quick look at what each category covers:
- Liability: Liability insurance pays to repair damages you cause to other drivers and vehicles. This insurance includes bodily injury and property damage liability.
- Collision: This helps you pay to repair or replace your car if you’re in an accident.
- Comprehensive: Comprehensive coverage is usually optional, and it covers damage to your car that is caused by unexpected events, like windshield damage, fire or accidents with animals.
- Uninsured motorist: This insurance covers you if you’re in an accident and the driver at-fault does not have liability insurance.
- Underinsured motorist: Uninsured motorist covers you if you’re in an accident and the driver at-fault does not have enough coverage to pay for damages to your vehicle or your medical expenses.
- Personal injury protection: This pays for your medical bills if you sustain injuries in an accident, regardless of who is at-fault.
Automobile liability insurance coverage
Liability insurance pays for damage and injuries that result from accidents where you are at fault. However, liability coverage only applies to the driver’s injuries and does not cover passengers in the vehicle.
In most accidents, both drivers are considered to be partially at fault because of a rule known as “comparative negligence.” There are a few situations when you won’t be considered at fault, such as if you were hit directly from behind, but otherwise you will be considered at least partly responsible.
As most states have comparable negligence laws, even if you are an incredibly cautious driver, a portion of the blame will be yours. According to the Centers for Disease Control and Prevention, the cost of injuries and deaths (medical and loss of productivity) from car accidents exceeded $75 billion in 2017. Without liability coverage, you could be in charge of paying these bills yourself. According to data from 2016, there is an accident where an injury occurs every 15 seconds; in the time it took you to read this paragraph, at least one person was injured in a car accident.
- Bodily injury includes medical costs, pain and suffering, lost income from wages and other special damages. It only applies to injuries that the other driver or their passengers sustain. It does not apply to your passengers.
- Property damage covers damage to other vehicles and their contents, as well as structures and other types of physical property. This also includes costs associated with the inability to use damaged property.
Auto collision insurance
This coverage pays for damage to your vehicle that is caused by other cars. It doesn’t cover damages to the other vehicles involved in an accident. Collision insurance is always optional and may only be required by a lender on more expensive vehicles.
Collision insurance is generally more expensive than liability insurance and often includes a deductible (an amount you pay out of pocket before insurance kicks in). Insurance companies generally have a few deductible options you can pick from. Higher deductibles mean lower rates, but you’ll have to pay more before your insurance helps with costs after an accident.
The benefit of collision insurance is that it pays for damage to your vehicle even when the accident was your fault. Collision coverage will only pay for the damage not covered by another driver’s policy when the accident is their fault. Simply put, you can only get paid once.
The best way to describe comprehensive coverage is as “everything else” insurance. This covers damage to your car from anything other than a car accident. It is an optional coverage that protects your investment. In 2016, buyer trends indicated that 77% of drivers purchasing liability coverage also purchased comprehensive insurance. In fact, many lenders require you to have comprehensive for any vehicle that has a lien against it to pay off the loan if the car is stolen. Comprehensive insurance deductibles are usually $500 or $1,000 depending on your provider and what you sign up for.
- Theft and vandalism
- Windows and windshield
- Animal damage
- Falling objects (like trees)
- Storms and natural disasters
Uninsured and underinsured motorist coverage
Uninsured motorist protects you in the event of an accident where the driver of the other vehicle does not have insurance. In this case, your uninsured motorist coverage steps in and covers your damages. The bodily injury portion of this coverage usually also covers injuries to your passengers.
Uninsured and underinsured motorist coverage is important because according to the latest data, roughly one out of every eight drivers doesn’t have car insurance.
Underinsured motorist coverage protects you from shortfalls in the coverage of the other driver in the case of an accident. Let’s say, for example, your brand new Tesla was totaled in an accident with a driver who only has state minimum liability coverage of $25,000. While no one was hurt, the value of your car is more than the other driver’s insurance. In this example, your underinsured coverage would make up the difference (up to your coverage limit) on the cost of repair or replacement.
Sometimes insurance companies sell both uninsured and underinsured coverage under the same policy, while others sell them as two separate types of coverage.
- Both uninsured and underinsured coverage function as supplemental liability insurance for another driver who causes an accident with your vehicle.
- Just like liability coverage, uninsured or underinsured coverage has separate coverage amounts for property damage and injury.
- Most insurers limit the amount of uninsured/underinsured motorist coverage to the same limits as your policy’s liability coverage.
Personal injury protection
PIP or Personal Injury Protection pays for additional medical and hospital expenses. Some states refer to this type of coverage as no-fault because it pays its benefits regardless of which driver was responsible for the accident. PIP coverage also applies to passengers in your vehicle.
Coverage may vary from state to state but will contain some or all of the following coverage benefits:
- Lost wages
- Service replacement for someone injured in an accident, meaning they’ll receive assistance with things like household chores or child care
- Rehabilitation costs
- Funeral costs
PIP/no-fault payments are not dependent on who was to blame; they also begin making payments much faster. Currently a dozen states (and Washington D.C.) have mandatory no-fault personal injury protection requirements:
- New Jersey
- New York
- New York
- North Dakota
- Washington D.C.
Other states require that PIP be offered as an option to all policyholders. Check with your state’s insurance department to determine how they handle personal injury protection insurance.
What is not covered by auto insurance?
Auto insurance policies are robust, and they provide coverage in the most common situations, like accidents or theft. But even the best auto insurance won’t cover your car from everything. As a policy holder, it’s important to know what your insurance does not cover.
Every car insurance company has a different set of coverage options, but here are some of the situations you probably won’t have protection for under a basic policy:
- Damages caused by someone else driving your car
- Damages that exceed your liability coverage
- Exotic or vintage cars
- Routine maintenance
- Vehicle repairs
However, you might be able to get protection for certain situations with additional coverage. For instance, most auto insurance companies offer add-on coverage for exotic and vintage cars. Some providers like Hagerty specialize in vintage car coverage. You may even be able to get a portion of your vehicle repairs paid for by your insurance company, depending on the cause. Any damages sustained in an accident will automatically be covered.
If someone else is driving your vehicle and they cause an accident, your insurance policy won’t cover them. However, damages will be covered if the driver has their own insurance policy with collision coverage. If other people frequently drive your car, like a trusted friend or relative, you can add them to your policy to get protection.
If you don’t have a car and drive someone else’s, you can get non-owner insurance. Essentially, non-owner insurance providers liability coverage that pays for injuries or any damages you cause to someone else in an accident.
You might also be wondering if your car is covered under insurance if it gets totaled. The answer is: it depends. A vehicle is considered totaled if the cost to repair it is higher than its current value. If your car is worth $10,000 and there’s $8,000 worth of damage, your insurance provider will help you pay for the damages, using your collision or comprehensive coverage. On the other hand, insurance wouldn’t cover the damages if there was $15,000 worth of damage on your $10,000 vehicle.
What are the factors that influence my rate?
Car insurance premiums are highly individualized. There are a number of factors that influence your insurance rate, including:
- Age of car
- City and state
- Claims history
- Credit score
- How much you drive
- Marital status
- Safety features in your vehicle
- Type of car
As of 2020, the average cost of car insurance in the United States was $1,555 per year. The most expensive states for car insurance are Florida ($2,587), New York ($2,498) and Louisiana ($2,351), and the least expensive states are Maine ($831), Ohio ($998) and Wisconsin ($1,049).
Who’s required to have auto insurance, and how much is required?
Forty-eight states have mandatory insurance requirements for motor vehicle registration. If you don’t have at least a minimum level of coverage in these states, you are breaking the law. This can lead to large fines, a loss of your driver’s license and possibly jail time. These penalties apply even if you never get in an accident. For example, if your car is registered in Washington and you get caught driving without insurance, it’s a traffic violation that leads to an immediate fine of at least $550.
The only two states that don’t require all drivers to have car insurance are New Hampshire and Virginia. New Hampshire “strongly recommends and urges” owners to carry at least standard liability and property damage insurance. The Granite State may not have mandatory insurance requirements for everyone, but it is required if any of the following apply:
- DWI conviction in the last 3 years for first offenses, longer for subsequent convictions
- Habitual offenders
- Individuals found at fault for an uninsured accident
- Individuals returning from a suspended license
Car insurance is also required in New Hampshire for people who have been convicted of one or more of the following:
- Leaving the scene of an accident
- Conduct after an accident
- Underage DWI
- Subsequent (2nd) reckless driving offense
The other state that does not have a mandatory requirement is Virginia, which allows car owners to forego even basic coverage if they pay an “uninsured motor vehicle fee” of $500 per year in addition to the regular cost of registration. Virginia’s fee does not release owners of liability for damages.
In the event of an accident, the driver and or vehicle owner will be personally responsible for the cost of all damages and injuries. People who had insurance at the time of registration who are cancelled or cease having coverage for any reason are required to pay the prorated portion of the uninsured motor vehicle fee immediately or face a substantial penalty.
Car insurance doesn’t just protect you, your passengers and your vehicle. It can be helpful in other ways. Certain types of drivers can benefit from getting a higher amount of car insurance or purchasing add-ons that can make their lives easier. For instance, someone who has never changed a tire before might consider getting roadside assistance as part of their auto insurance policy. Someone who lives in an area with extreme weather should consider getting comprehensive coverage, which will protect the vehicle from hurricanes, tornados and flooding.
How much insurance is enough insurance?
You might be wondering how much car insurance do I need? At the least, you need to carry your state minimum coverage. If you don’t have at least this much coverage, you are breaking the law. The basic required coverage in most states is automobile liability insurance coverage, which protects you from financial loss for accidents that are all or partly your fault.
Liability coverage is presented as two or three numbers; Pennsylvania for example is 15/30/5 – all of which represent thousands of dollars.
- The first number is the maximum amount that the insurance company will pay out for injuries to one person in a car you hit ($15,000).
- The second number is the maximum they will pay if multiple people in the other car are injured (the total is divided among all the injured) ($30,000).
- The third number is the maximum they will pay for property damage ($5,000).
However, many people will find that minimum coverage is insufficient. Let’s say you cause a serious accident that destroys multiple cars and you only have the Pennsylvania minimum amount of coverage for property damage, $5,000 total. This wouldn’t even begin to cover damages. Not only would you have to replace your own car out-of-pocket, the other driver could also sue you for damages, which would then come out of your other assets.
The more you have in coverage, the less likely it is you’ll ever pay for damages out-of-pocket. On the other hand, more coverage costs more money. This is the sort of tradeoff you need to manage to get the coverage that best suits you.
You should also consider what risks you want to insure and what risks you don’t. If you’re driving an old, broken down car, you may not need collision coverage. Because your car is worth so little, it may not be worth the money to insure it. On the other hand, liability is almost always worth having because it protects you from a lawsuit.
Shop around and pick the best provider for you
Determine how much insurance you want before you start shopping around for rates. This way, it will be easier for you to compare companies, and you’ll be less likely to buy coverage you don’t want or need.
The insurance departments regulate insurance companies to make sure they provide the right kinds of coverage and comply with state-specific laws.
However, not all insurance companies provide the same level of service. Differences can especially occur in the time it takes a company to process claims – the difference between getting a check in a week versus a month can be enormous. While insurance departments make sure insurers fulfill their obligations, consumer rating organizations like J.D. Power & Associates and Consumer Reports will tell you how they treat their customers. For example, J.D. Power rates providers based on factors such as overall satisfaction, claims, policy offerings and interaction to give an overall view of how customers feel about the service they get.
Controlling the cost of auto insurance is a proactive process, which means you can’t count on your insurer to do it for you; you have to do it yourself. The best advice is to shop your auto insurance around on a regular basis. Review your policy once a year to make sure coverage is appropriate and that drivers aren’t missing on any discounts.
However, there are several pros and cons to shopping around for multiple car insurance quotes. Getting different quotes helps you determine which company can give you the best value for your money. You can also get a quote from a new provider and use it as leverage to lower your existing auto insurance premium or find a provider with discounts that can help you save money. Comparing multiple quotes also helps you stay on top of your coverage because it forces you to evaluate how much insurance you do or don’t need.
To give you the most accurate quote, some insurance companies will run a hard credit check, which can lower your credit score. Be aware of those credit checks if you’re planning on getting three or more quotes.
How to save money on car insurance
Other than shopping around for the best deal with the service you want, there are a few things you can do to save even more money on your insurance.
Evaluate your coverage
Consider what you are insuring by answering some simple questions. Is your new car loan paid off? If so, do you need to continue comprehensive coverage? This is an especially important question if you live in an area with a low incidence of car theft. You might also want to consider increasing deductibles if you have the savings to pay for smaller issues out of pocket.
Ask your insurer about discounts for bundling your auto insurance with your homeowners or renters policy, life insurance and your other forms of coverage to receive a volume discount. Bundling insurance can save you money, and it can also make it easier to form a relationship with your insurance company and have your insurance needs met all at once.
Ask about discounts
There are a lot of discounts available other than bundling policies. Depending on the insurance provider, you can get discounts for having certain safety features in your vehicle, being a member of certain organizations or professions and sometimes for characteristics like being retired. Ask about any potential discounts so you don’t miss anything that could help you save money.
Even if you don’t meet discounts for being in a certain category, you can sometimes earn a discount. Ask your insurer about safe driver discounts and if you qualify. Many insurance companies offer discounts for each year you go without an accident or violation. Ask about taking a safe driver or defensive driving course and how this could lower your rates.
If you have a student driver on your policy, check to see if there are discounts for having good grades or for students who are away at school and don’t drive frequently.
Beware of scams
The most costly form of insurance is bad insurance. Bad insurance is insurance that does not provide the protection you want or need and often lulls you into a false sense of security by tricking you into thinking you are properly covered. If you want to avoid being scammed into buying bad insurance following this list of do’s and don’ts will help protect you:
Buy insurance from a door to door salesman or unsolicited callers.
Check prospective insurers and brokers rating with the Better Business Bureau.
Give your current policy number out indiscriminately.
Check with your state insurance department to make sure the agent/company are licensed in your state.
Fall victim to the promise of “Free Services” that only conceal hidden costs.
Use your common sense. If a deal sounds too good to be true, it likely is.
Before you sign a new insurance policy, always look at the company’s customer reviews to scan for red flags.
The parts of an auto insurance policy
When your auto policy arrives, it will come with your insurance ID card. You may have received a temporary ID by fax, email or directly from your agent, but the one that comes with your policy is the permanent one and should be immediately placed in your car so you don’t lose it.
Read through your policy when it arrives to make sure you have the coverage you want. While mistakes aren’t common, they do occur. It’s best not to discover that your limits or coverage is wrong when it comes time to make a claim. Car insurance policies have a set design and will include the following:
This is usually the first page of your policy and includes who and what are insured. The declarations page has the make/model of your car and the VIN (vehicle identification number). Compare the VIN on the policy with the way the number appears on your registration or title. If they don’t match, have it corrected or you’ll have some trouble when making a claim.
The declarations page will also include your premium amount and the policy term, either six months or a year. It will also mention any deductibles. If any of this information appears incorrect, advise your agent or insurer as soon as possible and request a corrected policy.
Insuring agreement or base policy
This section spells out the provisions of your policy, the extent of your coverage and the insurer’s responsibilities. It also stipulates certain requirements, like when and how to pay your premium on time and how to report accidents to the insurance company in a timely fashion.
This section spells out what isn’t covered; it’s especially important to read and understand these exclusions in their entirety. If you find exclusions you wish to have covered, speak with your agent or the company about having them added to the policy. Be aware that having exclusions removed will most likely result in a higher premium.
This section spells out your legal responsibilities and your insurance company’s legal responsibilities.
Also known as the fine print, this is where the terms of the policy are explained. Reading and understanding this section ensures you do not have any misunderstandings about your coverage and obligations.
What if I am a terrible driver?
Insurance companies are in the business of making money. They try to limit their expenses by avoiding riskier drivers since they are more likely to have an accident. If you have a poor driving record or are a brand-new driver with no history, it might be hard to find a company willing to cover you.
Use the assigned risk pool
One solution is to try to find coverage through an assigned risk pool. All states have a system of assigned risk where high risk drivers are given to an insurance company at a prescribed rate. Insurers are required to accept a certain number of these assigned risk drivers in order to continue selling insurance in the state.
Buying insurance through the assigned risk pool is not permanent. As violations fall off your record and accidents fade into the past without new incidents, you can move out of the pool and buy regular car insurance lower rates.
Become a better driver
Of course, if you have a history of bad driving, becoming a better driver is important. Insurance companies view good drivers as low-risk, and as a reward, will give them lower rates on their auto insurance. Usually once per year, the insurance company reviews your updated driving record and adjusts your premium based on recent infractions.
To clean up your driving record, avoid accident-related insurance claims, speeding tickets and any other traffic violations that are reflected on your record. Consider taking a defensive driving course or another driving safety class, especially if your insurance company will give you an additional discount for doing so.
What to do in the event of an accident
Accidents happen. The Property Casualty Insurers of Association of America reported in 2011 that drivers file a collision claim roughly once every 18 years. Given the likelihood that you will face accidents during your time as a driver, there are a few basics to keep in mind in the immediate aftermath of any car accident:
- Don’t panic.
- Make sure you and any passengers are physically okay. If someone in either vehicle is injured, immediately request medical assistance. Unless there’s immediate danger, don’t move anyone with a neck or a back injury.
- Put on your hazard lights and, if possible, relocate the car to the side of the road to avoid any further collisions.
- If you have a cell phone notify the police, even for a minor fender bender.
Once the vehicles have been moved and injuries have been addressed, it is time to exchange information with the other driver(s):
- Collect as much information as possible, including name, address, phone number and driver’s license number. Take pictures of the accident scene and get the contact information of any witnesses.
- Gather information about the other vehicle, particularly the license plate number, make and model.
- Don’t discuss who is at fault with the other driver. That’s the job of the insurers and/or the police. Protect yourself by not admitting fault or speculating on what happened.
Reporting the accident
After an accident, contact your insurance provider as soon as possible. They will need your name and contact information and ideally your policy number. They also need to know the day, time and location of the accident, as well as a general description of the injuries and damage. A more detailed report will come in the following weeks.
Don’t take your car in for repairs until after you’ve spoken with your insurance company because they may have rules you need to follow to handle the repairs, such as what garages you are permitted to go go to.
Filing a claim
When you talk to your insurer’s claim department, they will provide you with instructions regarding their procedures for filing a claim. Follow the instructions you are given, and if you are unclear or uncertain about what is being requested, always ask questions. Claims representatives are trained to walk you through the process and explain the whys and wherefores of the process.
Don’t wait until you get into a car accident to figure out your car insurance. By then, it may already be too late. Getting car insurance is extremely important, and remembering the basics makes things simple. Before you decide on a policy, shop around to find a provider that can offer you the best value—that includes any discounts you qualify for. Make sure you have the right amount of coverage for your state and your personal needs, and understand what your policy covers. If you are in an accident, follow the steps above to report the incident and file a claim with your insurance company.
If you master the basics presented in this auto insurance guide, you’ll become a more informed auto insurance consumer and be safer on the road.