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Car accidents are expensive. Car crashes cost an estimated $871 million a year, according to a study conducted by the National Highway Traffic Safety Administration. Fatal accidents alone cost around $44.4 billion, according to a 2015 study conducted by the CDC. Without insurance, drivers would have to cover hefty claims expenses out of pocket.
While most Americans understand that car insurance is important, many are unsure 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 car insurance pays for injuries and damage that you cause to another person in an accident up to a previously agreed-upon coverage amount. Auto insurance may also pay all or part of the costs associated with an accident, theft or other cause of damage to you and your car, even if you are not at fault for the damage. You pay an insurance premium to your provider in exchange for this coverage.
Auto insurance coverage is offered through different coverage options. Some options are mandatory in most states, like liability coverage, while other coverages may be optional depending on your situation, like collision coverage. Below are the common coverage options available:
- Uninsured and Underinsured Motorist
- Personal Injury Protection or Medical Payments
To get auto insurance, you’ll need to provide information about yourself, other household members and your vehicle(s). Expect to provide details such as your age, marital status, address, insurance claims history, the type of car you drive and driver’s license number. If other drivers are on your policy, you will also need to provide similar information for them.
Auto insurance – What’s covered
Different coverage options cover different scenarios. 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 helps pay for 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 at-fault in an accident.
- Comprehensive: Comprehensive coverage helps pay for damage to your car that is caused by events other than hitting another vehicle, like windshield damage, fire or colliding with animals.
- Uninsured and Underinsured motorist: Uninsured motorist provides coverage if you’re in an accident and the at-fault driver does not have liability insurance to pay for your injuries or damage. Underinsured motorist helps cover you if you’re in an accident and the driver at fault does not have enough coverage on their policy to pay for your expenses.
- Personal injury protection and medical payments: This helps pay for your medical bills if you sustain injuries in an accident, regardless of who is at fault.
Liability insurance pays for damage and injuries caused to others that result from accidents where you are at fault. Bodily injury liability can cover medical costs, pain and suffering, lost income from wages and other special damages. It applies to injuries that the other driver or their passengers sustain or a pedestrian.
Property damage liability 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 the damaged property. For example, if you hit someone and their car is no longer driveable, they may need a rental while their vehicle is repaired. Property damage liability would also cover the costs of a rental car in this scenario.
Collision coverage pays for damage to your vehicle if you are at fault in an accident. This damage would be caused by hitting another vehicle or an object such as a light pole, guardrail or mailbox. It doesn’t cover damages to the other vehicles involved in an accident. States do not legally require this coverage; however, most lenders will require collision coverage on vehicles they finance. Said differently, if you have a loan or lease on your vehicle, it’s likely that you will be required to carry collision coverage on that vehicle.
With collision coverage, you choose a deductible amount you would be responsible for if your vehicle is damaged. Your insurer covers the rest in a covered claim, up to the actual cash value of your vehicle (determined by your insurer at the time of the claim). For example, if your vehicle is worth $10,000 at the time it is totaled, your insurer would deduct your deductible from your claims payout. In this scenario, if you had a $500 deductible, you would get a payment of $9,500 from your insurer for your vehicle.
The best way to describe comprehensive coverage is that it covers damage to your vehicle from instances other than hitting another vehicle or object, such as a light pole, guardrail or mailbox. Comprehensive typically covers your vehicle’s damage caused by theft, vandalism, glass breakage, animals and falling objects (like trees). Like collision, comprehensive is not required by your state, but your lender will likely require it. Also, like collision, comprehensive coverage has a deductible that you choose at the time of adding this coverage to your policy and claims payouts work very similarly.
Uninsured and underinsured motorist coverage
Uninsured and underinsured motorist covers you in the event of an accident where the driver of the other vehicle does not have insurance or enough insurance. In these cases, your uninsured or underinsured motorist coverage steps in and covers your damages, up to your per person coverage limit. The bodily injury portion of this coverage usually also covers injuries your passengers sustain due to an accident where an uninsured or underinsured driver hits your vehicle.
Underinsured motorist property damage coverage is available in many states and helps protect you from shortfalls in the coverage of the other driver in the case of an accident. For example, imagine your brand new Tesla was totaled in an accident with a driver who only has state minimum property damage 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 motorist property damage coverage may make up the difference (up to your coverage limit) in the cost of repair or replacement of your vehicle.
Personal injury protection and medical payments
Personal Injury Protection, or PIP, may help pay for medical expenses, lost wages, essential services, rehabilitation costs and funeral expenses for you and the passengers in your vehicle due to an accident. Some states refer to this type of coverage as “no-fault coverage” because it pays its benefits regardless of which driver caused the accident. PIP can be required or optional in certain states, and the coverage is unavailable in other states.
PIP is available in:
- Arkansas (optional)
- Delaware (required)
- Florida (required)
- Hawaii (required)
- Kansas (required)
- Kentucky (required)
- Maryland (optional)
- Massachusetts (required)
- Michigan (required)
- Minnesota (required)
- New Jersey (required)
- New York (required)
- North Dakota (required)
- Oregon (required)
- Pennsylvania (required)
- Texas (optional)
- Utah (required)
- Washington (optional)
- Washington, D.C. (optional)
Alternatively, medical payments coverage is available as an option in most states and required in only Maine and New Hampshire. Medical payments can be used to help pay you and your passengers medical bills after an accident regardless of fault, but this coverage does not extend to lost wages, essential services or funeral expenses.
Auto insurance – What’s not covered
Auto insurance policies are robust and provide coverage in common situations, like accidents or theft. But auto insurance won’t cover your or your vehicle from everything. As a policyholder, knowing what your insurance does not cover is important.
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 standard policy:
- Routine maintenance
- Vehicle wear and tear
- Vehicles used for delivery
- Damage or theft of personal belongings left inside the vehicle
However, you might be able to get added coverage for certain situations in the form of endorsements or specialized insurance coverage. For instance, some insurance companies offer additional coverage for personal belongings that were stolen from inside your vehicle. Other providers offer coverage for vehicles used for delivery, like pizza delivery. It’s important to identify coverage gaps you have with your existing policy so that you avoid financial devastation should a claim happen, and that’s when you find out your insurance policy does not cover you.
Factors that influence insurance rates
Car insurance premiums are highly individualized. There are a number of factors that influence your insurance rate, including:
- Age (in most states)
- Age of vehicle
- State, city and ZIP code (in most states)
- Claims history
- Credit score (in many states)
- Gender (in most states)
- Vehicle usage
- Marital status
- Safety features in your vehicle
- Vehicle type
Required car insurance coverage
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 an accident, the driver and or vehicle owner will be personally responsible for the cost of all damages and injuries.
Car insurance doesn’t just protect you, your passengers and your vehicle. It can be helpful in other ways. Drivers may benefit from 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.
Choosing enough insurance coverage
You might be wondering how much car insurance is needed? At the least, you need to carry your state minimum coverage. However, minimum coverage may be insufficient. Let’s say you cause an accident that damages 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.
The more you have in coverage, the less likely you’ll pay for out-of-pocket damages. On the other hand, more coverage costs more money. This is the tradeoff you need to manage to get the coverage that best suits your needs and budget.
You should also consider what risks you want to insure and what risks you don’t. For example, an older vehicle that is not worth much and does not have a loan on it may not need collision coverage. Because the car is worth so little, it may not be worth the money to insure it in this scenario.
Shopping for car insurance
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 can give insight into customer and claims satisfaction.
There are additional pros and cons to obtaining multiple insurance quotes when shopping for car insurance. Getting different quotes helps you determine which company can give you the best value for your money. Comparing multiple quotes may also help you understand what additional coverage options and discount options are available to you. For example, certain providers may offer a disappearing deductible option, so you pay less in a claim situation after years of being claims free. Or, maybe a usage-based telematics discount is a savings opportunity for safe drivers who don’t drive often.
Saving money on car insurance
There may be a few things you can do to help save even more money on your insurance.
- Evaluate your coverage: Speak with a licensed agent to understand your insurance coverage needs. It’s best not to be underinsured, but you also don’t want to be overinsured.
- Bundle your coverage: Insurers typically offer a multi-policy discount if you bundle your car insurance with your property insurance, life insurance or insurance policies with the same carrier. Bundle discounts can be substantial, so it may be worth considering.
- Explore all 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 potential discounts so you don’t miss anything that could help you save money.
The parts of an auto insurance policy
When your auto policy arrives, it will come with your insurance ID card. You’ll want to place the physical copy in your vehicle should you need it. It’s likely you’ll have a digital copy as well, depending on your insurer. Having two versions of your ID card can make sure you have proof of insurance when you need it most.
Car insurance policy documents also include:
- Declarations page: A declarations page lists the insured drivers and vehicles and includes the coverage you selected when setting up your policy. Review your declarations page for accuracy and work with your insurer or agent to make any needed corrections.
- Insuring agreement or base policy: This section covers 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.
- Policy exclusions: This section discloses what isn’t covered; it’s especially important to read and understand these exclusions. If you find exclusions you wish to have covered, speak with your agent or the company to see if it’s an option.
- Policy conditions: This section covers your and the insurance company’s legal responsibilities.
- Policy definitions: This section is where the terms of the policy are explained. Reading and understanding this section helps prevent misunderstandings about your coverage and obligations.
Getting car insurance is important, and understanding the basics makes things simpler. Before you decide on a policy, shop around to find a provider that can offer you the best premium for the coverage you need. Knowing what coverage and discount options are available can help you find the right coverage and savings. Working with a licensed insurance agent or insurance company and discussing your situation in detail can help you find the right coverage for your needs and discount opportunities, too. What’s important is to be properly covered should you find yourself in a claim situation.