Car insurance basics: What is car insurance? 

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Understanding the basics of car insurance is crucial for every driver. It not only ensures you are adequately protected in the event of an accident but also helps you make informed decisions that can save you money.

At its core, car insurance is a contract between you and the insurance company. You pay a premium, and in return, the insurer promises to cover specific financial losses related to your vehicle, depending on the coverage you choose. There are several types of coverage available, each designed to protect you in different scenarios. Liability insurance, for instance, covers the costs if you’re at fault in an accident and someone else is injured or their property is damaged. On the other hand, collision coverage pays for repairs to your car if it’s damaged in an accident, while comprehensive coverage takes care of non-collision-related incidents like theft or natural disasters.

Understanding these basic components can help you tailor your car insurance policy to fit your needs and budget. It’s essential to evaluate your driving habits, the value of your vehicle, and your financial situation to determine the right amount of coverage.

What is car insurance?

Car insurance provides financial protection in the case of an auto accident or if your car is damaged by other means, such as severe weather or theft. It can also cover the cost if you injure someone or damage their property. 

The contract outlines how much the insurance company pays out for vehicle replacement, repairs and medical bills. Car insurance can cover property damage, bodily injury and other medical expenses. While basic coverage is required in most states, the coverage you receive will depend on the policy you purchase.

How does car insurance work?

Essentially, you agree to pay a certain amount of money, known as your premium, in exchange for protection against sudden financial hardship after an accident.

The insurance company calculates your premium based on how much coverage you need and your personal risk factors.

“That includes the age of the vehicle, driver’s age, driving record and geographic location where the vehicle is housed or used, to name a few,” says Mark Snyder, an insurance expert at Hi Marley, which markets a communications platform that can connect carriers, agents, policyholders and others. 

If you’re involved in an accident, you file a claim on your insurance policy. Your insurer will then evaluate the situation and determine how much money you should be paid to cover expenses. If applicable, a deductible (a certain amount you agree to pay out-of-pocket) is subtracted from the payout. Often, filing a claim increases your premium temporarily, especially if you were at fault.

What does car insurance cover?

Car insurance isn’t a one-size-fits-all product and many different types of coverage can be mixed and matched. Snyder says the premium for each coverage type is computed separately, based on certain personal and risk factors, and then added together for your total annual premium.

Below are the most common types of auto insurance coverage.

Comprehensive 

Comprehensive coverage pays for damage to your car that isn’t due to car accidents. That includes theft, fire, vandalism, natural disasters (for instance, hail damage or flood damage) and collisions with animals (such as hitting a deer).

Damage to your windshield may be covered under your comprehensive coverage as well. In some states, comprehensive coverage includes glass repair and replacement with no deductible, but it varies from state to state. Ask your agent about the specifics when you purchase your policy.

Collision

Collision coverage protects you if your vehicle is damaged in a collision with another car or object. Most auto loan lenders require collision and comprehensive insurance. 

“This is a first-party coverage that is intended to cover damage to vehicles the policyholder owns or leases,” Snyder says. Unlike property damage liability, collision coverage pays to repair your own vehicle in the event of an accident. The amount of your collision deductible will reduce your collision claim check.

When you have comprehensive and collision coverage, it’s often called full coverage.

Liability 

Liability coverage pays for the damage you do to others. It also takes care of your legal fees if you cause an accident. Most state laws require drivers to buy two types of liability coverage: bodily injury liability and property damage liability.

Bodily injury liability

Bodily injury liability coverage will pay for others’ medical bills and lost wages when an accident is your fault, except in “no-fault” states, where your own Personal Injury Protection (PIP) coverage would pay for your injuries. For more on PIP, see below.

Property damage liability

Property damage liability protects the policyholder from financial losses if they damage someone else’s property. This includes other cars or property, such as fences. 

“This coverage does not pay for damages to the policyholder’s own vehicle,” Snyder says. He added that there is typically no deductible associated with liability coverage.

Personal injury protection (PIP) and medical payments

Personal Injury Protection (PIP) coverage pays for medical expenses for you and your passengers who are injured in an accident. It also covers funeral costs. PIP is required in 16 states.

“Personal Injury protection helps you pay for your out-of-pocket medical expenses in an accident,” says Adam Schwery, an insurance agent for Country Financial Insurance based in Kansas City, Missouri. “It can be a big help in dealing with the recovery process after an accident.

It applies no matter who caused the accident, though if someone else is at fault, your insurer may seek damages from the other party.

Medical payments is a separate but similar coverage that pays medical bills for you or anyone in your household regardless of fault.

Uninsured/underinsured motorist coverage

Uninsured motorist (UM) coverage pays for your medical bills if an uninsured driver strikes your car or if you’re injured in a hit-and-run. According to the Insurance Information Institute, an insurance industry trade group, UM coverage is required by law in 20 states and the District of Columbia.

Similarly, underinsured motorist (UIM) coverage kicks in when someone causes an accident but doesn’t have enough insurance to cover all medical bills. In that case, the at-fault person’s insurance pays out to its maximum and then your UIM coverage pays for the remaining bills, up to your own limit.

Other types of car insurance coverage

A variety of extras are available. Just remember that when you make a claim, your insurer may re-evaluate your rate.  

• Rental reimbursement: Also known as loss of use coverage, it pays for a rental car when your vehicle is damaged or stolen. Check for the per-day dollar limits and overall maximum to make sure you’re getting a good value for your premium dollar.
• Roadside assistance: If you have a flat or break down and need a tow, roadside assistance covers the fees associated with these issues.
• Gap insurance: Available for newer vehicles, it pays the difference between your car’s actual cash value and the amount left on your car loan if your vehicle is totaled. While gap insurance is not required by law, it can be a wise investment for anyone who financed their car. 
• Rideshare driving insurance: If you drive for a rideshare company such as Uber or Lyft, you can purchase extra coverage to protect you when you’re driving but haven’t accepted a ride for a user yet.
• Original Equipment Manufacturer (OEM) insurance: Sometimes, following an accident, your insurance policy may only cover generic or aftermarket parts. To ensure you get the factory-original parts, you can purchase this coverage, which is usually only available for newer cars.
• Classic car insurance: If you have a classic or collector’s car requiring special transportation or antique parts following an accident, your regular insurance policy might not cover it. Some insurers provide classic car insurance to protect vintage vehicles.

Do I need car insurance?

The simple answer is yes. Most states require you to have some auto insurance. And you need it to protect yourself. If you’re in an accident and don’t have insurance, you’re on the hook for all the damages you incur. Minor accidents can add up to thousands of dollars and major accidents, with injuries, could bankrupt you. 

Is car insurance required by law?

Every state has different auto insurance requirements. Just about every state requires you to carry minimum liability coverage, the amount of which varies from state to state. As discussed earlier, liability insurance covers bodily injury and property damage you cause to others in an accident but doesn’t pay for the damages to your car or your injuries. 

The average national rate is $502, but the rate varies from state to state. Iowa has one of the lowest state minimums, at $260 a year, while Florida has one of the highest, at $993, according to data collected by Insure.com.

What doesn’t car insurance cover?

A basic car insurance policy doesn’t cover:

• Maintenance or mechanical failures
• Wear and tear
• People who regularly drive your auto but aren’t listed on your car insurance policy
• Driving on a ridesharing platform

And you should note that coverage can vary greatly from policy to policy.

If you don’t purchase collision and comprehensive insurance, for instance, you won’t be reimbursed for damages to your own car in an at-fault accident (unless you live in a no-fault state).

Additionally, a standard policy won’t cover you if you’re using your car for business purposes. If you use your vehicle for work, you need a separate business auto policy or other form of supplemental insurance.

How much car insurance do I need?

Every situation is different, but in general, we recommend the following coverage limits:

• Up to $100,000, per person, for the medical bills of those you injure
• With a $300,000 cap per accident
• And up to $100,000 to repair other drivers’ cars and property that you damage

“I think what they also need to consider when choosing liability limits is how much they stand to lose in the worst-case scenario,” says Country Financial Insurance’s Schwery. “Most people could stand to lose $500 but could not lose $50,000 or $100,000.”

Remember that when assessing what type of coverage to get, you should also determine what you can afford if you get stuck with repair or replacement costs, medical bills and other expenses that may come out of pocket if you don’t have adequate insurance.

“There is no right coverage for everyone – people in different financial spectrums have different coverage needs,” says Clayton Fischer, an agent with Blue Marlin Insurance in Coral Gables, Florida. “A review of your assets at risk is the most important part of selecting coverage.”

How much does car insurance cost? 

A full coverage policy’s average car insurance cost is $1,895 a year or $158 a month. These rates are for a coverage level of 100/300/100. A 100/300/100 policy protects you for up to $100,000 in bodily injury for one person, $300,000 in bodily injury per accident and $100,000 in property damage per accident. 

The average state minimum coverage costs $503 a year, though coverage limits vary for each state. Minimum requirements vary by state, and most states have really low limits. You’ll want to consider buying more than the state minimum in order to be adequately protected.

Full coverage insurance is more expensive than the state minimum because it provides robust coverage that includes liability, comprehensive, and collision coverage. It makes sense to purchase full coverage insurance as it provides more protection to your car than state-mandated coverage. 

Where do you buy car insurance? 

When you’re buying auto insurance, it’s a good idea to shop around and compare quotes from several companies. This can save you hundreds of dollars — even if your driving record is less than stellar.

You can get quotes from:

• Local insurance agents
• Sites that provide quotes from multiple insurers
• Directly from car insurance companies

Insure.com’s annual customer satisfaction study can help you find the best car insurance companies.

Once you’ve selected the best offer, review the policy in detail and sign. Your policy will become active after you pay the first premium.

Factors that determine car insurance rates

Car insurance companies spend considerable time and effort deciding how to price policies. Understanding the many elements and risk factors influencing car insurance rates might help you get the deepest discounts. The car insurance risk factors usually used are:

• Where you live
• Your driving record
• Your credit (except where state law bans the use of credit information in insurance pricing)
• Your past claims
• Your vehicle
• Your daily commute and annual mileage
• Your age

Other pricing factors also come into play, such as whether your car will be parked in a garage when you’re home.

How to save on auto insurance

Though your auto insurance premium is based on your personal risk factors, there are many ways to get the rate lowered. Here are a few:

• Increase your deductible – but be sure you can afford the higher out-of-pocket costs before your insurance coverage begins.
• Bundle your auto insurance with home, renters or another type of insurance policy at the same company.
• Ask about affinity group discounts, which apply to certain professional groups, alumni organizations, club memberships and more.
• Don’t drive often. Insurance companies often lower rates for drivers whose mileage is low.
• Maintain good credit, as insurers use credit information to price their policies.
• Do well in school to receive a good student discount.
• Install an anti-theft device, which can also get you a discount.

However, the best way to save money on car insurance is to shop your policy at renewal time — especially if you’ve gotten a ticket or gotten into an accident — to see if you can get a lower rate for the same coverage from a different insurer.

What our experts say

Q. What do consumers need to consider when selecting car insurance coverage?

Adam Schwery

Adam SchweryInsurance agent, Country Financial Insurance

“I think what they also need to consider when choosing liability limits is how much they stand to lose in the worst-case scenario. Most people could stand to lose $500 but could not lose $50K or $100K. So, I would recommend going with a higher liability limit of $250,000 per person and $500,000 per occurrence and add an umbrella policy. To make this more affordable, choose higher deductibles on your comprehensive and collision coverage.”

Clayton Fischer

Clayton FischerAgent, Blue Marlin Insurance.

“There is no right coverage for everyone – people in different financial spectrums have different coverage needs to be reviewed. A review of your assets at risk is the most important part of selecting coverage. The recent college graduate with [an] entry-level job and building an asset portfolio needs less coverage than a small business owner with a family. I would review the assets at risk if brought into litigation and find a coverage amount that would most accurately reflect my assets at risk.”

What are common insurance terms I should know?

Insurance terminology you should be familiar with:

• Bodily Injury: An injury sustained by a person.
• Claim: Any request or demand for payment under the insurance policy’s terms.
• Deductible: Usually, the insured must pay a dollar amount on each loss to which the deductible applies. The insurance company pays the remainder of each covered loss up to the policy limits.
• Effective date: The date that coverage begins on an insurance policy.
• First party: Term used to refer to an insured.
• Liability: Any legally enforceable obligation or responsibility for the injury or damage suffered by another person.
• No-fault insurance: This may pay for your medical treatment, lost wages, or other accident-related expenses regardless of who caused the accident. This coverage is subject to the terms, limits and conditions of your policy contract and is not available in all states.
• Policy limit: The maximum amount a policy will pay, either overall or under a particular coverage.
• Principal driver: The person who drives the car most often.

Methodology

Insure.com gathered average car insurance rates from Quadrant Information Services for a male driver age 40, unmarried, with a clean driving record and good credit score, driving a 2023 Honda Accord. The rates are for a full coverage policy of 100/300/100 with comprehensive and collision and $500 deductible.

Shivani Gite

Contributing Writer

 

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Shivani Gite is a personal finance and insurance writer with a degree in journalism and mass communication. She is passionate about making insurance topics easy to understand for people and helping them make better financial decisions.