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Car Insurance 101: Your Guide to Insurance

Why Do I Need Car Insurance?

Car insurance protects you financially if you are in an accident or if your vehicle is lost or stolen. If you are still making payments to a lender or leasing a vehicle, car insurance protects the lender’s asset: the vehicle.

Car insurance also helps shield you from financial losses as a result of injuries or damage to property. If you hit a patch of ice and skid into a home’s fence, the property damage liability provision in your car insurance will cover the damage.

What Types of Car Insurance Are There?

There are different types of coverage for vehicle insurance. The coverage you need depends on whether you own your car outright or make car payments to a lender. If you are making payments, your lender likely will require that you have both comprehensive and collision coverage.

Here are the different types of coverage commonly available for car insurance.

  • Auto Liability Coverage: Your state will typically set minimum requirements for auto liability coverage. There are two primary components of auto liability coverage: bodily injury and property damage. Bodily injury coverage pays for costs incurred if you injure someone in an accident that you cause. Property liability coverage pays for costs incurred if you damage someone’s property in an accident. Most states require auto liability coverage.
  • Comprehensive Coverage: Comprehensive coverage pays for repairs that result from damages that are not vehicle collisions. This type of coverage is important because collisions are just one of many potential hazards to your car — including hail damage, vandalism and theft. These are considered “covered perils” and are often included in comprehensive coverage. Comprehensive coverage is usually optional, but if you lease your vehicle or are still making payments to a lender, you may need to purchase this coverage as part of your lease or payment agreement.
  • Collision Coverage: Collision coverage is what most people understand as car insurance. If you are in an accident, collision coverage helps repair or replace your vehicle. And similar to comprehensive coverage, collision coverage is frequently optional, but a lender may require it.
  • Medical Payments: Medical payments coverage is different from liability coverage, even though both cover injuries sustained in an accident. The difference is that medical payments coverage helps pay for injuries to passengers in the car with you. Liability coverage, on the other hand, would be for those injured in the other car. Some states require this coverage, while others do not.
  • Personal Injury Coverage: Personal injury coverage can help pay for medical expenses, but its primary function is to cover expenses if you are injured. This type of coverage pays for things such as lost wages if you must take time off of work to recover. It can also pay for services that you are unable to complete yourself while you are recovering, such as lawn care.
  • Uninsured/Underinsured Motorist Coverage: This coverage protects you if you are hit by a driver who doesn’t have insurance — or doesn’t have sufficient coverage to cover the cost of the injuries they cause. This type of coverage is required in some states but is considered optional in others.

What Is a Deductible, and How Does It Affect My Premium?

The deductible is simply the amount of repair cost that you are responsible for covering before your insurance kicks in. Let’s say you have a $500 deductible. If you’re in an accident that causes $750 in damages, you’ll pay $500 for the repairs, and your insurance company will pay the remaining $250. However, if your deductible is $1,000, you are responsible for the entire $750 in damages since that amount is lower than your deductible limit.

When you research car insurance quotes, insurance companies will ask you what level of deductible you want to pay. Since this is the amount that you are responsible for covering, consider how much you can pay out of pocket for repairs. You’re looking for cheap car insurance that still covers your needs.

A lower deductible might be easier to cover out of pocket, but it will result in a higher premium cost. A higher deductible means that you are willing to shoulder more of the cost of repairs. This reduces the amount that your insurance company will need to pay, so a higher deductible usually results in a lower premium rate.

It’s important to weigh these considerations carefully when you set your deductible and choose your auto policy.

How Does Car Insurance Work?

When you buy a car, you’ll typically need to provide proof of insurance coverage. If you are ever in an accident, you must file a claim to access the benefits provided by your insurance coverage.

A claim is a record of the accident. It can include everything from the weather conditions at the time of the event to the total damage or injuries sustained.

Your insurance company sends you to an approved repair shop and then reimburses you for the cost (minus your deductible).

How Much Car Insurance Do I Need?

When you call insurance companies to get car insurance quotes, you’ll have to answer a variety of questions to determine your rate. Many of these questions are required for underwriting purposes, and they can vary from one state to the next.

How much car insurance you need depends on your personal financial situation — and how much insurance your state requires you to carry.

Most states require drivers to carry a minimum level of auto liability coverage, which is usually broken into three numbers. 

For example, a minimum level of auto liability coverage of 30/60/25 means that the auto policy includes: 

  • $30,000 is the coverage for injury to a single person
  • $60,000 is the injury coverage maximum paid for an accident (if more than one person is injured); 
  • $25,000 is the maximum that will be paid out for property damage.

Is the minimum state requirement enough coverage? That depends on several factors that you should discuss with your insurance agent. If you are found to be at fault in a serious accident and your coverage is insufficient, your other assets — such as your home — may be at risk.

While auto liability coverage is typically mandated by the state, collision and comprehensive coverage might not be. Unless you own your vehicle outright, your lender or leaseholder may require you to purchase comprehensive and collision as a condition of your loan or lease.

Why Your State Matters for Car Insurance

Where you live impacts your rates in several ways. Because states regulate insurers, they may require drivers to carry different types of car insurance. Some states ban the use of criteria like credit scores or marital status in the underwriting process. This may have an impact on the rates insurers charge in those states.

States can have a big impact on rates. Car insurance in California is typically more expensive because the state is densely populated, and people frequently drive considerable distances. The more cars there are on the road and the farther distances are to travel, the likelier accidents are. 

Car insurance in Texas can be pricey thanks to its big cities and long distances. Florida can be expensive due to high rates of uninsured drivers. Some states present a higher risk for stolen vehicles, so premium rates there might be higher.

Even your immediate neighborhood can have an impact on your rates. It’s more expensive to insure a car in a high-crime area. And if you live in a densely populated area, your rates might be higher because where there are more cars, there are more fender benders and accidents. Searching for “car insurance near me” will give you an idea of what is available in your area.

Can I Get Car Insurance Without a Driver’s License?

It can be challenging to find an insurance company willing to cover a person without a driver’s license. Insurers base coverage on how much risk they take on. A driver with a license has a driving record that tells the insurer how much risk they’re accepting. Without that information, an insurer is missing key information that allows them to assess risk and set rates.

This question arises frequently when there is a teenager in the household with a permit but no license. Contact your insurance company as soon as they obtain their permit to let them know that there’s a new driver in the household.

Since individual circumstances vary, there are ways to purchase car insurance without a license. Let’s say you have a medical condition that prevents you from driving, but you want your caretaker to be able to drive your car. In a situation like this, talk to your insurance agent and see if you can be listed on the policy as an excluded operator.

What Are Optional Insurance Coverages?

There is a wide range of optional insurance coverages that drivers can tailor to their needs. Your insurance agent will likely ask you about these to generate your car insurance quote, so it’s a good idea to have a basic understanding of each auto policy option.

  • Gap Coverage: This covers the “gap” between your car’s replacement cost and its depreciated value. Cars depreciate rapidly the moment they are driven off the dealership’s lot. Lenders and leaseholders will typically require you to carry both comprehensive and collision coverage, but gap coverage is optional. If you total your new car, your collision coverage will cover the car’s depreciated value — which is likely less than what you still owe on the car. That’s when gap coverage comes in handy.
  • Rental Reimbursement Coverage: Some insurers include this coverage in their policies, while others offer it as optional coverage. If your car is seriously damaged in an accident, rental reimbursement coverage covers the costs of a rental car for you to use while your vehicle is being repaired.
  • Towing and Labor Coverage: Also known as roadside recovery insurance, this type of coverage helps you out in the case of a dead battery, flat tire or empty gas tank. Like rental reimbursement, this is sometimes offered as an insurance benefit automatically, so ask if this coverage is included or optional.
  • Rideshare Coverage: There are now new insurance coverage offerings due to the rise of rideshare services, including optional rideshare coverage. If you drive for a rideshare company, most states require the company’s commercial policy to cover you. Optional rideshare coverage fills any gaps left by that commercial coverage, which is especially important if you use your car for both personal and rideshare (business) use.

The Bottom Line

Almost every state requires drivers to have vehicle insurance to drive on its roads. Only New Hampshire and Virginia do not require drivers to have vehicle insurance. In those states, the responsibility for liability and damages rests with the individual choosing to forego coverage. If you are in an accident or your vehicle is stolen, you are responsible for the entire cost of repairs or the loss of your vehicle.

Vehicle insurance protects you financially if you are in an accident. So it’s important to make sure you have the right amount of coverage to protect your assets. Cheap car insurance is great for your wallet — but be sure you have the coverage you need.

Your insurance agent can design the right auto insurance policy for you at a price that makes sense for your needs.

Disclaimer:

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