What is car insurance?
Car insurance is more than just a legal requirement or another expense to account for in your budget. Car insurance is a contract between you and an insurer that offers financial protection if you are found liable for property, medical or other damages that result from a covered accident. And that’s just the beginning — there are a slew of other coverage options beyond your state, or possibly your financial lender’s, requirements. Bankrate’s insurance editorial team is here to help you understand what car insurance is and how it works so you can choose the right policy for your needs.
What is car insurance?
Car insurance is a way to protect yourself financially if you are involved in a car accident or suffer a covered loss through fire, theft, vandalism or an act of nature. Some types of car insurance only apply if you are at fault in the accident, while others pay when you are not at fault. Some coverage types help with medical bills, and others pertain to property and vehicle damage.
In 2022, car insurance claims averaged $24,211 for bodily injury and $5,313 for property damage, according to the Insurance Information Institute. Regardless of the type of coverage, one of the key things to know is that the coverage limit you choose is as much as your policy will pay out. Any amount outside of that is considered your responsibility. Experts recommend that you read your policy carefully before you make any final decisions. That way, you will have a clear picture of exactly what may be on the hook for.
Types of car insurance
When selecting your coverage on a car insurance policy, there are many options to choose from. Liability coverage, for instance, typically has state-mandated minimum limits that you must carry to register your car and drive it legally. Other coverage types, like comprehensive and collision, are usually optional unless you lease or finance your car (though about 80% of U.S. drivers carry these coverage types).
- Bodily injury liability coverage (BIL): Bodily injury liability coverage provides medical payments for passengers in the other vehicle if you are at fault in the accident.
- Property damage liability (PDL): Property damage liability coverage provides payments for damages you caused to property if you are at fault in the accident. This property can include other vehicles along with stationary objects like light poles and structures.
- Collision coverage (COLL): Collision insurance covers vehicle damage for at-fault accidents with other vehicles or stationary objects, such as a tree or light pole, rollover accidents and even pothole damage. In some states, it also covers damage as a result of a hit-and-run. The payout is determined by your vehicle’s actual cash value (ACV) minus your deductible. Collision is one-half of what most insurance companies refer to as full coverage. Your lender will usually require collision and comprehensive coverage if you are financing or leasing, and they may have rules regarding your deductible amount.
- Comprehensive coverage (COMP or OTC): Comprehensive covers your vehicle for things that are typically outside of your control, commonly called other than collision. Some examples include hitting an animal, theft, vandalism, fire, acts of nature, flooding and glass damage. Comprehensive is the other half of what most insurers consider a full coverage policy.
- Uninsured and underinsured motorist coverage (UM/UIM): Uninsured and underinsured motorist provides coverage if you are hit by someone who is uninsured or does not have enough insurance to cover your damage. These coverage types may also be used in hit-and-run accidents or if you are struck by a vehicle as a pedestrian or while riding a bike. Depending on the state, you may be able to choose UM/UIM for bodily injury, property damage, or both. In some states, UM/UIM is mandatory.
- Medical payments coverage (MedPay or MPC): Medical payments coverage provides medical payments for yourself and the passengers in your vehicle, regardless of who is at fault in the accident. MedPay is usually an optional coverage.
- Personal Injury Protection (PIP): Personal injury protection can cover things like medical payments, lost wages and funeral expenses for yourself and the passengers in your vehicle. It does not matter who is at fault in the accident, and this coverage may carry a deductible. Depending on your state’s regulations, personal injury protection may be mandatory, and it is not available in all states.
While these are the most basic car insurance policy coverage types, many other options exist. Some of these include gap insurance, rental reimbursement, accident forgiveness, emergency roadside assistance, mechanical breakdown insurance and new car replacement. Some of these coverage types are not available at every company or for every vehicle.
Do I need car insurance?
Nearly every state requires drivers to carry a minimum amount of coverage in order to legally drive. New Hampshire and Virginia are the only states that don’t require car insurance if certain conditions are met. For instance, in New Hampshire, the driver must pay for the costs of bodily injury or property damage resulting from a car accident they caused. Although they could pay for it out of pocket, most people prefer to purchase car insurance. Virginia currently allows drivers to opt out of the insurance requirement by paying a $500 uninsured motorist fee when registering their vehicles; however, beginning July 1, 2024, Virginia will also require car insurance.
States usually impose strict penalties for people caught driving without insurance. In many cases, drivers are issued fines, required to obtain an SR-22 certificate, could face jail time or might have their license suspended. Some states require proof of insurance coverage for several years after the infraction, which can drive up insurance rates. These penalties don’t take into account the damages you could be charged with if you’re involved in a car accident without insurance.
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Powered by Coverage.com (NPN: 19966249)
Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in states where it is licensed. Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.
How does car insurance work?
Now that you know what auto insurance is, you might be wondering how it works in real life. Car insurance spreads the financial risk of owning and driving a car between you and an insurer, which the insurer agrees to do in exchange for a premium. Paying your premium is an essential part of how car insurance works and helps you avoid a coverage lapse.
Your insurance agent can help you determine what auto insurance type and level of coverage best suit your needs, and once you reach that agreement, you purchase your policy by paying the premium. An insurance policy is a contract based on a good faith agreement that if you are involved in a covered claim, your insurance company will pay for damages based on your coverage and up to the limits you carry.
Sometimes, a specific coverage type will carry a deductible. This is the amount of money you must pay out-of-pocket to use that coverage. Liability coverage claims don’t require a deductible, but collision, comprehensive and uninsured/underinsured motorist coverages typically have separate deductibles. For instance, a $500 deductible on collision means that the first $500 worth of damage to your vehicle is your responsibility if you are at fault in an accident. The rest of the damage is typically covered by your insurance company (up to the ACV of your vehicle). It’s standard practice for the insurance company to deduct the deductible from your claim payout amount.
How to file a claim
If you get in an accident, the process for filing claims is similar across car insurance companies. After an accident, you should:
- Make sure everyone is in a safe location after the accident and call the police. Depending on the accident’s severity, you may need to call 911 for medical assistance.
- Take pictures of the damage, both yours and that of the other party.
- Do not admit liability even if you think you may be at fault for the accident. Your insurance company will determine who is at fault after receiving the accident’s details.
- Gather the documentation needed to file your claim. Your insurance professional can provide you with this information, but it generally includes a “proof of claim” report and a copy of the police report.
- Call your insurer or use your insurer’s online claim portal or mobile app to file the claim. You may be required to contact your agent as well.
- Monitor your claim progress through the insurance company and be sure to follow up with your claim specialist.
Before you file a claim, check with your insurance provider to see what specific steps are necessary for your claim so you do not experience any unnecessary delays or issues.
How much does car insurance cost?
Understanding auto insurance rates is key to saving money on your premiums. The average cost of car insurance in the U.S. is $2,545 per year for full coverage, but the cost can vary significantly, depending on the state in which you live. For example, while drivers in Florida pay the most on average for full coverage car insurance at $3,950 per year, Vermont offers the cheapest full coverage rate, averaging $1,359 per year.
Other rate factors that help determine your auto insurance cost include your location, driving record, claims history and vehicle type. In most states, age, gender and credit-based insurance scores are also considered. To be sure that you get the right coverage at the lowest price, consider starting your search by collecting multiple quotes from the best car insurance companies to see which company can offer you the best rate for your situation.
With so many rate factors considered, it is impossible to compare your rate to that of your friends or family members. You and your friend may live in the same neighborhood and drive a similar vehicle, but you may have vastly different rates based on other factors.
How much car insurance do you need?
As mentioned above, your state most likely has minimum limits on the different types of coverage that you need to carry to drive legally. There are three types of coverage typically required of drivers, written as liability amounts in the following order:
Bodily injury coverage per person / Bodily injury coverage per accident / Property damage coverage per accident
You will commonly see these ratios listed as minimums. For instance, it is common to see 50/100/25. Those are simply the minimum amounts of each coverage type required in thousands of dollars.
Simply, this means that for a 50/100/25 ratio, if you are at fault, up to $50,000 gets paid out for each person’s injury, $100,000 is the maximum total payout per accident and $25,000 is the maximum payment for property damage. State law designates the minimum amount of coverage that is required for its drivers.
Some states have low minimum liability limit requirements. California, for instance, only requires that you carry 15/30/5. Since most accidents result in property damage higher than $5,000, carrying the minimum limit increases the likelihood that you will have to pay out of pocket for damage if you are at fault in an accident. Carrying low bodily injury limits could also leave you with expensive out-of-pocket medical bills and legal judgments if you are ruled at fault. Most insurance professionals recommend that you carry higher than the state minimum for liability coverage to better protect yourself from financial risk.
Additionally, carrying state minimum liability does not provide coverage for damage to your vehicle. Omitting comprehensive and collision coverage can cause financial hardship if you are in an at-fault accident and your car needs extensive repairs.
How to save on car insurance
Before you begin shopping for affordable car insurance, consider what you’re looking for in an insurance provider and determine how much insurance coverage you need.
Since every insurance provider considers different factors when writing insurance policies, you might be able to save by requesting quotes from several insurers. To start, request quotes from the cheapest car insurance companies. Don’t forget to use the same types and amounts of coverage in order to do an apples-to-apples comparison.
In addition to choosing affordable insurance, you might be able to save on your premium through eligible discounts. Most insurers offer a variety of discounts. Some of the more common ones include:
- Driver-based discounts: These might include discounts for student drivers, military members or professional discounts.
- Driving-based discounts: Insurers often reward safe driving habits through telematics program discounts, defensive driving course discounts or low-mileage discounts.
- Vehicle-based discounts: You might earn a discount if your vehicle has daytime running lights, anti-theft software, anti-lock brakes and other safety features.
- Loyalty-based discounts: Insurers may reward you if you’ve been continuously insured for a set period of time or if you bundle multiple policies with them.
- Billing discounts: Some insurers will reduce your premium if you agree to pay the amount in full, submit payments electronically or sign up for automatic payments.
Insurers might also offer unique discounts like a premium reduction for married couples, a homeowner discount or a discount for switching your insurance policy to their company.
Some people raise their comprehensive and collision deductibles to lower their premium. Although it is true that a higher deductible results in a lower cost for those coverages, this strategy may not be the best choice for everyone. Car insurance is about lowering your financial risk, so it’s generally not a good idea to choose a deductible amount you cannot easily afford.
What do I need to buy car insurance?
If you are looking for how to get car insurance for the first time or have not set up a new policy in a while, you might be wondering where to begin.
You may need to provide several pieces of information before purchasing a new car insurance policy, all of which provide a better idea of you and your vehicle. These include your:
- Driver’s license (both for you and for all drivers that will be listed on your policy)
- Vehicle registration
- Social Security number (varies by insurer and state regulations)
- Banking information
- Vehicle identification number (VIN)
- Lienholder or leasing company information and their coverage requirements
It also helps to have a copy of the current declarations page, as this outlines current insurance coverage on any vehicles for which you need a new quote.
Once you have your items together, get a few online car insurance quotes to compare how you can save with one insurer versus another. You may qualify for better discounts with a particular auto insurance company, so it is worth the time to shop around for quotes before you buy. You should also keep in mind that most insurance companies require you to list all licensed drivers that live in your household on your policy.
Although it is possible to get quotes with less information, it is important to understand that the quote could be very inaccurate. Once you are ready to purchase a policy, these pieces of information are required and any accidents or moving violations that were not reported during the quoting process, for example, will be discovered through the underwriting process. The best way to avoid a surprise change to your quoted premium is to provide complete and accurate information when requesting a quote.
Frequently asked questions
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It depends. Car insurance companies can use about a dozen factors to calculate your premium, including your location, driving history and vehicle type, or even your credit history in some cases. For this reason, car insurance is almost like a fingerprint — no one policy will be exactly the same as another. That’s why one of the best ways to find the best company for you is to shop around for free car insurance quotes and compare the options.
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While you won’t need an active insurance policy before buying a car, you will likely need to show proof of insurance to complete your purchase and drive off the lot. Since buying a new car can be an all-day event, some people prefer to set up their policy to go into effect on the day they pick up the car. If you already have an existing policy, your current coverage may temporarily extend to your new vehicle, but this can come with some risk, as it’s limited to only the coverage you carry on your old car. Plus, this coverage extension usually only lasts for 30 days. That’s why many insurance professionals recommend that you either add the new car to your existing policy or finalize your new policy the day of your car purchase.
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Canceling a car insurance policy is usually straightforward, but each company has a different process or requirements to complete this request. Some insurers will accept a verbal request to cancel, and others will require you to submit your request in writing. Furthermore, some insurance companies will ask you to provide proof that you have obtained new insurance or have canceled the registration on your vehicle. Since this process varies from company to company, you may want to contact your agent for specifics on canceling your policy.
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Accident forgiveness is optional coverage offered by many insurers that provides protection from an increased rate after your first at-fault accident. There is often a fee to add this coverage to a policy, but if you have a good driving record, you may be eligible to add this coverage at no cost.
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