Ultimate Guide To Car Insurance
Car Insurance may not be your favorite bill to pay each month, but that doesn’t mean it’s not a necessary tool in your belt. Knowing how it works will absolutely put you in a better position if you ever need to use it, and may even save you a bundle when you go to get your next quote.
Read to the end to learn everything you’ve ever wanted to know about car insurance, and probably a whole lot more. If knowledge is power, then you’ll probably be able to skip the gym today.
What Is Car Insurance?
Car insurance, also known as auto insurance, is a state-mandated protection for anyone who wishes to use a motor vehicle on the public road system. This protection is agreed upon by you (the insured) and the insurance company (the insurer) in a contract called an insurance policy.
The basic purpose of auto insurance is to protect your financial assets in the case of a car accident or theft.
An insurance policy is a semi-customizable set of coverages which is sold to a customer through a licensed insurance agent or broker. Some coverages included in auto insurance are required by the state for simply operating a vehicle, and others coverages are required by the finance company that holds the loan on your vehicle. More on the different types of coverages later.
Most insurance policies last six months or one year. The cost of the policy (known as a premium) can either be paid in full at the beginning of the policy or monthly, depending on the agreement that you come to with the agent. Almost all policies will auto-renew at the end of the policy.
A good way to answer the question: “What is car insurance?”:
“Paying a small bill now, to avoid a potential huge bill later.”
Why Is Car Insurance Mandatory?
When driving on the road, there are always risks of an accident happening. Even if you are a good and responsible driver, this doesn’t mean that the folks you are sharing the road with are as mindful or safe. All states require every driver to carry auto insurance in case one of these accidents happens.
The liability coverages (covered later) included in your car insurance policy protects you from bearing the full financial responsibility if you cause an accident that injures someone or damages any property.
There are times when injuries sustained in a car accident can cost several to even hundreds of thousands of dollars in medical bills. Since most people don’t have an extra $100,000 lying around to pay for someone else’s medical treatment, the state mandates that we carry insurance so that injuries from these accidents are financially taken care of.
How Does Car Insurance Work?
Something to mention at the start is that insurance is not some magical shield you can purchase. No matter what anyone tells you, insurance will not prevent an accident from happening. It won’t prevent a deer jumping into the road or your car being stolen. It won’t prevent drunk drivers or high-speed chases. Insurance is meant to protect you from the financial fallout of an accident, not the physical consequences. So even if you have the best insurance in the world, this doesn’t mean that you can’t be permanently hurt in a vehicle or that you shouldn’t drive as safely as possible.
We’ll get off our soapbox now…
Car insurance is made up of several different types of coverages which, together, protect you, your car, other people, and other people’s property.
As mentioned earlier, some of these coverages are required by your state, and others are required by the company that holds your car loan. Some aren’t required at all but are available depending on your needs.
Note: Different states have varying laws on how to assign fault in an accident. We will lay out the basic terms and definitions, but your experience may vary from state to state.
Let’s break down the different types of coverages:
Bodily Injury Liability Coverage
Bodily Injury Liability (BI) is one of the two most basic coverages in any auto insurance policy. This coverage will pay damages for physical injuries to another person or people if you are liable for the accident. These types of injuries could include whiplash, broken bones, tissue damage, all the way up to death.
It’s worth noting that Bodily Injury coverage does not cover your injuries. BI is known as a “third-party” coverage, where you are the “first-party”. This means that if you are injured in an accident in which you are at fault, BI will not cover your injuries (don’t worry, other coverages will insure your medical costs).
BI will cover damages only up to the limits in which your policy states. These limits are set by you and your agent when building your policy. They are displayed in an “XX/XX/XX” structure, where the first “XX” is the dollar limit (per thousand) covering each person, and the second “XX” is the dollar limit (per thousand) covering the total for all injured third-parties.
Example: 100/300/XX (We’ll explain the third XX in a minute)
This means that each third-party person injured in an accident is covered up to $100,000, and the total amount covered for the accident is $300,000 (no matter how many people are injured).
All states require Bodily Injury coverage for every driver. There is a set minimum amount of coverage required varying by state. (See graph)
Property Damage Liability Coverage
Property Damage Liability (PD) is the second of the basic coverages of an auto insurance policy. This coverage pays for any damages to a third-party’s property. The most common property damaged in an auto accident is another person’s vehicle, but it can also include things like fences, structures, and even items damaged in the other person’s vehicle.
Like Bodily Injury coverage, Property Damage is a third-party coverage, and therefore does not cover damage to your vehicle in an at-fault accident (again, there are other coverages that protect your car). An interesting and mostly unknown fact about PD coverage is that it also does not cover any property you own inside of your vehicle (whether damaged in an accident or stolen). These items are actually covered under your renters or homeowner’s insurance.
Along with BI, Property Damage is displayed as an “XX” value, and only cover up to the limits in your policy. PD is the third value (per thousand) in the “XX/XX/XX”
This means that all third-parties’ property is covered up to $100,000 combined (no matter how many parties or items are damaged).
All states require Property Damage coverage for every driver. There is a set minimum amount required varying by state. (See graph)
Uninsured Motorist Coverage
Uninsured Motorist (UM) is the first of the coverages in your auto insurance that covers you, the first-person. This coverage pays for your bodily injuries or property damage if:
- The driver who is deemed at-fault does not have any auto insurance
- Your damages come from a hit-and-run vehicle
- The at-fault driver’s insurance company denies coverage
If an at-fault driver has no auto insurance, it would be possible to sue for damages. If this person doesn’t have enough assets to cover the costs, however, your injuries could be left unpaid for. This is the true benefit of uninsured motorist coverage.
This coverage is not mandated by all states, but is generally only a few dollars per month, which is well worth the cost. Some states also separate Uninsured Motorist Bodily Injury (UMBI) and Uninsured Motorist Property Damage (UMPD), while others combine them into one coverage.
Same as Bodily Injury coverage, Uninsured Motorist is displayed in an “XX/XX” structure, where the first “XX” is the dollar limit (per thousand) covering each person, and the second “XX” is the dollar limit (per thousand) covering the total for the incident.
Underinsured Motorist Coverage
Underinsured Motorist (UIM) is easily understood after reading about Uninsured Motorist, as they act in a very similar way. The only difference between UM and UIM is that UIM covers you in the case that the at-fault driver has auto insurance, but their limits are not high enough to cover all of your injuries or damages.
Since “minimum coverage” insurance has been advertised heavily in recent years, it’s become more common that at-fault drivers don’t have enough coverage to satisfy the injuries or damages caused. In some accidents with more serious injuries, even higher insurance limits can be exhausted. This fact, combined with the low cost of coverage is an excellent reason to carry UIM coverage.
As with Uninsured Motorist, some states also separate Underinsured Motorist Bodily Injury (UIMBI) and Underinsured Motorist Property Damage (UMIPD), while others combine them into one coverage.
Underinsured Motorist is displayed in an “XX/XX” structure, where the first “XX” is the dollar limit (per thousand) covering each person, and the second “XX” is the dollar limit (per thousand) covering the total for the incident.
Medical Payments or Personal Injury Protection
Medical Payments (MedPay) is another coverage that can cover you, the first-person. It can also pay out to any third-party passengers or pedestrians involved in an accident. The major benefit of MedPay is that it pays out no matter which party is at fault.
Note that Medical Payments coverage is only available in states that follow a “traditional tort liability” law system, therefore it is not available in “no-fault” states.
Medical Payments coverage is displayed as an “XX” value, and only covers up to the limits in your policy.
Personal Injury Protection (PIP) is much like MedPay in that it covers you, the first-person, and any other person travelling in your vehicle. In no-fault states, injured parties receive payment for injuries or damages from the policy of the vehicle they were traveling in, regardless of who is at fault.
Collision coverage is the first of two major types in a full coverage (generally defined as an insurance policy pertaining collision and comprehensive coverages) policy. Collision insurance covers any damage to your vehicle caused by a car accident with another moving vehicle or a stationary object, regardless of which party is at fault.
Collision coverage is not mandated by any state, but is required by the finance company who holds the loan to your vehicle. Finance companies expect borrowers to carry full coverage insurance policies to protect any interest they own in the vehicle.
Example: If you were to owe $20,000 on a truck, then someone wrecks your truck, your finance company will still need you to pay off your loan, even if the vehicle is now worth $0. Your insurance company will step in and pay the value of the truck to you, which you will use to pay off the remainder of the loan.
Collision coverage payouts are limited to the market value of your vehicle, which will vary depending on the make, model, age, condition, and many other factors. The market value of your vehicle is set at the time directly before the accident. A claims adjuster will determine what that value is and what the cost of the damages incurred are.
Collision coverage also includes a deductible, which is the agreed upon amount that the insured will pay to access this coverage. Standard deductibles are anywhere between $100 and $1,000, with higher deductible policies generally costing less than lower deductibles. Note that you generally will not need to pay your deductible out of pocket.
Example: You are involved in an accident in your car, which causes major damage to the front of the vehicle. You have a $500 deductible. The claims adjuster has determined that it will take $3,000 to repair your vehicle to its initial condition. Your insurance company will write you a check for $2,500 ($3,000 – $500) to have the damages repaired.
Deductibles are an insurance company’s way of making sure people don’t file tiny or fraudulent claims. If an insured has some skin in the game, they are less likely to file an unworthy claim.
Comprehensive (sometimes referred to as “other than collision”) coverage is the second major type in a full coverage insurance policy. Comprehensive coverage works in much the same way that collision does. Vehicle values, deductibles, state and finance company requirements are all the same. The main difference between the two is how the vehicle is damaged.
Comprehensive damage is caused by something, simply, other than collision, hence the nickname. Some even call this, “act of God” coverage.
Examples of comprehensive damage include:
- Falling trees or other objects
- Contact with an animal
- Theft or vandalism
- Extreme weather damage
As mentioned with Collision coverage, standard deductibles are anywhere between $100 and $1,000, with higher deductible policies generally costing less than lower deductibles.
Towing & Labor
Towing and Labor, sometimes known as roadside assistance, is a coverage that assist when your car broken down or stranded. Roadside issues like flat tires, running out of fuel, or being locked out of your car are some of the most common among the uses for this coverage.
Some of the other things that Towing and Labor may cover are:
- Jump starts on dead batteries
- Towing to an auto shop
- Fuel delivery
- Changing flat or blown tires
- Unlocking your doors
This is an optional coverage offered by most auto insurance companies. Neither the state or a finance company can force you to carry this coverage. It’s worth noting that some companies may not offer you this coverage if you don’t also carry comprehensive and collision coverage.
Rental Reimbursement Coverage
Rental reimbursement, or loss-of-use, coverage will reimburse your out of pocket expenses if you need to rent a car due to repair on a covered collision or comprehensive claim. If your car is out of commission due to an accident, this coverage will cover most or all of the cost of renting a car for the duration of your repair. Not having a car is rough, especially for folks that commute to work or have kids.
According to Enterprise, a surprising number of people think they have this coverage when they actually do not. It’s a fairly inexpensive coverage for the peace of mind that you get knowing that you won’t ever have to go without a car due.
This coverage is offered in dollar per day quantities. Generally, you can get protection of about $15 to $50 per day. Obviously the more benefit you purchase, the more the policy will cost. Just know that $15 per day probably isn’t going to cover your 7 passenger 4×4 SUV, but might get you a decent subcompact sedan.
Other Types of Coverage
There are other types of coverage offered by different insurance companies that aren’t a part of the standard coverages. Not all companies offer all of these types of policies, so if you need one of these, be sure to ask the quoting agent. These are never required by the state or financing company but may appeal to you depending on the type of vehicle, usage, or aftermarket alterations made to the vehicle.
- Sound System Coverage – Covers most aftermarket audio equipment that you have installed in your vehicle — Note: the equipment must be “permanently affixed” to be covered by this policy.
- Glass Coverage – If you have a chip or crack in your windshield, this coverage will assist in reimbursing your costs to fix it.
- Gap Insurance – Gap is additional insurance that covers your vehicle for the difference in your loan amount and the market value — Essentially, cars can lose so much “value” when you drive them off the lot that the market value is less than your loan value. This insurance bridges that “gap”
All of the coverages above, with their limits, pricing, and other pertinent information will be displayed on a declarations page. Your insurance company will send you a copy in the mail after your policy starts. When you go to get another quote from a different company, be sure to have a copy of your dec page so you can compare apples to apples coverage.
Do I Need Car Insurance?
Short answer, yes. If you own a vehicle and want to drive it, then your state requires you to carry at least liability (bodily injury and property damage) insurance coverage.
If you drive someone else’s vehicle often, then you need to make sure that they have proper insurance coverage on their vehicle. If you live in the same residence as that person, then you need to be added as an “additional driver” on their policy.
A non-standard, but still important case is, “What if I own a car, but don’t drive it?” In this case, it depends on a few factors. 1. If you have a loan on the vehicle, then your finance company will still require that you carry comprehensive and collision coverage. 2. If you don’t have a loan then auto insurance isn’t required by law. Again this is only if you don’t drive the vehicle at all.
There is, however, a hidden benefit to keeping coverage on a vehicle you don’t drive: If you go for any amount of time without having car insurance, whether you need it or not, the next time you go to get insurance the rate will be much higher. This is due to a “lapse” in your insurance history. While this may not seem fair, the states have allowed the insurance companies to use this information in their rating factors, which always makes your insurance more expensive when starting again.
What Kind Of Car Insurance Do I Need?
This is a common question if you are new to driving or have never purchased your own car insurance. Since you probably see 10,000 commercials every year advertising different companies that never say much about coverage, it’s a great question to ask.
The bulk of drivers can boil most of their concerns down into this one question: Full Coverage vs Liability
Full Coverage vs Liability Car Insurance
Quick answer for lots of drivers – If you have a loan on your car, then you need full coverage insurance. This means that your policy needs to include comprehensive and collision coverage (explained above).
If, however, you don’t have a loan on your car, then it gets a little trickier. Nothing requires you to carry full coverage insurance, though the state still mandates that you carry liability insurance, which includes bodily injury and property damage coverage.
The rule of thumb on this is: if you can’t afford to replace it, then you should insure it.
The only time when this rule tends to break down is when your car has a very low market value. If your car is worth $600, but it costs you an extra $100 per month to carry full coverage, then it may make sense for you to go with only liability insurance.
Super Important Note: You should take that $100 that you aren’t spending on insurance and put it into a bank account until you have enough cash to buy a car outright. In this case, you can afford to replace it, so you don’t need to insure it.
How Much Car Insurance Do I Need?
Now that you know what kind of car insurance you need, the next obvious question is: How much car insurance do you need?
The answer to this question isn’t simple, and has multiple factors involved, but we can give some basic guidance on a few different types of coverages.
Bodily Injury and Property Damage Limits
It’s almost never wise to carry the state minimums. Unless you are choosing between food/shelter and car insurance, you should always assess what you have to lose and compare it with your coverage amounts.
That being said, the amount you do carry should be based on what you have to lose. This means that if you were to be sued for damages, what can they take away from you? Assets like bank accounts, investments, your house, your car, your paycheck are all on the line. If you value any of those things, you’ll carry a proper amount of coverage. Talk with the agent who quotes you to find what best suits your needs.
Comprehensive and Collision Deductibles
As mentioned earlier, if you can’t afford to replace it, then you should insure it. This applies when it comes to deductibles as well.
Standard deductibles range from about $100 – $1000. This is how much you will be liable for when repairing your car in an accident. While carrying a $1,000 deductible may lower your monthly premiums by a bit, if you don’t keep that kind of cash stored away, then you could find yourself in a real pickle if your car is damaged.
Carry a deductible that you can shell out if you need to. That’s the bottom line.
How Do I Get Car Insurance?
Simply answered, you get car insurance from an agent at a car insurance company.
A different question is: What is the best way to get the insurance I need for the least amount of money?
In that case, we have a few suggestions for you:
- Get multiple quotes – Your price will vary from company to company, so the more quotes you gather, the better chance you have of getting the best price. Getting a quote from a company is free, so get as many as you can!
- Compare apples to apples – If you get a quote that seems impossibly low, be sure to get the details on all of the coverages and limits being offered. A 100/300/100 policy is not equal to a 25/50/10 policy.
- Get a quote every year – Car insurance rates change all the time. Discounts expire. Laws get (slowly) updated. This means that just because Company A had the best rate for you last year, that Company B won’t have the best price this year.
- Bonus tip – You can change insurance companies mid-policy, and it’s not any more difficult than waiting until the end.
How Much Is Car Insurance
Car insurance prices are based on a multitude of factors, some of which include:
- Zip Code
- Driving History
- Credit Rating
- Insuring Company
- Many many other factors
Essentially, this means that the only way to get an accurate estimate of what it will cost for you to get car insurance is to get a quote. It should take less than 15 minutes online.