Car insurance is complicated. Nearly every driver in the U.S. is required by law to purchase auto insurance, but you may be confused about how it works. What does it cover? How much does it cost? Why does it cost so much? Let’s take a closer look at how it works, which can save you time and money.
Types of Car Insurance Coverage
One of the reasons car insurance can seem complicated is that it can include several different types of coverage. Most states have minimum coverage requirements, and you can add additional coverage to help you cover costs in more situations. Here are the types of coverage you’ll see in auto insurance policies.
This is essential coverage in most states. Your policy may have two types of liability coverage: bodily injury liability and property damage liability. If you’re found to be at fault in an accident, liability insurance helps cover the costs incurred by the other party.1
With bodily injury liability coverage, your insurance helps to cover medical bills for the other party. With property damage liability, your insurance helps to cover damage to the other party’s vehicle or structures that your vehicle hit.
Liability coverage is usually written on your declaration page as a combination of three numbers. For example, you might have 25/50/10 coverage. The first number (25) means up to $25,000 could be paid out to a single person injured in an accident. The second number (50) means up to $50,000 could be paid out in an accident injuring multiple people. The third number (10) refers to property damage, which means up to $10,000 of coverage is provided for damage done to someone else’s property.2
Liability insurance doesn’t cover the costs to repair your vehicle or your medical bills. It only covers the other party if you’re found to be at fault.
Personal Injury Protection and Medical Payments
Some states require you to purchase personal injury protection (PIP) coverage. In other states, you may have the option to buy either PIP coverage or medical payment coverage.3 Personal injury protection provides more comprehensive protection than medical payment coverage. It provides coverage for you and your passengers in the event of an accident. PIP pays for medical expenses, lost wages, and nonmedical costs.4 2
Medical payment coverage helps pay for your and your passengers’ medical bills if there are injuries due to a car accident. It doesn’t matter who is at fault.5 It also shouldn’t be used as a replacement for health insurance because it will only cover medical expenses for injuries that occurred in an auto accident.
Most states require you to have uninsured/underinsured motorist coverage. This helps cover your medical costs and damage to your vehicle if the other party is at fault in an accident but doesn’t have insurance or doesn’t have enough insurance. For example, if your car is damaged in a hit-and-run accident and the other party isn’t found, your vehicle’s repairs may be covered by uninsured motorist coverage.6
Collision coverage helps to pay for damage to your car if you’re at fault in an accident. A collision occurs when a vehicle is moving and hits an object. It could be a mailbox, guardrail, another vehicle, or any other inanimate object. Collision coverage may also cover you if you hit a pothole or roll your vehicle.7
Comprehensive coverage pays for a wide range of damage to your vehicle, as long as it isn’t from a collision. Most policies cover damage from hail, floods, tornados, hitting an animal, fire, theft, vandalism, and damage from falling objects.8
Windshield damage may also be covered under comprehensive coverage. Some insurance companies also offer separate full glass coverage that allows you to get your windshield replaced without paying your full comprehensive deductible.9
This is an optional, but usually affordable, type of coverage. If your car breaks down, you can get towed to a local service facility (subject to the terms of your policy). Roadside assistance may also include help if you’re locked out of your car, if you need a jump, or if you’ve run out of gas.10
Having access to a rental car after a claim is important to many drivers who don’t have a backup vehicle. Rental reimbursement pays for some of your rental costs if you need to rent a vehicle while your current one is being repaired. This coverage may have daily limits and your insurer may limit the number of days you can use the coverage.
Some insurance carriers automatically include a small amount of coverage if your vehicle was in a covered accident. Otherwise, you will need to add the coverage to your policy.10
Do you owe more than what your vehicle is worth? Gap insurance will cover the difference between the value of your vehicle and what you owe in the event of a total loss claim. You can often buy this from your dealer when you purchase a new vehicle as well as through your lender or your insurance company. You may want to price out all your options before you decide where to buy gap insurance.10
Elements That Impact Auto Insurance Costs
Auto insurance costs vary from insurance company to insurance company. They also vary from person to person, even if you’re buying the same coverage from the same company. These factors influence your auto insurance costs.
Your Policy Choices
You do have some control over your policy costs (also known as policy premiums). As long as you meet the minimum requirements of your state, you can adjust your policy limits, the types of coverage you have, and your deductibles.
- Policy limits: The more coverage you get, the higher your costs will be. While it might be tempting to go with state minimum coverage, consider getting more if it’s affordable. State liability limits tend to be low, and the actual costs associated with an accident can be high. Medical bills, for example, can get very expensive very quickly.2
- Types of coverage: Comprehensive and collision coverage are often optional, but your lender may require you to have those types of coverage if you’ve financed or leased a car. If this coverage is optional for you, ask for quotes with and without this coverage when you shop for a policy. Keep in mind that not having this coverage means higher potential out-of-pocket costs if something happens involving your vehicle.
- Deductibles: A deductible is the amount of money you pay out of pocket after a claim before your insurance coverage starts. A higher deductible means a lower insurance premium. Different types of coverage within your policy may have different deductibles.11
Insurance companies also use statistical data to determine which drivers are more likely to be high risk. They charge potentially higher risk drivers higher premiums. Here are common rating factors.
- Your age: You probably already know that age is a factor. New drivers pay the most, and then rates decrease as you gain experience. Rates begin to increase again later in life. For example, a 75-year-old driver could be charged rates as high as a newly licensed teenager.12
- Your vehicle: If you have a high-value vehicle, your insurance costs will be higher. Your costs will also be higher if you have a sports car versus a minivan.11
- Your driving record:You’ll pay more for insurance if you have a history of speeding tickets or other moving violations.12
- Your claims history: Insurance companies also look at whether you’ve filed car insurance claims in the past and what those claims were for. If you frequently file claims, you will likely be charged a higher rate.2
- Your location:Where you live can also make a difference in your car insurance rate. Insurance carriers monitor claims, and if you live in a high-risk area, it could be reflected in your car insurance payment.12
- Your credit score:Most states allow insurance carriers to use credit scores as a factor in determining your car insurance premiums. Typically, the higher your credit score is, the lower your car insurance rate will be.13
Most insurance companies offer a variety of discounts. These may include multiple vehicle and multiple policy discounts. Insurance companies may also offer discounts for not filing claims. Always try to keep all of your insurance policies with one insurance carrier to maximize discounts.
How to Shop for Car Insurance
The first step in getting car insurance is getting multiple quotes. Start by obtaining quotes for the same type of coverage from multiple companies. Once you select an insurance provider, you can work with that provider to tailor your coverage to your needs and your budget.
You should also periodically review your coverage to make sure it’s still meeting your needs. An annual review is a good idea. You may also need to shop for new coverage if your insurance provider doesn’t renew your policy. If you’re having trouble finding insurance, contact your state’s insurance department for assistance.