Car insurance is a contract between you and an insurance company where the insurer agrees to protect you against liability if you injure another person or damage their property in an accident.
Depending on your coverage options, car insurance can also cover medical bills for you, your passengers, and other drivers involved in an accident and pay to repair or replace any parts of your car damaged in a collision or other incident beyond your control.
Read on to learn how car insurance works, including the available coverage options and the average cost of a policy.
What is car insurance?
Car insurance is a contract between you, also known as the policyholder, and an insurance company. Under the agreement, the insurer agrees to pay for damages to your or another person’s vehicle that occur during a covered event.
It also protects you from liability that may result from an accident you cause. In exchange for this protection, you pay the insurer a premium. The premium can be paid annually, monthly, or in 3 or 6-month increments, depending on the insurance company.
The six most common types of auto insurance are:
- Medical payments
- Personal injury protection (PIP)
Who needs car insurance?
States require car insurance in every state except Virginia and New Hampshire, with Virginia requiring drivers to pay a $500 uninsured motorist fee. However, drivers in these states are still responsible for damages resulting from a car accident.
Other than Virginia and New Hampshire drivers who opt out of car insurance, every driver needs it.
Each state has minimum car insurance requirements, typically including at least bodily injury and personal injury liability insurance. Check with your state’s Department of Motor Vehicles to verify how much coverage you may need.
Not only is it illegal to drive without insurance in most states, car insurance companies will typically charge you a higher premium if there’s a gap in your coverage. So you want to secure and maintain auto insurance consistently.
Types of car insurance coverage
Before you choose the best auto insurance for you, consider what kind of coverage is required and what offers you the protection you need. These are the most common types of car insurance coverage.
Liability insurance is mandatory in most states and covers medical expenses, car repairs, and other costs after an at-fault accident. It doesn’t cover you or the passengers in your car at the time of the accident, just the damages to the other driver’s car and its occupants. There are two main types of liability car insurance:
- Bodily injury liability: Provides financial protection against the cost of medical care for injuries you cause to the other party when you’re at fault in an accident. It also helps cover your legal expenses if you’re sued for damages, funeral costs, lost wages, or pain and suffering.
- Property damage liability: Helps pay to fix or replace the other party’s vehicle and/or property damaged in an accident you cause.
Uninsured/underinsured motorist coverage (UMBI/PD)
This insurance covers damages from an accident when the other driver is uninsured or doesn’t have enough coverage to pay for the damages or injuries they cause. Uninsured motorist coverage can also protect you if you’re the victim of a hit-and-run accident.
Personal injury protection (PIP)
PIP coverage pays for medical and related expenses associated with an accident. Depending on where you live, it may just cover you and your relatives who live with you. In other cases, it’ll also apply to passengers in your vehicle. It might pay for medical bills, lost wages, prescriptions, and funeral costs. You’ll also see PIP referred to as no-fault coverage.
Medical payments coverage (MedPay)
Medical payments insurance is similar to PIP in that it covers accident-related medical expenses regardless of who is at fault. It may cover ER and doctor visits, therapy visits, and X-rays. You can also use the coverage if you’re struck by a vehicle as a pedestrian or in an accident while in someone else’s car.
Comprehensive insurance coverage
Comprehensive car insurance covers damage to your vehicle caused by something other than an accident, such as a natural disaster or vandalism. If you have a car loan or lease, your lender requires you to carry comprehensive insurance. Otherwise, it’s optional.
Collision insurance pays to repair or replace your car after any accident when your vehicle is in motion, regardless of who is at fault. Situations where collision coverage kicks in include being in a single-car accident or running into a stationary object, like a mailbox or lamppost. This is only required for leased or financed vehicles.
Additional car insurance coverages
In addition to the common coverages listed above, additional options can further protect you and your vehicle. Not all of these are insurance, but they all offer protection.
Rental reimbursement insurance covers the cost of a rental car while your vehicle is being repaired after a claim. This coverage typically has limits, such as the number of days you can have a rental or how much you can spend per day. There may also be restrictions on the type of car you can rent and the agencies you can get it from.
Non-owner car insurance
Non-owner coverage is liability insurance designed for people who don’t own a car but regularly rent or borrow vehicles. This policy will cover you if you injure another party or cause damage to their property while driving a vehicle you don’t own. However, it won’t pay to repair or replace the car you’re driving.
Moreover, the coverage is typically secondary to that of the owner, so it would only come into play if the owner’s liability insurance doesn't cover the incident in full.
If your vehicle is stolen or declared a total loss, your comprehensive or collision coverage will only pay for your car’s actual cash value. Thanks to depreciation that could be less than the balance on your vehicle’s loan or lease.
Gap insurance pays for the difference, or the gap, between your car’s current value and the remaining balance on your lease or loan. This can be handy because you won’t be left paying for a vehicle you can no longer drive.
Emergency roadside assistance
When you pay for emergency roadside assistance coverage, a crew will rescue you if you have car trouble while on the road. This can be helpful whether you need a tow or battery jump, get locked out of your car, have a flat tire, or run out of gas. Note that if your vehicle needs a tow, you may have to abide by mileage limits according to your policy.
Mechanical breakdown coverage, or car repair insurance, is specifically for repairs to the parts and systems of your car. It can cover repairs to parts or systems of your vehicle that fail due to normal wear and tear or mechanical malfunctions — items that comprehensive or collision insurance don't typically cover. This coverage is similar to an extended warranty but is usually added to an existing insurance policy and covers more items.
Umbrella insurance is a type of personal liability policy that provides coverage beyond the liability limits of your existing insurance policies. For example, car insurance generally provides up to $250,000 per person and $500,000 per accident in liability protection. Umbrella insurance can give you $1 million or more in added liability insurance and expand coverage to include personal injury claims (defamation, slander, and false arrest).
What’s the average cost of car insurance?
According to Dow Jones’ MarketWatch, the average annual cost of car insurance is $1,730 for full coverage insurance and $635 for liability coverage. While this is the average, how much you pay can vary widely depending on where you live, your coverage, your vehicle, and specific demographics such as your age and gender.
You may want to look for the cheapest premium when getting auto insurance quotes, but finding the right policy requires more than that. It’s essential to compare car insurance rates, deductibles, coverage limits, and other details before choosing.
Ideally, you should get a quote from multiple insurance companies to see which ones offer the best total coverage for the price.
How much car insurance is necessary?
You must carry bodily injury liability and property damage liability coverage in most states. Some states also require uninsured/underinsured motorist coverage and PIP and/or MedPay.
Ultimately, minimum coverage requirements depend on your state and whether you have a lease or loan. Lenders typically require collision and comprehensive coverage on top of state minimums to help protect their investment in your vehicle.
You can work with an insurance agent to determine your needed coverage.
Make sure you know what you’re getting
When you buy car insurance, there are lots of options available. Policies vary widely, so knowing what it protects you against is essential before deciding. While you might find a cheap car insurance policy, it may not adequately protect you.
Before you buy insurance, review quotes from multiple providers, and compare coverage limits so you’re comparing apples to apples. Also, look at what each insurance company offers regarding discounts, programs, customer service ratings, financial stability, apps, and more, before deciding which option is right for you.