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By Martha C. White and Paul Reynolds
May 6, 2021
Photo Collage of a car on top of a hand with a colored background
Money; Getty Images

Like drivers’ licenses and speed limits, car insurance is one of the rules of the road, since it's required by law almost everywhere. Also, like hitting the highway, there are also a lot of moving parts when it comes to insuring a vehicle — so buckle in and read on.

What is car insurance?

Car insurance protects you financially if you get into an accident or if your car is damaged in other ways. It covers the cost of medical care for injuries, and often for lost income due to a crash, too. Other provisions typically include coverage for damage you cause to others' property, as well as for the cost to repair or replace your own vehicle due to a collision, theft, vandalism, and other perils.

Who needs car insurance?

You do. No, seriously. All but two states require drivers to carry auto insurance. (Virginia lets drivers pay an uninsured motorists fee, and New Hampshire lets drivers prove that they could afford the costs of an accident if they want to skip buying insurance, which is typically done by posting cash or a bond.)

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How does car insurance work?

Provided you maintain your car insurance by keeping its payments up-to-date, you get continuous protection against both the consequences to you of various perils and of your liabilities while at the wheel. Here's what you need to know about insurance coverage and the process for collecting on it.

Fault varies by state

The norm is that blame is assigned for accidents and other automotive mishaps, with that determination of fault affecting who pays the resulting costs. However, about a dozen states have what is known as no-fault insurance. This alternative system changes much about how car insurance works, including its deductibles. In no-fault states, blame for crashes is not assigned, and each driver involved in an accident has their own insurance handle their liabilities and other accident costs.

Making a car-insurance claim

If you’re in an accident or your vehicle is damaged in other ways that your insurance covers, alert your insurance company as soon as possible. That begins the process of filing your claim -- which you can often do now from your mobile phone. Through one of its insurance adjusters, the insurance company then gathers (or has you gather) other data as needed, which may include estimates of repair costs.

The insurance company then negotiates with the other driver’s insurance company to reach agreement on responsibility for the accident (assuming it happened in a state that assigns fault).

However that responsibility is divided, your insurance company handles your claim and its reimbursement, and settles up as needed with the other driver's insurer to recover some or all of your payout.

Understanding deductibles

Expenses like medical costs or damage to the property of others, which are covered under the policy’s liability coverage, are usually fully reimbursed. But you may have to pay a deductible before you’re made whole financially for the cost of damage you cause to your own car. That expense is covered under the policy’s collision and comprehensive (C&C) coverage, provided you carry that.

You need to have enough money to pay your C&C deductible upfront. However, in most states, your insurer will reimburse your deductible later, if you're found not at fault for the crash, and then reclaim the sum from the insurance of the other (at-fault) driver.

If you live in a no-fault state, you’re required to pay your own deductible in the event of a claim, because no formal fault is assigned -- and there is therefore no possibility of the other driver in an accident being held responsible for paying it.

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Choose your car insurance coverage

Car insurance includes several different types of coverage, some of which are optional and some of which you can adjust based on your needs. You also need to make a decision on the deductible amount that works best with your budget.

Here are the steps to help you choose how much insurance you should buy.

Know the minimum liability you’re required to carry

Regulators in your state stipulate the types and amounts of liability coverage you’re required by law to carry. Insurers will be aware of these requirements for your state.

Nearly all states require liability coverage, which includes bodily injury liability per person and per accident. Liability coverage also includes property damage liability per accident. (In no-fault states, bodily injury coverage isn’t required, but you're instead required to carry personal injury protection to pay for your own injuries.) There is also usually a third requirement, for property damage liability coverage.

Liability insurance is typically summarized in a string of three figures; for example, 25/50/25 would signify coverage of $25,000 per person injured, to a maximum of $50,000 per accident, along with $25,000 in property damage coverage.

Buy more than the liability minimums, if you can afford it

State-mandated liability coverage limits can be as low as $15,000 for bodily injury per person. Medical payments if someone is hurt in an accident can be far more expensive than this, and the injured party could sue you to make up the difference if your liability coverage isn’t sufficient.

The same also holds true for property damage insurance requirements. In California, for instance, the minimum required is a mere $5,000. This minimum might be enough if you get in a fender bender, but if you total someone’s luxury car, destroy property like a phone pole or fire hydrant, or do serious damage to a building, you could be staring down some jaw-dropping bills.

The upshot: While sticking to your state’s bare minimum of insurance coverage might seem like a smart way to save money, it can backfire by leaving yourself personally responsible for some of the cost of injuries and property damage if you cause an accident.

Experts typically recommend coverage of 100/300/100. That is, bodily injury liability of $100,000 per person and $300,000 per accident, along with property damage liability of $100,000 per accident.

Weigh your need for supplementary medical coverage

The personal injury protection (PIP) coverage that’s required in no-fault states (sometimes simply described as “no-fault insurance”) is usually available in other states as a policy add-on. It covers medical expenses for you and your passengers, along with reimbursing you for lost wages and other expenses related to your injuries, such as needing to hire someone to carry out household tasks as you recuperate.

In at-fault states, you may also or instead have an option to buy medical payments coverage (or MedPay), which covers medical expenses but not the ancillary expenses such as wage loss.

You likely don’t need MedPay provided you and others who ride with you have adequate health insurance. But even those who are well-insured might consider getting optional PIP coverage because it would cover loss of income due to an accident, at least to a monetary limit.

Lean towards getting uninsured/underinsured motorist coverage

This protects you if you get into an accident with someone who doesn’t have — or doesn’t have enough — insurance coverage of their own. Most states require this coverage. But even when it isn’t required -- as in Florida, for example -- you should consider adding this coverage.

That’s especially the case if the percentage of drivers on the road where you live is well above the national norm of about 12% -- as is the case in Florida, for example, where the proportion of uninsured drivers is usually about double the national figure.

Get collision/comprehensive coverage, unless your car is old

Collision and comprehensive coverage are usually lumped together in insurance policy descriptions, but they’re slightly different: Collision coverage refers to damage that happens to your car if it hits, or is hit, by another vehicle or some other obstacle when you’re behind the wheel. Comprehensive covers all of the bad things that can happen to your car when you’re not driving it: Theft, vandalism, fire or storm damage, and so on.

If your car is more than 10 years old, you might not need collision coverage anymore. According to the most recent data available from the National Association of Insurance Commissioners, the average insurance claim payout for collision damages is more than $4,000. Look up your car’s value on an independent site like Edmunds.com or KBB.com — if it’s close to that average, you’ll probably be better off dropping that coverage and just saving a little more so you can pay for any damage you might incur in an accident.

Other coverage options include reimbursement for costs like roadside assistance or windshield replacement.

Buying a new car? Consider gap coverage

Vehicle depreciation means that your new car’s value plummets the moment you drive off the dealer’s lot, so if you hit a phone pole a week after signing the contract and total your car, the amount your insurance company will reimburse you could potentially be less than the amount you agreed to pay your lender.

Gap coverage covers you for that difference. Not everyone needs this, but it can protect you if you borrow money to buy or lease a new car, especially if you put little or no money down on a luxury vehicle or one loaded with options.

This car insurance coverage also is recommended for people who select a long financing term (more than five years is the rule of thumb, but you should do the calculations for your individual circumstances if you’re putting little or no money down).

Decide on a deductible

Lower deductibles raise the policy’s premium, as a rule. There are some insurers that offer “no deductible” features or policies with similar verbiage, but the trade-off is usually much higher premiums. You’d probably be better off taking a policy with a deductible and putting money into a savings account in case you ever need to pay it.

Deductibles typically range between a few hundred dollars and a few thousand. For instance, if you have a deductible of $500 and you get into an accident that causes $2,000 of damage to your vehicle, your insurance company will pay $1,500 towards those repairs.

Gathering car insurance quotes and getting the best price

There are a number of reasons -- like the risk of being underinsured -- why the best car insurance for you isn’t necessarily the cheapest option. That said, there are some tried-and-true ways to lower your car insurance premium.

Shop around, including online

If you’re searching for car insurance online, most carriers have tools that let you adjust your coverage levels if you’re seeking a way to lower your car insurance premium. To get car insurance, you’ll need a few pieces of information, including your driver’s license number and the vehicle identification number.

You can buy car insurance in person or online, and you can go directly through the insurance company or through an independent agent or an online platform that sells policies from multiple insurance companies -- including Money's own comparitive tool.

If it’s your first time buying car insurance, third-party sites or apps can be useful, but be aware if you use one of these platforms to get auto insurance quotes that those prices might be generated using assumptions about your driving record and coverage preferences that might not reflect your actual needs.

Seek bundling discounts

Experts recommend contacting your insurance agent to see if you can get a better deal, and comparing that with quotes from other insurance carriers every few years or when you have a major life change. You also can often save on car insurance if you bundle multiple vehicles into a single policy, or get your homeowners and car insurance policies from the same company.

Consider trying usage-based insurance

This emerging insurance alternative requires agreeing to have either how well or how far you drive monitored by app or on-board device, and having that data affect your premium. The programs are offered by both "insurtech" startups and big insurance companies, along with a few automakers. Pay-as-you-go programs track your mileage and pay-as-you-drive behaviors like speeding, swerving or slamming on your brakes, and reward safe drivers with lower rates.

Take a driving course

If you have a history of vehicular infraction — think multiple speeding tickets or a D.U.I. — taking a defensive driving course might help lower your car insurance rates. While an in-person class may be required to get an insurance discount, online courses may also qualify.

When should I start thinking about auto insurance?

Begin your research into car insurance as soon as you’re in the market for a car. Car insurance can be a significant expense and needs to be factored into your total vehicle budget. Indeed, the premiums you’ll pay will vary a lot depending not only on the cost of the car you are buying, but on other factors about it, such as its incidence of claims and costs to repair compared with other vehicles.

If you’re purchasing a vehicle from a dealership, you’ll need to provide proof of insurance before you can drive away with it. This holds true whether you’re buying a new or used car.

If you’re getting a car loan or leasing your vehicle, the the lease or loan contract with the seller may require that you carry collision insurance and comprehensive insurance, and potentially gap insurance, too.

If you haven’t checked out car insurance pricing in a few years, it’s a good idea to do so, particularly if you’ve recently gone through a major life change like getting married or moving to a new place -- both factors that can change your premiums. If you’ve acquired an additional vehicle, you also should do some comparison-shopping of different car insurance companies' offerings.

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How much does car insurance cost?

The average cost of car insurance in the U.S. is $1,732 a year, or roughly $144 a month. Of course, if you carry collision and comprehensive insurance, or if you’ve elected for higher liability coverage limits, your cost will be higher. Indeed, a host of factors, from your driving record to the car you drive to where you live influence how much you will pay. (See “What determines car insurance premiums?” below.)

What determines car insurance premiums?

There are many variables that affect the cost of auto insurance beyond your choices about your deductible and elected coverage levels discussed above.

The vehicle itself

In general, a newer vehicle means a higher insurance premium. New cars have a lot of bells and whistles intended to keep you safe, from airbags to collision-alert sensors or automatic braking. These features can help you avoid accidents and keep you from getting seriously injured if you are in an accident, but the flip side is that they make vehicles much costlier to repair.

And some car categories are pricier to insure than others. The average cost last year to insure a personal vehicle last year ranged from $1,087 for a small SUV to $1,342 for a small sedan (the cheapest and most expensive classes of cars, respectively, in AAA’s analysis).

Where you live

Where you live and work can make a big difference in how much you pay. If your commute is bumper-to-bumper or you regularly park in an area where rates of theft are high, you can expect to pay more. State-level regulations about how much coverage you must carry can also influence your premium.

How much you drive

Broadly speaking, the more you drive, the greater your risk of an accident and the more you’ll pay for car insurance. Since so many Americans spent most of 2020 working from home because of the COVID-19 pandemic, big insurance carriers like Allstate, Geico, and State Farm issued refunds to drivers to reflect the decrease in miles driven. Consumer watchdog groups, though, say they should have reimbursed drivers much more, and some states are ordering companies to do just that.

Your driving record

If you have traffic tickets or at-fault accidents on your record, or more serious infractions like a D.U.I., you can expect to pay more to insure your vehicle. Young drivers, who tend to get in more accidents, also pay higher car insurance rates — although teens can often benefit by being added onto a parent’s policy.

Your credit score

Poor credit is associated with a higher rate of claims, so people with good or better credit are more likely to be eligible for the best rates. That policy draws controversy from some consumer advocates, and some insurers have pledged to do away with credit scores as a pricing factor for car insurance.

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Key Takeaways About Car Insurance

Shop, and shop again as needed

Where you live and how much you drive are two big determinants of your insurance premiums: Do some comparison-shopping or contact your insurance agent after a big life change like a move or a new job.

Don’t be underinsured

It might cost a few bucks less, but not having enough coverage can cost you in the long run. And your state’s minimum coverage requirements aren’t necessarily a good proxy for your coverage needs.

Embrace new technologies

Give at least a trial to some new ways to track how (or how far) you drive, since these new usage-based tracking tools can save you money if, respectively, your mileage is low or you're a careful driver. And installing your auto insurance company app can allow to to file claims more quickly, which in turn can allow you to be reimbursed more rapidly.

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