Almost every state mandates drivers carry a minimum amount of liability insurance, and you must meet those requirements in order to drive legally. Additionally, if you bought your car with a car loan or are leasing a vehicle, your lender will almost certainly have specific coverage requirements you must follow.

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You are required to carry car insurance for a number of different reasons, but you might also wonder what it is you’re paying for. Knowing the basics of car insurance may help you make an informed decision when choosing the best policy that fits within your budget and meets your coverage needs. From coverage selections to filing claims, Bankrate breaks down car insurance and provides you with some tips on how you might be able to lower your rate.

What is car insurance?

Car insurance is a way to protect yourself financially if you are involved in a car accident or suffer a loss through fire, theft, vandalism or an act of nature. Some types of car insurance coverage only apply if you are at fault in the accident, while others pay when you are not at fault. Furthermore, some coverages help with medical bills, and others pertain to property and vehicle damage.

In 2020, car insurance claims averaged $20,235 for bodily injury and $4,711 for property damage. 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. For this reason, it is essential to balance policy affordability with levels of coverage.

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.

  • 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 may cause 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 provides coverage for your vehicle if you are at fault in the accident or are struck by a hit-and-run driver. The payout is determined by your vehicle’s actual cash value (ACV) minus your deductible. Collision is one half of what most people 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. Some examples include hitting an animal, theft, vandalism, fire, acts of nature, flooding and glass damage. Comprehensive is the other half of full coverage.
  • 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. 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. Medical payments 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, 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.

How does car insurance work?

Car insurance works by taking on some of the financial risk involved in driving and owning a car. A car insurance company does this in exchange for a premium. Your insurance agent can help you determine what 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. This is often the case with comprehensive and collision. 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 covered by your insurance company (up to the ACV of your vehicle). Sometimes, your insurance company will subtract the deductible from your 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:

  1. 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.
  2. Take pictures of the damage, both yours and that of the other party.
  3. 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 hearing the accident’s details.
  4. 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.
  5. 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.

What goes into insurance rates

Understanding auto insurance rates is key to saving money on your premiums. The average cost of car insurance is $1,771 per year for full coverage, but the cost can vary significantly, depending on the state in which you live. For example, while drivers in Louisiana pay the most on average for full coverage car insurance at $2,864 per year, Maine offers the cheapest full coverage rate, averaging $876 per year.

Other rate factors that help determine your auto insurance cost include your age, credit score (in states that allow a credit rating to be considered), location, driving record and vehicle type. 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.

So a 50/100/25 ratio for auto insurance means: 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. Most insurance agents 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 can cause hardship if you are in an at-fault accident and your car needs extensive repairs.

How to save on car insurance

Comparison shopping for an auto insurance policy in your area is crucial for finding cheap insurance because prices vary by insurer and ZIP code. Some of the cheapest car insurance companies offer much more affordable options than their competitors.

Outside of comparison shopping, there are some actions you can take to help slash your insurance costs, such as understanding how much coverage you really need and purchasing accordingly. It also pays to look for car insurance discounts.

Some common car insurance discounts include:

  • Good driving discount
  • Defensive driving course discount
  • Low mileage discount
  • Telematics discount
  • Good student discount
  • Driver’s training discount
  • Multi-car discount
  • Military or veteran’s discount
  • Bundling discount

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, “What do I need to buy car insurance?”

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 people you expect to be driving your insured vehicles)
  • Vehicle registration
  • Social Security number
  • 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.

Frequently asked questions