Car insurance basics: What is car insurance? 

Shivani Gite is a personal finance and insurance writer with a degree in journalism and mass communication. She is passionate about making insurance topics easy to understand for people and helping them make better financial decisions.

Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service.

Assistant Professor of Insurance & Risk Management Department of Economics, Finance, Insurance & Risk Management College of Business University of Central Arkansas

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Whether you’re a first-time driver or simply haven’t had to deal with car insurance before, our guide to getting car insurance will give you an understanding of the basics of car insurance and help you get the best auto coverage at the most affordable price.

For many people – even those drivers who have owned a car for years – auto insurance can be confusing. But you don’t need an auto-insurance agent’s knowledge of car insurance. The following insurance basics will provide much of what you need to get the right policy for you and your family.

Key Takeaways

What is car insurance?

Let’s begin with a quick definition. Car insurance is a contract between you and an insurance company that provides financial protection in the case of an auto accident or if your car is damaged by other means, such as severe weather or theft. It can also cover the cost if you injure someone or damage their property. 

The contract outlines how much the insurance company pays out for vehicle replacement, repairs and medical bills. Car insurance can cover property damage, bodily injury and other medical expenses. While basic coverage is required in most states, the coverage you receive will depend on the policy you purchase.

How does car insurance work?

Essentially, you agree to pay a certain amount of money, known as your premium, every six months to a year, in exchange for protection against sudden financial hardship after an accident.

The insurance company calculates your premium based on how much coverage you need and your personal risk factors.

“That includes the age of the vehicle, driver’s age, driving record and geographic location where the vehicle is housed or used, to name a few,” says Mark Snyder, an insurance expert at Hi Marley, which markets a communications platform that can connect carriers, agents, policyholders and others. 

If you’re involved in an accident, you file a claim on your insurance policy. Your insurer will then evaluate the situation and determine how much money you should be paid to cover expenses. If applicable, a deductible (a certain amount you agree to pay out-of-pocket) is subtracted from the payout. Often, filing a claim increases your premium temporarily, especially if you were at fault.

Our recommendations:

What does car insurance cover?

Car insurance isn’t a one-size-fits-all product and many different types of coverage can be mixed and matched. Snyder says the premium for each coverage type is computed separately, based on certain personal and risk factors, then added together for your total annual premium.

Below are the most common types of auto insurance coverage.

Comprehensive 

Comprehensive coverage pays for damage to your car that isn’t due to car accidents. That includes theft, fire, vandalism, natural disasters (for instance, hail damage or flood damage) and collisions with animals (such as hitting a deer).

Damage to your windshield may be covered under your comprehensive coverage as well. In some states, comprehensive coverage includes glass repair and replacement with no deductible, but it varies from state to state. Ask your agent about the specifics when you purchase your policy.

Collision

Collision coverage protects you if your vehicle is damaged in a collision with another car or object. Most auto loan lenders require collision and comprehensive insurance. 

“This is a first-party coverage that is intended to cover damage to vehicles the policyholder owns or leases,” Snyder says. Unlike property damage liability, collision coverage pays to repair your own vehicle in the event of an accident. The amount of your collision deductible will reduce your collision claim check.

When you have comprehensive and collision coverage, it’s often called full coverage.

Liability 

Liability coverage pays for the damage you do to others. It also takes care of your legal fees if you cause an accident. Most state laws require drivers to buy two types of liability coverage: bodily injury liability and property damage liability.

Bodily injury liability

Bodily injury liability coverage will pay for others’ medical bills and lost wages when an accident is your fault, except in “no-fault” states, where your own Personal Injury Protection (PIP) coverage would pay for your injuries. For more on PIP, see below.

Property damage liability

Property damage liability protects the policyholder from financial losses if they damage someone else’s property. This includes other cars or property, such as fences. 

“This coverage does not pay for damages to the policyholder’s own vehicle,” Snyder says. He added that there is typically no deductible associated with liability coverage.

Personal injury protection (PIP) or medical payments

Personal Injury Protection (PIP) coverage pays for medical expenses for you and your passengers who are injured in an accident. It also covers funeral costs. PIP is required in 16 states.

“Personal Injury protection helps you pay for your out-of-pocket medical expenses in an accident,” says Adam Schwery, an insurance agent for Country Financial Insurance based in Kansas City, Missouri. “It can be a big help in dealing with the recovery process after an accident.

It applies no matter who caused the accident, though if someone else is at fault, your insurer may seek damages from the other party.

Uninsured/underinsured motorist coverage

Uninsured motorist (UM) coverage pays for your medical bills if an uninsured driver strikes your car or if you’re injured in a hit-and-run. According to the Insurance Information Institute, an insurance industry trade group, UM coverage is required by law in 20 states and the District of Columbia.

Similarly, underinsured motorist (UIM) coverage kicks in when someone causes an accident but doesn’t have enough insurance to cover all medical bills. In that case, the at-fault person’s insurance pays out to its maximum and then your UIM coverage pays for the remaining bills, up to your own limit.

Insight:

You may be wondering if you need insurance. Most states require you to carry minimum liability coverage, which covers bodily injury and property damage you cause to others in an accident.

Other types of car insurance coverage

A variety of extras are available. Just remember that when you make a claim, your insurer may re-evaluate your rate.  

Do I need car insurance?

The simple answer is yes. Most states require you to have some auto insurance. And you need it to protect yourself. If you’re in an accident and don’t have insurance, you’re on the hook for all the damages you incur. Minor accidents can add up to thousands of dollars and major accidents, with injuries, could bankrupt you. 

QuickTake

What car insurance is required by law?

Every state has different auto insurance requirements. Just about every state requires you to carry minimum liability cover, the amount of which varies from state to state. As discussed earlier, liability insurance covers bodily injury and property damage you cause to others in an accident but doesn’t pay for the damages to your car or your injuries. 

The average national rate is $511, but the rate varies from state to state. Alaska has one of the lowest state minimums, at $336 a year, while New Jersey has one of the highest, at $989, according to data collected by Insure.com.

What doesn’t car insurance cover?

A basic car insurance policy, according to insurance company Progressive, doesn’t cover:

And you should note that coverage can vary greatly from policy to policy.

If you don’t purchase collision and comprehensive insurance, for instance, you won’t be reimbursed for damages to your own car in an at-fault accident (unless you live in a no-fault state).

Additionally, a standard policy won’t cover you if you’re using your car for business purposes. If you use your vehicle for work, you need a separate business auto policy or other form of supplemental insurance.

How much car insurance do I need?

Every situation is different, but in general, we recommend the following coverage limits:

“I think what they also need to consider when choosing liability limits is how much they stand to lose in the worst-case scenario,” says Country Financial Insurance’s Schwery. “Most people could stand to lose $500 but could not lose $50K or $100K.  So, I would recommend going with a higher liability limit of $250,000 per person and $500,000 per occurrence and add an umbrella policy. To make this more affordable, choose higher deductibles on your comprehensive and collision coverage.” 

Remember that when assessing what type of coverage to get, you should also assess what you can afford if you get stuck with repair or replacement costs, medical bills and other expenses that may come out of pocket if you don’t have adequate insurance.

You need to decide how high to set your liability limits. That’s the maximum amount your insurance will pay if you cause an accident. Most states’ liability limits are set low, so consider going above your state’s requirements.

“There is no right coverage for everyone – people in different financial spectrums have different coverage needs to be reviewed,” says Clayton Fischer, an agent with Blue Marlin Insurance in Coral Gables, Florida. “A review of your assets at risk is the most important part of selecting coverage. The recent college graduate with [an] entry-level job and building an asset portfolio needs less coverage than a small business owner with a family. I would review the assets at risk if brought into litigation and find a coverage amount that would most accurately reflect my assets at risk.”

How much does car insurance cost? 

A full coverage policy’s average car insurance cost is $1,682 a year or $140 a month. These rates are for a coverage level of 100/300/100. A 100/300/100 policy protects you for up to $100,000 in bodily injury for one person, $300,000 in bodily injury per accident and $100,000 in property damage per accident. 

The average state minimum coverage costs $511 a year for the limits 25/50/25. Your minimum requirements vary by state, and most states have really low limits. But the amount of coverage you purchase is one of the most important factors determining your auto insurance costs. 

Full coverage insurance is more expensive than the state minimum because it includes liability, comprehensive, and collision coverage. It makes sense to purchase full coverage insurance as it provides more protection to your car than state-mandated coverage. 

Where do you buy car insurance? 

When it comes time to get your auto insurance policy, it’s a good idea to shop around and compare quotes from several companies. It’s easy to get car insurance quotes and compare prices from multiple insurers that can save you hundreds of dollars. Shopping around can save you money even if your driving record is less than stellar.

You can get quotes from:

Insure.com’s annual customer satisfaction study can help you find the best car insurance companies.

In addition, many state insurance departments release annual reports showing the number of consumer complaints against each insurance company that does business in the state. Check your state insurance department’s website.

Once you’ve selected the best offer, review the policy in detail and sign. Your policy will become active after you pay the first premium.

Factors that determine car insurance rates

Car insurance companies spend considerable time and effort deciding how to price policies. Understanding the many elements and risk factors influencing car insurance rates might help you get the deepest discounts. The car insurance risk factors usually used are:

Other pricing factors also come into play, such as whether your car will be parked in a garage when you’re home.

How can I save on auto insurance?

Though your auto insurance premium is based on your personal risk factors, there are many ways to get the rate lowered. Here are a few ideas:

However, the best way to save money on car insurance is to shop your policy at renewal time — especially if you’ve gotten a ticket or gotten into an accident — to see if you can get a lower rate for the same coverage from a different insurer.

What our experts say

Q. What do consumers need to consider when selecting car insurance coverage?

What are common insurance terms I should know?

Insurance terminology you should be familiar with:

Frequently asked questions

What is full coverage car insurance?

Full coverage car insurance is a policy that includes liability, comprehensive, and collision coverage, as well as any additional coverage options that your state requires. It pays for damage to your car and liability coverage, which helps pay for injuries and property damage you cause to others in an at-fault accident. 

How do I compare car insurance quotes? 

It’s easy to get overwhelmed when you’re looking for car insurance. Along with comparing the price, you need to compare coverage types and features. You might be enticed to choose the cheapest option when buying insurance, but don’t let this influence your judgment. The cheapest deal may not provide the coverage you need. 

Price is only one factor to consider. It might be wise to pay a little more for insurance that offers better benefits. It’s important to shop around and compare quotes from different companies before choosing an option that will meet your needs. 

Methodology

Insure.com gathered average car insurance rates from Quadrant Information Services for a male driver age 40, unmarried, with a clean driving record and good credit score, driving a 2021 Honda Accord. The rates are for a full coverage policy of 100/300/100 with comprehensive and collision and $500 deductible.

Shivani Gite is a personal finance and insurance writer with a degree in journalism and mass communication. She is passionate about making insurance topics easy to understand for people and helping them make better financial decisions.

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