Car insurance is more than just a legal requirement or another expense to account for in your budget. Car insurance is a contract between you and an insurer that offers financial protection if you are found liable for property, medical, or other damages that result from a covered accident. And that’s just the beginning — there are a slew of other coverage options beyond your state, or possibly your financial lender’s, requirements. Bankrate’s insurance editorial team is here to help you understand what car insurance is and how it works so you can choose the right policy for your needs.
What is Car Insurance?
Car insurance is a way to protect yourself financially if you are involved in a car accident or suffer a covered loss through fire, theft, vandalism, or an act of nature. Some types of car insurance only apply if you are at fault in the accident, while others pay when you are not at fault. Some coverage types help with medical bills, and others pertain to property and vehicle damage.
In 2022, car insurance claims averaged $24,211 for bodily injury and $5,313 for property damage, according to the Insurance Information Institute. 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. Experts recommend that you read your policy carefully before you make any final decisions. That way, you will have a clear picture of exactly what may be on the hook for.
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 (though about 80% of U.S. drivers carry these coverage types).
- 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 caused 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 insurance covers vehicle damage for at-fault accidents with other vehicles or stationary objects, such as a tree or light pole, rollover accidents, and even pothole damage.
- Comprehensive coverage (COMP or OTC): Comprehensive covers your vehicle for things that are typically outside of your control, commonly called “other than collision”.
- Uninsured and underinsured motorist coverage (UM/UIM): This provides coverage if you are hit by someone who is uninsured or does not have enough insurance to cover your damage.
- Medical payments coverage (MedPay or MPC): Medical payments coverage provides medical payments for yourself and the passengers in your vehicle, regardless of fault.
- Personal Injury Protection (PIP): Personal injury protection covers medical payments, lost wages, and funeral expenses for yourself and passengers.
Do I Need Car Insurance?
Nearly every state requires drivers to carry a minimum amount of coverage in order to legally drive. New Hampshire and Virginia are the only states that don’t require car insurance if certain conditions are met. In New Hampshire, the driver must pay for the costs of bodily injury or property damage from a car accident they caused. Virginia allows drivers to opt out of the insurance requirement by paying a $500 uninsured motorist fee when registering their vehicles, but starting July 1, 2024, Virginia will also require car insurance.
How Does Car Insurance Work?
Car insurance spreads the financial risk of owning and driving a car between you and an insurer, in exchange for a premium. Paying your premium helps you avoid a coverage lapse. When you buy a policy, the insurance company agrees to cover damages based on your coverage and up to the limits you carry.
Sometimes, a specific coverage type will carry a deductible, which is the amount of money you must pay out-of-pocket to use that coverage. For example, a $500 deductible on collision means that the first $500 worth of damage is your responsibility. The rest is typically covered by your insurer, up to the actual cash value (ACV) of your vehicle.
How to File a Claim
After an accident, follow these steps to file a claim:
- Ensure everyone’s safety and call the police.
- Take pictures of the damage.
- Do not admit fault; let the insurer decide liability.
- Gather required documentation like a police report.
- Contact your insurer or file a claim online or via their app.
- Monitor the progress of your claim and follow up as needed.
How Much Does Car Insurance Cost?
The average cost of car insurance in the U.S. is $2,545 per year for full coverage, but this varies by state. Factors like your location, driving record, vehicle type, and even your credit score can influence your premium.
How Much Car Insurance Do You Need?
Your state most likely has minimum liability limits that you need to carry to drive legally. It’s usually written as three numbers representing bodily injury per person, bodily injury per accident, and property damage per accident.
For example, a 50/100/25 ratio means $50,000 coverage for each person’s injury, $100,000 for total injuries per accident, and $25,000 for property damage. Experts recommend carrying higher limits than the state minimum to better protect yourself.
How to Save on Car Insurance
Shop around for multiple quotes from insurers to find the best rate. Many insurers offer discounts based on factors like your driving habits, vehicle safety features, and how you choose to pay your premium.
What Do I Need to Buy Car Insurance?
When purchasing car insurance, you may need the following:
- Driver’s license (for all listed drivers)
- Vehicle registration
- Social Security number
- Banking information
- Vehicle Identification Number (VIN)
- Information about any lienholder or leasing company
Providing complete and accurate information when requesting a quote ensures that you receive an accurate premium.
