If you live in the United States, you most likely use a car to get around. And if you’re driving a car, that means you (or whoever owns the vehicle) had to get car insurance.
But how does car insurance work? If you’re buying it for the first time, it can be a confusing process. There are so many types of coverage available, widely varying prices, and enough jargon to make you feel like you’re in an economics class.
To help you cut through the confusion, we’ve created this comprehensive guide to car insurance. Below, you’ll learn about why you need car insurance, the types of car insurance available, and how to get the car insurance policy that’s right for you.
Note: This article focuses on how car insurance works in the United States. If you live elsewhere, local laws and insurance requirements will likely differ.
Why You Need Car Insurance
First and foremost, you need car insurance because the law generally requires it. This varies based on your state.
But most states require you to have at least some form of liability coverage (discussed in the next section). Driving without insurance can get you into legal trouble; don’t do it.
But beyond the legal requirements, car insurance is a smart thing to have. It protects you from serious financial problems that could result from an accident. Like most forms of insurance, it’s something you hope you’ll never need but will be glad to have if you do.
However, saying you need “car insurance” isn’t too helpful. This is because car insurance breaks down into many different types of coverage, which we’ll explore next.
The 7 Types of Car Insurance You Should Know
One of the most confusing parts of shopping for car insurance is determining what type of coverage you need.
Based on our research, we’ve identified seven main types of car insurance you should be aware of. While it’s unlikely you’ll need all of these in the real world, it’s still good to be familiar with them.
Up first, we have liability car insurance. We’re discussing this first because it’s one of the most common types of coverage. Most states require you to have it to legally drive a car.
But why do they require it?
Let’s say you rear-end someone at a traffic light. The accident ends up giving the other driver a broken arm, which costs them a lot of money to treat.
Without liability insurance, you could be responsible (liable) for the other driver’s medical bills. And depending on the severity of the accident, resulting medical bills could easily climb into thousands or tens of thousands of dollars.
If you have liability insurance, however, then your insurance company will likely cover the other driver’s medical bills and any additional costs you’re liable for.
More specifically, liability insurance breaks down into two types of coverage: bodily injury insurance and property damage insurance. Here’s a quick look at each:
Bodily injury insurance pays for a person’s medical bills if you injure them in a crash. In addition to paying medical expenses, this part of your liability policy can also reimburse the person for lost wages due to injuries.
Property damage insurance pays to repair another person’s vehicle or property if you damage it in an accident. And if someone takes you to court after an accident, this part of your policy can also cover your legal fees.
Note: Some states require personal injury protection insurance (PIP) instead of liability insurance. We discuss PIP in detail below, but be sure to check which type of coverage your state requires.
Liability insurance covers damage you cause to other people’s vehicles or property, but what about if your car is damaged in an accident? This is the purpose of collision insurance.
Collision insurance pays to repair your car if it’s damaged in a crash. This includes collisions with other vehicles, collisions with objects (such as backing into a pole), and vehicle rollovers.
Unlike liability coverage, collision insurance is always optional under state law. However, your lender will often require it if you’re financing or leasing a vehicle.
Once you’ve paid off your loan, it may make sense to drop your collision coverage. This is particularly true if your insurance premiums are more than the value of your vehicle.
Liability and collision are the two most common types of car insurance coverage, but there are several other types available.
Another common type of car insurance is comprehensive coverage. This covers damages to your car not sustained in a collision. The specifics vary based on your policy, but comprehensive coverage will generally pay to repair:
- Hail damage
- Fire damage
- Damage from hitting an animal
- Damage from theft
If you’re leasing your vehicle, the dealership usually requires you to have comprehensive coverage. Otherwise, you’ll need to decide if it makes sense for your situation.
Typically, it makes more sense to have comprehensive coverage for a new car than an old beater. But that’s ultimately up to you.
Gap insurance isn’t as well-known as the previous types of coverage, but it could save you from a bad financial situation. To see why, here’s a quick example:
Let’s say you’ve just bought a new car. A few weeks after buying it, you get into a collision and the vehicle is totaled. But because you financed the car, you’re still responsible for paying off your loan.
You might think that your collision insurance will cover you, but think again. New cars can lose more than 10% of their value within the first month of purchase, according to data from CarFax. And after a year, a new car typically loses around 20% of its value. In financial terms, we refer to this loss of value as depreciation.
Your collision insurance only covers the depreciated value of your car, not the amount it was worth new.
So if you bought a $15,000 car that’s now worth just $10,000, your insurance will pay you $10,000 if it’s totaled. And if you put little or no money down, that could mean your loan balance (on a car you don’t have) is greater than your insurance payout.
Gap insurance exists for situations like these. If you have gap insurance, then your insurance provider will make up the “gap” between what your vehicle is worth and what you owe on your loan. This means you won’t be stuck paying for a car you can no longer use.
So how do you know if you should get gap insurance? According to the Insurance Information Institute, gap insurance is usually a good idea if you:
- Put less than 20% down on a vehicle
- Financed a vehicle for 60 months or longer
- Leased a vehicle (the dealership usually requires it in this case)
- Purchased a vehicle that depreciates faster than the average
- Rolled over negative equity from an old car loan into the new loan (i.e., the lender for your new vehicle combined your old vehicle loan with a new loan)
Uninsured and Underinsured Motorist Coverage
If another driver hits your vehicle and injures you, their liability insurance will theoretically cover your medical bills and vehicle repairs.
But what happens if the person who hits you has no insurance? In this case, you could end up paying your medical and repair bills out of pocket.
To protect you from such a bad financial situation, insurance companies offer uninsured and underinsured motorist coverage.
Uninsured motorist coverage will reimburse you for expenses that an uninsured driver can’t pay.
Underinsured motorist coverage, meanwhile, reimburses you if the at-fault driver has insufficient coverage for the expenses you incur in the accident.
Sometimes these types of coverage are bundled together, but other times they’re sold separately; it depends on your state and the insurance company.
And in many states, the law requires you to have one (or both) of these types of coverage. Twenty-two states require uninsured motorist coverage, while fourteen require underinsured motorist coverage (you can view a full list of both types of states here).
Medical Payments Coverage
If you’re injured in a car accident, you might assume that your health insurance will cover all of your medical bills. However, this often isn’t the case. Most health insurance, for instance, has a deductible that you have to pay before your coverage kicks in.
To protect yourself from such a situation, you can purchase medical payments coverage. Medical payments coverage is fairly self-explanatory. It covers car accident-related medical expenses (for you and often passengers) that your health insurance won’t.
This is always an optional policy add-on; no state requires it. It could be worth considering if you have high-deductible health insurance, but it’s usually less necessary than the other types of car insurance on this list.
Personal Injury Protection Coverage (PIP)
Liability insurance payouts are based on which driver is at fault in an accident. But in some cases, it can be tricky to determine who’s at fault. This can lead to court battles that end up costing both drivers a lot of money and time.
To reduce such litigation (especially for minor injuries), some states have adopted a “no-fault” system. In such states, all drivers are required to purchase personal injury protection (PIP) coverage instead of liability insurance.
If you’re in an accident, PIP will cover your medical expenses no matter who’s at fault. And in many cases, it will also pay for lost wages, childcare costs, and cleaning services if your injuries render you unable to work or perform daily tasks. This coverage usually extends to vehicle passengers as well.
The specifics of PIP coverage can get complicated depending on your state and the type of health insurance you have. So it’s a good idea to consult with an insurance agent to determine what type of coverage you need.
How to Get Car Insurance in 3 Steps
Now that you have an overview of the main types of car insurance, we can take a look at how to get a car insurance policy. In general, the process consists of three steps:
Determine the Coverage You Need
As you saw from the previous section, there are many types of car insurance available. But in practice, you’ll probably need a policy with just one or two types.
Before you do anything else, research the minimum coverage your state requires. This guide from Policygenius is a good place to start.
Once you’ve done that, you can start getting more specific. If you’re planning to finance your car, you’ll likely need collision coverage. And if you’re planning to lease a car, you’ll probably need comprehensive coverage as well.
The car dealer will tell you what they (and the state) require when you purchase the vehicle. But it’s a good idea to do some research before you enter the high-pressure sales environment of the dealership.
And beyond the type of coverage you need, bear in mind that different cars will cost different amounts to insure.
While you won’t be able to get a specific number until you get a quote, it is useful to look up how much a vehicle generally costs to insure. You might end up deciding to buy a different vehicle once you learn how much you’ll pay for insurance on your dream car.
Get Car Insurance Quotes
After you’ve done preliminary research on the type of coverage you need, it’s time to get some quotes. This process is pretty straightforward. You’ll fill out a questionnaire that asks about:
- Your driving history
- The vehicle you plan to purchase
- The type(s) of coverage you’re looking for
- Demographic factors such as your age, sex, and location
The insurance provider will then use all of this information to provide you with a quote. This is roughly what you’ll pay for your car insurance each year. In addition to what you’ll pay each year/month (your premium), be sure to consider the coverage limits and deductible.
All aspects of your policy will have a coverage limit, which is the maximum amount your insurer will pay for a claim.
For instance, your liability coverage might have a limit of $25K for bodily injuries. If you end up being liable for more than $25K after an accident, you’ll need to make up the difference out of pocket.
For this reason, be sure the coverage limits for all aspects of your policy are sufficient for your financial situation. Don’t assume that the minimum coverage your state requires will be enough. That could be a recipe for a bad financial situation if you end up owing more than your insurer will cover.
In addition to the coverage limit, be sure to pay attention to any deductibles your policy has.
The deductible is the amount you have to pay out of pocket before your insurance coverage applies.
Liability car insurance doesn’t have a deductible, but collision insurance usually does. A higher deductible will mean lower premiums, but be sure that you can afford the deductible out of pocket. You don’t want to end up drowning in credit card debt just because you wanted to save a few bucks each month on your premiums.
Finally, be sure to compare several different car insurance providers. Your specific quote will vary based on your situation. So don’t assume that you’ll get a good deal from a provider because a friend or family member did. Always do your research.
Sign Up for the Best Deal
Now that you’ve done your research, it’s time to sign up for car insurance. You’ll need to fill out some more paperwork, which you can usually do online. You’ll then enter your payment information and decide if you want to pay your premiums monthly or annually. If you have any difficulties or questions, your insurance agent can help you.
Be sure to talk with your insurance agent and get proof of coverage before you go to purchase a vehicle, especially if you’re going on a weekend when your insurer’s office isn’t open.
Otherwise, the dealer might not let you drive the car off the lot. Driving uninsured is illegal in every state except New Hampshire and Virginia, and even in those states you’re still liable for accidents where you’re at fault. So it’s essential to be able to prove you’re covered when you get to the dealership.
Car Insurance FAQ
Now that we’ve covered the main points of how car insurance works, let’s conclude with answers to some common car insurance questions:
Does car insurance cover a stolen vehicle?
If you have comprehensive coverage, the answer is generally yes. Comprehensive coverage will reimburse you for the actual cash value of your car, minus your deductible.
So if your policy has a $1,000 deductible and someone steals your $9,000 car, the insurance company will most likely write you a check for $8,000. Bear in mind that the insurance company will only reimburse you for what your car is currently worth, not what you paid for it new.
As we mentioned, comprehensive coverage is usually optional unless you’re leasing a vehicle. So if you only have liability and collision coverage, you could be out of luck if someone steals your car.
Does car insurance cover belongings stolen from my vehicle?
No, it does not.
Comprehensive coverage may reimburse you if someone steals a part of your vehicle (catalytic converter, rims, etc.). But it won’t cover personal belongings in your vehicle such as your phone, headphones, or laptop.
However, your renter’s or homeowner’s insurance will usually cover such theft.
Does my car insurance cover me when I’m out of state?
Generally, yes. As long as you’re taking a short-term trip, your car insurance will cover you.
However, you will need to update your coverage if you’re making a permanent move, as car insurance requirements vary state-to-state.
Does car insurance cover my rental car?
Typically, your liability and comprehensive car insurance coverage will still protect you when you’re driving a rented vehicle. Though you should always check with your insurance agent if you have any doubts.
However, your collision insurance usually won’t apply to rented vehicles. Still, you have a few options for making sure you’re covered.
To start, many credit cards (particularly travel cards) offer collision coverage for rental cars. All you have to do is pay for the rental with the credit card in question.
If your credit card doesn’t cover you, you may want to purchase a Collision Damage Waiver. This isn’t technically “insurance.” Rather, it transfers financial responsibility for damages from you to the rental company.
Similarly, you may want to purchase a Loss Damage Waiver. This releases you from liability for money the rental company loses while they’re getting a damaged car repaired.
Bottom Line: Don’t assume your insurance will cover you when you rent a car. Check with your agent and/or credit card company to see what coverage they offer. If it isn’t sufficient, then consider purchasing coverage from the rental car company.
Never Drive Without Car Insurance
You should now have a much better understanding of car insurance than the average person.
Car insurance coverage can vary widely based on your location, circumstances, and insurance provider. So I strongly recommend consulting an insurance agent about specific questions. There are simply too many edge cases and details to cover in one article.
Whatever you do, always be sure to drive with car insurance. It’s there to keep you and other drivers safe.
Confused about renter’s insurance? Read this next.
Image Credits: driver’s hands on steering wheel
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