From minor fender benders to totaled vehicles, drivers need to take steps to protect themselves. Purchasing auto insurance is one of the best ways to do this — that’s part of the reason why almost every state requires its drivers to have it. And while those states will outline what type and how much car insurance you are required to have, choosing how to meet those requirements is up to you.
Insurance companies can offer you different types of coverage with different costs, premiums, and deductibles. The seemingly endless list of coverage options and providers can feel dizzying to a beginner buying car insurance for the first time, but you can easily make the right decision by understanding a few simple things about how insurance works and what’s required of you.
- Defining Car Insurance Terms
- Different Types of Car Insurance
- Your State’s Requirements
- Saving on Car Insurance Costs
- FAQ
Quick Answer: How Does Car Insurance Work?
Car insurance protects you financially if you're in an accident or your vehicle is damaged. Here's how it works:
- You pay a monthly or annual premium to an insurance company
- In exchange, they agree to cover certain costs related to accidents, theft, or damage
- When you file a claim, you pay your deductible first
- The insurance company pays the remaining covered costs up to your policy limits
Example: If you have a $5,000 accident with a $500 deductible and collision coverage, you pay $500 and insurance pays $4,500.
Important: Most states require minimum liability insurance to cover damage you cause to others. Additional coverage types (collision, comprehensive) can be optional, depending on the state or if you have an auto loan.
Defining Car Insurance Terms
Before looking at different car insurance companies and their options, you’ll first want to make sure you understand the basics of how insurance works. Essentially, companies provide drivers with insurance policies to limit the costs and risk associated with car accidents and other auto trouble.
Key Players:
- You (the policyholder): Pay premiums and file claims when needed
- The insurance company: Collects premiums and pays out claims when covered events occur
- Other parties: People you might injure or whose property you might damage
Payments:
- Premiums (what you pay): Regular payments (monthly, semi-annually, or annually) to keep your coverage active
- Deductible (your portion of a claim): The amount you must pay before insurance kicks in. Higher deductibles mean lower premiums, and vice versa.
Policy:
- Policy limits (what insurance pays): The maximum amount your insurer will pay for covered claims. Limits are listed as numbers like 25/50/25 (more on that later)
- Claims (when you need help): When something covered by your policy happens, you file a claim, and the insurance company investigates and pays according to your coverage
Real-World Example
Let’s say you crash your car, causing $5,000 worth of damage. That’s a hefty bill to deal with all at once, but with the help of an auto insurance policy, you could potentially pay much less than that out of pocket, depending on your policy and coverage type. Of course, that money isn’t free. Instead, you pay small amounts more often in case you need a large, one-time sum. Those are called “premiums,” and you may pay them monthly, twice a year, or annually.
Your insurance policy will also include a deductible. This is the amount you’ll have to cover before your insurance company pays a cent. So, if your deductible was $2,500, you’d pay for half of the $5,000 worth of damage first, then insurance would cover the rest. According to the Insurance Information Institute, consumers spend an average of $866.31 on auto insurance annually.
Different Types of Car Insurance
Now that you know how you’ll pay for insurance, let’s talk about what that money will get you. Most insurance policies are made up of at least one of the five following types of coverage:
Liability Coverage
Liability insurance covers you in case you’re in an accident and found to be at fault. It comes in two forms. Bodily injury liability is reserved for costs related to hurting another individual in an accident; property damage liability is for damage you cause to another person’s property.
Most states require you to have a minimum level of liability insurance (you get both forms as a package deal). But it’s smart to buy more than state minimums, if you can afford it. Crashes in which people or property are harmed can be costly, meaning you don’t want to run out of coverage.
Uninsured/Underinsured Motorist Coverage
So, what happens if you’re in an accident where the other driver is responsible, but he or she doesn’t have insurance — or enough insurance to cover the damage? Uninsured/underinsured motorist coverage helps fill those gaps. Some states require this coverage, while others don’t.
Medical Payments Coverage/Personal Injury Protection
In the event of an accident, medical payments coverage helps pay for the medical costs of anyone injured in your vehicle. This could be either you or your passengers. Some states require this insurance, while others don’t.
A similar type of insurance is personal injury protection (sometimes called “no-fault insurance” or PIP). PIP coverage pays medical bills for you and your passengers, no matter who’s at fault in an accident. It can also help cover other, non-medical expenses related to your injuries, like lost wages. Your health insurance may not cover all accident-related expenses, which is why PIP can be valuable. A few states require this insurance, while other states don’t offer it at all.
Collision Coverage
If you’re in an accident, collision insurance covers the cost of repairs up to your car’s market value minus the cost of your deductible. If the cost of repairs exceeds the value of your car, i.e., your car is totaled, this insurance could help you pay for a replacement.
Collision coverage is typically optional unless required by your lender. If your car is older and not worth much money, it may not make sense to pay for this coverage. On the other hand, if you’re driving a new or expensive car, collision coverage could prove worthwhile to prevent losses in case of an accident.
Comprehensive Coverage
Surprisingly, comprehensive coverage doesn’t mean you get full coverage for all of the above. Rather, the “comprehensive” in comprehensive coverage refers to covering you for events that aren’t necessarily driving-related accidents—if, for instance, your car is stolen, damaged by vandalism, or a tree falls on it. Like collision coverage, comprehensive coverage isn’t mandatory unless your lender requires it, but it can be useful depending on your budget and vehicle type.
Other Optional Types of Car Insurance
- Guaranteed Auto Protection (GAP insurance) covers you in case your car is damaged and you still owe more on it than its market value.
- Rental reimbursement pays for a rental car while your car is being repaired under a covered accident.
- Emergency roadside assistance helps you in case you’re stranded somewhere, perhaps with a dead battery, or if you’ve locked yourself out of your car.
- Mechanical breakdown insurance covers your car’s mechanical parts and systems, potentially preventing you from having to foot a large repair bill.
| Coverage Type | What It Covers | Required? |
|---|---|---|
| Liability | Injuries you cause to others or their property | Yes, in most states |
| Collision | Damage to your car from crashes | Not usually, unless your vehicle is financed or leased |
| Comprehensive | Non-crash damages, like theft, weather, or vandalism | Not usually, unless your vehicle is financed or leased |
| Uninsured Motorist | Injuries/damage from uninsured drivers | Varies by state |
| Medical payments/PIP | Medical costs for you and your passengers | Varies by state |
Your State’s Requirements
Pretty much every state requires you to purchase a minimum level of car insurance. New Hampshire is a notable exception. Arizona and Virginia also don’t require traditional auto insurance.
States list their minimum liability insurance requirements in the following format: 25/50/25. The first two numbers represent bodily injury liability limits for an accident. The third number is the maximum coverage for property damage liability. In this example, each person injured would receive a maximum of up to $25,000, and the maximum the insurer would pay per accident for bodily injury is $50,000.
So, let’s say you’re responsible for an accident with more than two injured parties, or those individuals have injuries that cost more than $25,000. If you went with just your state’s minimum requirements, then you’ll have to pay any remaining costs out of pocket — no matter how much that is. That’s the big reason to get higher coverage limits, if you can. If you’re still unsure what you need, it’s worthwhile to talk to an insurance agent in your area to get an insurance quote.
| State | Required Insurance | Minimum Liability Limits |
|---|---|---|
| Alabama | Bodily injury and property damage liability | 25/50/25 |
| Alaska | Bodily injury and property damage liability | 50/100/25 |
| Arizona | Bodily injury and property damage liability | 25/50/15 |
| Arkansas | Bodily injury and property damage liability | 25/50/25 |
| California | Bodily injury and property damage liability | 30/60/15 |
| Colorado | Bodily injury and property damage liability | 25/50/15 |
| Connecticut | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/25, $25,000 uninsured/underinsured per person, and $50,000 uninsured/underinsured per accident |
| Delaware | Bodily injury and property damage liability, PIP | 25/50/10, $15,000 PIP per person, and $30,000 PIP per accident |
| Florida | Property damage liability, PIP | $10,000 property damage liability per accident and $10,000 PIP coverage |
| Georgia | Bodily injury and property damage liability | 25/50/25 |
| Hawaii | Bodily injury and property damage liability | 20/40/10 and $10,000 PIP |
| Idaho | Bodily injury and property damage liability | 25/50/15 |
| Illinois | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/20, $25,000 uninsured/underinsured per person, and $50,000 uninsured/underinsured per accident |
| Indiana | Bodily injury and property damage liability | 25/50/25 |
| Iowa | Bodily injury and property damage liability | 20/40/15 |
| Kansas | Bodily injury and property damage liability, uninsured/underinsured motorist, PIP | 25/50/25, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, $4,500 for medical expenses, $900 per month for lost wages, $25 per day for substitution benefits, $2,000 for funeral expenses, $4,500 for rehabilitation expenses, $900 per month for survivor benefits, and $25 per day up to one year substitution benefits |
| Kentucky | Bodily injury and property damage liability, PIP | 25/50/25 and $10,000 PIP |
| Louisiana | Bodily injury and property damage liability | 15/30/25 |
| Maine | Bodily injury and property damage liability, uninsured/underinsured motorist, PIP | 50/100/25, $50,000 uninsured/underinsured per person, $100,000 uninsured/underinsured per accident, and $2,000 in medical payments |
| Maryland | Bodily injury and property damage liability, uninsured/underinsured motorist | 30/60/15, $30,000 uninsured/underinsured per person, $60,000 uninsured/underinsured per accident, and $15,000 uninsured property |
| Massachusetts | Bodily injury and property damage liability, uninsured/underinsured motorist, PIP | 25/50/30, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, and $8,000 PIP |
| Michigan | Bodily injury and property damage liability, PIP | 50/100/10, $1 million property protection, $250,000 PIP* lower PIP amounts available for some Medicare and Medicaid recipients |
| Minnesota | Bodily injury and property damage liability, uninsured/underinsured motorist, PIP | 30/60/10, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, and $40,000 PIP |
| Mississippi | Bodily injury and property damage liability | 25/50/25 |
| Missouri | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/25, $25,000 uninsured/underinsured per person, and $50,000 uninsured/underinsured per accident |
| Montana | Bodily injury and property damage liability | 25/50/20 |
| Nebraska | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/25, $25,000 uninsured/underinsured per person, and $50,000 uninsured/underinsured per accident |
| Nevada | Bodily injury and property damage liability | 25/50/20 |
| New Hampshire | Financial responsibility only | 25/50/25, $1,000 medical, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, $25,000 uninsured/underinsured property, if you opt for insurance |
| New Jersey | Property damage liability, PIP | $5,000 property damage liability and $15,000 PIP |
| New Mexico | Bodily injury and property damage liability | 25/50/10 |
| New York | Bodily injury and property damage liability, uninsured/underinsured motorist, PIP | 25/50/10, $50,000 wrongful death coverage per person, $100,000 wrongful death coverage per accident, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, and $50,000 PIP |
| North Carolina | Bodily injury and property damage liability, uninsured/underinsured motorist | 50/100/50, $50,000 uninsured/underinsured per person, $100,000 uninsured/underinsured per accident, and $50,000 uninsured/underinsured property |
| North Dakota | Bodily injury and property damage liability, uninsured/underinsured motorist, PIP | 25/50/25, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, and $30,000 PIP |
| Ohio | Bodily injury and property damage liability | 25/50/25 |
| Oklahoma | Bodily injury and property damage liability | 25/50/25 |
| Oregon | Bodily injury and property damage liability, uninsured/underinsured motorist, PIP | 25/50/20, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, and $15,000 PIP |
| Pennsylvania | Bodily injury and property damage liability, PIP | 15/30/5, $5,000 medical payments |
| Rhode Island | Bodily injury and property damage liability | 25/50/25 |
| South Carolina | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/25, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, and $25,000 uninsured/underinsured property |
| South Dakota | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/25, $25,000 uninsured/underinsured per person, and $50,000 uninsured/underinsured per accident |
| Tennessee | Bodily injury and property damage liability | 25/50/25 |
| Texas | Bodily injury and property damage liability | 30/60/25 |
| Utah | Bodily injury and property damage liability, PIP | 30/65/25, $3,000 PIP |
| Vermont | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/10, $50,000 uninsured/underinsured per person, $100,000 uninsured/underinsured per accident, and $50,000 uninsured/underinsured property |
| Virginia | Bodily injury and property damage liability, uninsured/underinsured motorist | 50/100/25, $50,000 uninsured/underinsured per person, $100,000 uninsured/underinsured per accident, and $25,000 uninsured/underinsured property |
| Washington | Bodily injury and property damage liability | 25/50/10 |
| Washington, D.C. | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/10, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, and $10,000 uninsured/underinsured property |
| West Virginia | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/25, $25,000 uninsured/underinsured per person, $50,000 uninsured/underinsured per accident, and $25,000 uninsured/underinsured property |
| Wisconsin | Bodily injury and property damage liability, uninsured/underinsured motorist | 25/50/10, $25,000 uninsured/underinsured per person, and $50,000 uninsured/underinsured per accident |
| Wyoming | Bodily injury and property damage liability | 25/50/20 |
Saving on Car Insurance Costs
If you’ve ever watched TV or listened to the radio, you’ve surely heard that you can save X% on car insurance rates just by calling a certain company. One insurance provider may simply charge you less than another. But you can also do lots of simple things on your own to lower auto insurance costs.
Any insurer will likely look at your driving record when determining the rate it will offer you. Of course, safe driving will help. But if you’ve slipped up in the past, you’re not necessarily out of luck. Ask your provider if taking a defensive driving course will reduce your rate or if it offers a safe driver program for being accident-free for a certain length of time. Some insurers even offer good student discounts for young drivers who maintain high grades.
Providers will also potentially provide discounts for several other things that reduce the risk of your car being damaged. For instance, parking your car in a garage (rather than on the street) can affect your rate. Ditto for having a car with built-in safety features like airbags, antilock brakes, or a security system. And of course, if you drive infrequently, opting to walk or take public transport when you can, that could get you a discount, too! Additionally, consider bundling your auto insurance with homeowners' or renters’ insurance.
Also, now that you know how each kind of coverage functions, you can make some strategic decisions to limit your costs. For instance, you could remove collision or comprehensive insurance from older vehicles that may not have a high market value. As mentioned above, your state requirements won’t include these types of car insurance.
Your understanding of deductibles and premiums will come in handy as well. Typically, a higher deductible will lower your premium. Before decreasing your deductible, just make sure you’re okay paying more out of pocket in the event of an accident. Because, ultimately, that’s what having a car insurance policy is all about: feeling financially comfortable while protecting yourself, your car, and others while on the road.
FAQ
What does car insurance actually cover?
Car insurance covers financial losses from accidents, theft, and vehicle damage, but what's covered depends on your policy type. Liability insurance (required in most states) covers damage and injuries you cause to others. Collision coverage pays for damage to your car from accidents. Comprehensive covers non-accident damage like theft, vandalism, and weather. Medical payments/PIP covers medical expenses for you and your passengers. Optional add-ons can cover rental cars, roadside assistance, and mechanical breakdowns.
What is a deductible, and how does it work?
A deductible is the amount you pay out-of-pocket before your insurance covers the rest of a claim. For example, with a $500 deductible and $3,000 in damage, you pay $500 and insurance pays $2,500. Higher deductibles ($1,000-2,500) lower your monthly premiums but increase what you pay per claim. Lower deductibles ($250-500) raise premiums but reduce out-of-pocket costs when you file a claim. Choose a deductible you can comfortably afford to pay in an emergency.
What's the difference between comprehensive and collision insurance?
Collision covers damage to your car from accidents with other vehicles or objects (hitting a car, running into a tree, rolling your car). Comprehensive covers almost everything else: theft, vandalism, fire, flooding, hail, hitting an animal, falling objects, and natural disasters. Both are optional unless you finance or lease your vehicle. Both require you to pay a deductible before insurance pays. Think of it as: collision = crashes, comprehensive = everything else.
How do I know how much car insurance I need?
Consider three factors: your state's requirements, your assets to protect, and your vehicle's value. Start with your state's minimum liability coverage, then increase it if you have significant assets (home equity, savings, investments) that could be targeted in a lawsuit. For your own vehicle, choose collision/comprehensive coverage if your car is worth more than $3,000-4,000 or if you couldn't afford to replace it. Many experts recommend at least 100/300/100 liability coverage to adequately protect yourself from lawsuits.
What happens if I drive without insurance?
Driving without required insurance is illegal in most states and carries serious consequences: fines ($500-5,000), license suspension, vehicle impoundment, SR-22 requirement (high-risk insurance), dramatically higher future insurance rates, and personal liability for all damages you cause in an accident. If you cause a $50,000 accident without insurance, you're personally responsible for every dollar. You could face wage garnishment, lawsuits, and bankruptcy. The risk far outweighs any premium savings.
