8 things about car insurance every driver needs to know

Understanding your car insurance: What you need to know to make smart choices

You need car insurance. It’s the law almost everywhere, and it provides financial protection if you’re in an accident. But beyond that, many people don’t understand their coverage or what they need.

Shopping for car insurance is easier when you know what you want and why you need it. That means understanding what affects rates, what coverage is more costly and why, and how to avoid mistakes leading to overpaying.

Here are eight facts about auto insurance that you need to know to buy the right coverage without overpaying.

1. It doesn't cost as much as you think to buy more coverage

Full coverage insurance, which includes comprehensive coverage and collision coverage often doesn’t cost a lot more than liability insurance. That’s because the most an insurance company will have to pay out on a comprehensive or collision claim is the value of your car, which it will pay out in actual cash value (depreciated value) and not what the car cost new.
Uninsured motorist coverage is generally very affordable as well, and protects you in an accident where the other driver is uninsured.
If you live in a no-fault state, you might want to consider increasing your personal injury protection and medical expenses coverage. It's generally cheap and adds a lot of extra protection.
Liability insurance, is typically the most expensive part of your coverage, especially for younger, less experienced drivers who are more likely to cause an accident. However, it doesn't cost that much to increase your liability limits, and it could make a huge difference in an at-fault accident.

2. There are a lot of factors that affect car insurance rates

Auto insurance companies use many different criteria when evaluating an insurance application during a process called underwriting. Each car insurance company has guidelines for which drivers it will accept and what rates it will charge. But the factors remain the same for most insurers:

Age (and years of experience). A handful of states don't allow the use of age as a rating factor, but they can still use years of driving experience.
Gender (at least when you're young). Again, gender isn't allowed as a rating factor in a few states, but where it is, the impact lessens with age. Male teens pay the highest rates.
Location (down to the ZIP code). Factors about where you live that impact rates include theft rates, weather, insurance regulations and crash statistics.
Credit history (your insurance score is related to your FICO score). There are a few states where this isn't allowed, but in most states your credit history affects car insurance because it's statistically correlated with the likelihood of filing a claim.
You vehicle (year, make and model). Everything from the age of your vehicle to how it scores on crash tests affect how much you pay for car insurance.

3. The right car insurance company is personal (there's no one best pick)

Car insurance rates differ significantly from one insurance company to another. That's because each insurance company uses its own formula to assess risk and decide what you pay for coverage. They may use the same factors above, but they don’t weigh them the same way. This means no two insurers will have identical prices for the same driver or vehicle. Often, the difference is hundreds of dollars.

"Auto insurance is a highly competitive business and one of the most effective ways to reduce insurance costs is simply to shop around," says Jeanne Salvatore, senior vice president of the Insurance Information Institute. "Drivers should look for an insurance company that will provide a good price along with excellent service."

The best plan is to decide what coverages and options you need and comparison shop so you can find cheap auto insurance that still provides sufficient coverage.

4. If you let your policy lapse, you'll pay more in the long run

If you have allowed your insurance to lapseWhen your auto insurance coverage ends because you missed a payment or did not renew it on time. A lapse in auto insurance coverage may result in paying higher premiums for a new policy., insurers will view you as a bigger risk, and they'll charge you more. To avoid a lapse:

Always have the new coverage in place before you switch car insurance companies.
If you won’t be driving for a while, consider keeping some coverage in place to prevent a lapse.
If you're having trouble affording your car insurance, call your insurer for payment options or find a cheaper policy.

5. Higher deductibles save you money in the long run

Choosing higher deductibles means you pay more if you file a claimAn insurance claim is a request you make to your insurance company for coverage after your car is damaged or you have an accident. You can file a claim online, by phone, or in writing., but it also means you pay less in premiums. If you don't need to file a claim, that money stays in your pocket.

Here's an example:

Let's say you choose a $1,000 deductibleThe deductible is the amount you pay out of pocket for a covered loss when you file a claim. and your monthly rate goes down by $30. You save $360 a year. In three years, you will have saved more than it would cost to pay the deductible. If you don't have to file a claim in that time, you can have the deductible amount set aside. And, if you don't file a claim for several more years, that's money you could spend on something else.

6. Car insurance discounts can make a big difference

Most insurance companies offer auto insurance discounts for things like:

A safe driving record
Car safety features
Anti-theft devices
Electronic payments
Payment in full up front

Make sure you're getting all of the discounts you qualify for; they can result in savings of 30% or more.

7. You should carry only the car insurance coverage you need to save money

There's no reason to pay for coverage you don't need. For example:

If you have an older car that isn't worth much and you own it outright, you probably don't need comprehensive and collision coverage.
If you have a second car, you may not need to carry rental reimbursement coverage.
If you are a AAA member, you don't need to pay for roadside assistance on your car insurance policy.

A car insurance coverage calculator can help you decide what coverage you really need and what you can safely drop.

8. The car you drive will affect your auto insurance rates

The car you drive has a big impact on your insurance, so when shopping for a car, choose wisely.

For example, if the car you drive is expensive to repair, the company will have to pay more if you get in an accident. Conversely, if your car is extremely safe and protects occupants well, the risk of serious injuries is reduced. If your car model is generally less likely to be stolen, your car insurance company is less likely to have to pay to replace it.

Get quotes for the car models you are considering when shopping so you'll know before you buy how it will impact your budget.

It's important to have car insurance, but you don't have to overpay

You need car insurance because, in all states but New Hampshire, it's the law. But beyond that, it's important to have car insurance to protect yourself financially. If you cause an accident, you are responsible for the cost of injuries and damage (even in New Hampshire), and without insurance you will have to pay for everything out of pocket.

And unless you can afford to replace or repair your car, you need full coverage to protect that investment. Furthermore, your lender will required it.

That doesn't mean you should overpay. Armed with the facts about car insurance costs, you can shop smart and get covered at the best price.

Helpful auto insurance tools and calculators