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Do you know the basics of auto insurance?

By Insurance.com Posted : 11/14/2014

As a driver, you know how crazy it gets on the road. Between distractions and the rush to get somewhere on time, accidents can and do happen. Fenders get bent and sometimes people get hurt. Even if you're just parked in your driveway, a tree limb can crash through your windshield or someone can steal your car. When the worst happens, auto insurance is there to protect you.

Auto insurance can protect you against the financial risk associated with personal injuries and property damage caused by auto accidents, theft or vandalism. Nearly all states require you to purchase at least a minimum amount of liability coverage. Other types of auto insurance coverage may be optional or required, depending on state regulations. If you have a car loan or lease, the lender will also generally require that you purchase collision and comprehensive coverage.

The "What Drivers Like You Buy" tool will give you an idea of what other drivers of your age and circumstances typically buy.

Liability coverage

This is the state-mandated car insurance coverage you'll be required to have:

  • Bodily injury liability: Protects your assets if you're held liable for an auto accident in which other people are injured or killed. Limits are per person and then per accident.  Thus, limits of 25/50 break down to be a maximum of $25,000 per person and $50,000 per accident.
  • Property damage liability: Covers repairing or replacing vehicles or property of other people that you are responsible for damaging.

Liability coverage will also pay for the legal costs associated with defending you against lawsuits related to accidents. To adequately protect your assets, you probably want to purchase much more than the minimum amount of coverage required in your state. 

Liability limits of at least 100/300/50 are recommended.  That would give you bodily injury liability coverage of $100,000 per person, $300,000 per accident and property damage liability limits of $50,000.

Uninsured and underinsured motorist

Uninsured motorist and underinsured motorist coverages are required in some states and optional in others states.  It often makes sense to purchase them, unless you can afford to pay personally for medical costs or have a good health insurance plan that will cover your injuries without a lot of out-of-pocket expenses.

  • Uninsured motorist bodily injury: Pays your medical expenses if you’re injured by an at-fault driver that is without car insurance.  Depending upon policy terms, it may also cover pain and suffering and lost wages.
  • Underinsured motorist property damage: Pays, up to a preset limit, if an at-fault uninsured driver damages your vehicle.  If your state doesn’t require it, you might want to skip it and instead obtain collision coverage, which is a better choice to protect your car.
  • Underinsured motorist bodily injury coverage: Covers you if the at-fault driver has too little auto insurance to cover medical expenses arising from your auto accident-related injuries.  

Uninsured and underinsured motorist bodily injury usually extend coverage to your passengers, and may also cover you, and those listed on your policy, while riding in other cars or as pedestrians.

Medical payments and personal injury protection

Medical payments and personal injury protection both cover injuries related to an auto accident, regardless of fault.  However, they are not the same coverage.  

  • Medical payments coverage (MedPay): Covers reasonable medical costs for you and your passengers due to injuries sustained in an auto accident while in your insured vehicle.  MedPay is only required in a few states, but available as optional coverage in most other states.
  • Personal injury protection (PIP): Also referred to as no-fault coverage because PIP is required in no-fault states.  PIP covers various medical and/or funeral expenses for you and your passengers. It is more comprehensive than MedPay because PIP will also normally pay for loss of essential services and lost wages. PIP benefits vary by state and may require you to pay a co-payment and/or deductible.

MedPay and PIP coverages also typically extend to you and your family members if injured while riding in another person’s vehicle or if hit by a vehicle while a pedestrian.

Collision and comprehensive coverage

Physical damage coverages of collision and comprehensive are not required by any state, but can be mandated by finance and leasing companies.  These are the types of insurance that give coverage to your vehicle, regardless of fault.

  • Collision: Pays to repair or replace your car if it's damaged in an accident with another car or object, such as a tree, fence or guardrail.  It also covers the upset of your car, such as rolling it down an embankment.
  • Comprehensive: Is also called other-than-collision coverage because it insures your car against damage caused by something other than an auto accident. That includes theft, fire, flood, vandalism, and striking an animal. Comprehensive insurance also covers damage from a natural disaster, such as a tornado, hail storm or hurricane.

Collision and comprehensive coverages come with deductibles of your choosing.  Your lender or leasing company may require you choose a certain deductible amount, such as $500. 

Additional coverages

These coverages are optional, relatively cheap and may provide a lot of protection, although they may not be helpful in all circumstances.  Determine what your specific needs are and if you should add any optional coverages to your policy.

  • Gap coverage: Pays the difference between the actual cash value of your car and the amount you owe on your loan or lease if your car is totaled in a covered accident. It is sometimes called loan/lease coverage.  You’re required to carry collision and comprehensive on your vehicle to buy gap insurance.
  • Towing and labor or roadside assistance: Towing and labor usually covers the cost to tow your car to a repair facility or make minor repairs after a covered accident. Roadside assistance usually covers towing, minor repairs and fuel delivery, even if there was no accident.
  • Rental reimbursement: Pays the cost of renting a replacement car if yours is not drivable due to a covered accident. The coverage usually pays up to a certain daily or weekly limit.
  • Custom parts and equipment: If you’ve customized your vehicle, you need extra coverage for those special parts.  Custom equipment -- such as special tires, custom paint, or running boards -- isn't normally covered unless you add on this special coverage.  Without the custom parts coverage, you’d typically only be covered for the stock item you replaced.

And then the insurance company pays for everything, right?

That would be nice, but it's not always true. Here are some things you'll always need to cover yourself:

  • Deductibles: The amount of money that you've agreed to pay out of your own pocket before your insurance coverage kicks in. You can have different deductibles for different coverages and liability coverage never has a deductible.
  • Exclusions: Events or situations your policy specifically will not cover, such as property damage or personal injury you intentionally cause or damage to your own car due to mechanical failure or wear-and-tear.
  • Costs above policy limits: Any expenses that exceed the the dollar amounts listed on your policy contract for coverage you're entitled to receive. You're left responsible for any costs that surpass your limits.

Driving a good bargain on auto insurance rates

Many factors affect your auto insurance premium, including your age, the state in which you live, the make and model of your car, where your car is parked at night and your driving record. Although you can't do much about some of these factors, here are seven tips for managing your rate:

  1. Increase your insurance deductible, but not so much that you can’t afford it.
  2. Eliminate optional coverages if you don't need them (e.g., rental reimbursement if you have other means of transportation while a car is in the shop).
  3. Eliminate collision and comprehensive coverage if you drive an older car that wouldn't cost much to replace and if you could afford to pay for repairs if necessary.
  4. Ask about available auto insurance discounts (e.g., low-mileage discounts, discounts for safety or anti-theft devices) for your car insurance policy. Discounts vary by insurer.
  5. Avoid buying a vehicle prone to theft or expensive to repair, this can raise your rates.
  6. Drive safely to establish a good driving record – and receive a good-driver discount.
  7. Maintain good credit. Credit can be used in most states to help determine your rates.

Shop around for auto insurance

It's important to shop around for auto insurance coverage. Insurance premiums for the same coverage on the same car can vary widely among different insurers. A particularly good time to investigate your alternatives is when your current insurance policy is coming up for renewal, but you can compare car insurance rates and change policies at any time. Get quotes from several reputable companies, but don't let price be your only consideration. Make sure the coverage offered by each insurer meets your needs, and find out if the insurer has a solid financial strength rating.

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