Why do I need car insurance in the United States?
You need car insurance to drive to meet legal financial responsibility requirements. Each state sets its own required minimums for coverage. New Hampshire and Virginia don't require insurance, but they still have financial responsibility laws, meaning you must prove your ability to pay for an at-fault accident.
It’s important to understand that the minimum coverages required by one state or another have no impact on the amount of damages that can be held against you in the event of an accident. You are personally responsible, by law, for paying anything beyond your insurance limits.
"You're taking a big risk if you drive without insurance or just the minimums," says Craig Trombly, who spent a career as a licensed damage appraiser for auto insurance claims.
In many states, there are serious penalties for driving without insurance. You may be cited and fined a substantial amount of money, or you may have your license or registration suspended or revoked.
What kind of auto insurance is mandatory?
Liability coverage is mandatory in almost every state. This mandatory car insurance is often referred to as compulsory coverage and is the minimum limits needed in each state. Liability insurance coverage covers:
- Bodily injury for others when you’re at fault in an accident
- Damage to others' property
Liability coverage categorizes specific kinds of liabilities per accident and/or per person. Policy coverage is expressed as a sequence of numbers separated by slashes, representing the coverage limits per kind.
For example, the most common liability coverages are:
- Bodily injury coverage per person
- Total bodily injury per instance (or for all people in an accident)
- Property damage coverage per incident
For example, an 25/50/10 liability policy covers:
- $25,000 bodily injury per person
- $50,000 total bodily injury for all people
- $10,000 property damage
There are other types of coverage that are optional, but usually standard in auto insurance policies. Lenders also require them if you finance your vehicle. The most common of these are comprehensive and collision.
In no-fault states, you will be required to carry personal injury protection (PIP) and in some cases medical payments (MedPay) as well. In these states, your insurance company pays for your injuries in an accident regardless of who is at fault.
Some states also require uninsured/underinsured motorist coverage.
Why should you have comprehensive and collision coverage?
Trombly says it’s not a good idea to drive without collision and comprehensive coverage unless the total loss of your vehicle wouldn’t be a hardship. One example is if you drive a low-value, older car that you know you could afford to lose.
Collision coverage pays for damages to your vehicle if you crash with another vehicle or object, minus the deductible that the driver pays when filing a claim.
"If you're wealthy enough to go out and pay cash for a $50,000 car, maybe you think you don't need to pay for collision coverage," says Trombly, "but if you slip on ice and total the car when it hits a tree, that's an at-fault accident and you would lose all that money you paid for the car."
When your vehicle is damaged in an incident outside of a collision, comprehensive coverage pays for the damages up to the selected limit, less any deductible. A common example of an incident that would fall under comprehensive coverage is a tree falling on your car, but it also covers damage from vandalism, theft, civil disturbances or animals, among many other unforeseen events.
"Comprehensive is a really good way to spend your money," says Trombly, given that you would otherwise just be out of luck (and a lot of money) if the wind blows a tree over and totals your car.
States that don't require car insurance
Car insurance with minimum limits is required in 48 states and the District of Columbia.
New Hampshire and Virginia don’t require drivers to carry auto insurance. However, drivers are still effectively obligated to have insurance because if you want to drive without auto insurance, the state requires you to prove you have the financial means to cover the costs of an accident.
Regardless of states' different requirements regarding auto insurance, you’re liable for costs and damages in an accident when you’re found to be at fault.
Why do you need car insurance?
You need car insurance because the costs of a car accident can be shockingly high. Most drivers don’t have enough cash on hand to cover accident damages without hardship.
Auto insurance policies can incorporate several types of coverage to protect your finances, yourself and others.
Financial protection
If you’re in an accident, the damages to yourself and others can be costly, exposing your assets and income if you’re sued for damages or putting your livelihood at risk if you’re injured and can no longer work. If your policy doesn’t cover what a victim seeks and a judgment is rendered against you, you could find yourself facing financial ruin.
Mandatory minimums set by states are generally not enough to cover the costs of a significant accident. In California, for example, the requirement for property damage liability coverage is a minimum of $5,000.
Speaking from his experience as a licensed appraiser, Trombly points out that if you were to lose control of your car and crash into a house, "that $5,000 isn't going to take you very far."
Damages to you
Car insurance policies protect you from damages in many ways.
Underinsured motorist coverage protects you if you’re in an accident caused by someone who doesn’t have enough coverage to meet your claims. Given the relatively low minimums mandated by states, this is a piece of your policy you shouldn’t overlook.
Similarly, uninsured motorist coverage protects you should you be unfortunate enough to be harmed in an accident by someone who’s at fault but has no car insurance. This auto insurance coverage also covers you if you’re the victim of a hit-and-run.
Personal injury protection, required in many states, covers medical expenses for you and your passengers following injuries from an accident. This coverage tends to only be offered in what are known as "no-fault" states, wherein the policy is obligated to cover the healthcare expenses of the policyholder regardless of whether or not they were at fault.
Many policies can also include medical payments coverage, which covers medical bills for you and/or your passengers following an accident.
Damages to passengers
Although it varies by state laws and requirements, most car insurance policies protect your passengers, depending on your types of coverage.
If you’re injured as a passenger, the policyholder's personal injury protection, medical payments coverage and/or underinsured or uninsured coverage may pay for your damages. The bodily injury liability coverage of the at-fault driver's policy should cover you if you were a passenger in the car they hit.
Damages to others
Bodily injury liability coverage covers the cost of injuries to others caused by you or family members listed on your policy. Most states require some amount of this coverage, but you should note that medical expenses and damages (such as loss of income) from injuries can be very costly, especially if you cause a serious accident. A victim can sue you for damages if your policy limits do not cover their claims.
Protection for lenders
Liability insurance only pays for damages to others, so car loan lenders usually require you to maintain full coverage for a financed vehicle, including comprehensive and collision, so that their secured asset is protected.
Without insurance coverage, lenders are exposed to potential losses if the financed vehicle is totaled or you cannot make your payments. Requiring the borrower to maintain the coverage specified in the loan contract for the vehicle itself, as opposed to just the state's minimums for liability, ensures they won’t incur a total loss.
How are car insurance premiums calculated?
An insurance company calculates auto insurance premiums by taking several factors into account. These factors include:
- Value of the vehicle
- Coverage types and limits
- Type of vehicle
- How it is used
- Where it is driven and stored
- Driver’s gender
- Driver’s age
- Driving record
Other financial factors that have an impact on premiums can include:
- Your credit score
- Your marital status
- Whether you rent or own a home
In general, younger drivers pay higher rates than older drivers. Younger drivers have less driving experience and a higher rate of accidents than older ones. As you grow older and maintain a clean driving record, you should be eligible for lower rates.
Your premium costs also go up if you have moving violations, such as speeding, on your driving record. Insurance companies have good reason to view drivers who are frequently pulled over and cited by police for irresponsible driving as being a high risk.
Auto insurance FAQs
What is non-owner car insurance and who needs it?
You don’t need a car to get car insurance. Non-owner car insurance provides coverage to those who drive but do not own a vehicle.
You might consider this type of coverage if you rent a car or borrow one from a friend with some regularity. Typically, non-owner policies cover only the state's liability requirements, but it may be possible to purchase additional coverage.
When did car insurance become mandatory?
Car insurance became mandatory over time. Massachusetts was the first state to require car insurance in 1927, but it was not until the 1970s that most states had mandated drivers to carry car insurance.
Is car insurance state specific?
Your car insurance comes with you when you cross state lines and should be effective anywhere in the U.S. If your policy provides only your home state's minimum coverage, it will go up when you travel to another state where the requirements are higher to meet those legal minimums. On the other hand, your coverage won’t decrease if you travel somewhere with lower required minimums.
Do you need car insurance to buy a car?
While it’s possible in most places to buy a car without insurance, registering and driving the car are different matters where the car usually does have to be insured.
While states vary in their insurance requirements for registering a car, and most require some minimum level of coverage to lawfully drive it, dealerships and lenders typically require customers to insure the vehicle they have purchased before they drive it off of the lot.
