Understanding Auto Insurance: A Guide for Beginners
Auto insurance is mandatory in most states. However, the limits are quite low. Most drivers need much more coverage than state minimum requirements to protect themselves financially because driving a car can create financial responsibilities.
Check out this guide to auto insurance to learn everything you must know about purchasing your first policy.
What is Car Insurance?
Car insurance is financial protection from your insurance company in exchange for monthly or semi-annual premiums. Car insurance policies protect you financially if you are in a car accident, a tree falls on your car, or your vehicle is vandalized.
You pay for car insurance even if you don’t use it (file a claim). When you need it, such as after an accident, you file a claim and will be grateful for the money spent on the premiums to protect you financially.
The Key Components of Car Insurance
Car insurance has many moving parts. Here are the key terms a guide to auto insurance must include to help you when purchasing car insurance.
- Premium – Insurance companies charge a fee or premium in exchange for the coverage provided. You can pay the premium semi-annually or monthly. However, if you choose the monthly option, your insurance company may charge a small fee for processing the transactions.
- Deductible – The amount you take responsibility for is the deductible. You must pay this amount before insurance will begin paying any portion of the claim. The average deductible is $500. Most insurance companies also offer deductibles for $1,000, $1,500, and $2,000.
- Coverage amount – Each type of insurance (more below) has a maximum amount of coverage provided. This is the maximum amount of the damages or liabilities the insurance company will cover.
What are the Types of Car Insurance Coverage
Car insurance has many different types. Most people know about liability insurance because almost every state requires it, but there are other types of insurance, too.
We’ll start with liability insurance because it’s often required and the most common. This coverage pays for damages to other property or people. For example, if you cause a car accident and cause harm to another car and its driver, your liability coverage would cover the damages. This insurance protects you from any lawsuits brought against you due to a car accident.
In most states, this coverage is mandatory, and if caught without it could result in suspension of your license or jail time.
Collision coverage covers the cost of the damages to your vehicle in an accident. Notice that liability coverage doesn’t cover your car; you must have collision coverage to handle the cost of replacing or repairing your vehicle after an accident you are at fault for.
Most states don’t require collision insurance; however, if you finance your car, your lender will likely require it to protect themselves if you are in an accident that totals your vehicle.
Comprehensive coverage handles costs of damage caused to your vehicle that isn’t accident-related. For example, if you have hail damage or a tree falls on your car, your comprehensive insurance would cover the repair cost.
MedPay covers injuries that occur to you or your passengers from a covered accident when you are at fault. It can either work as a supplement to your health insurance for medical costs or replace health insurance if you don’t have any, but only for covered car accident injuries.
Personal Injury Protection
States considered no-fault states may require Personal Injury Protection or PIP insurance. This coverage provides financial protection for your injuries regardless of who is at fault for the accident.
PIP coverage not only covers the medical costs of the accident but may also cover lost wages or other costs incurred as a result of your injuries, such as therapy, childcare expenses, or other major expenses.
If a driver hits you and is at fault but doesn’t have enough or any car insurance, uninsured/underinsured coverage will protect you, but there are two types. Uninsured motorist or UMBI covers the cost of bodily injuries incurred from an accident caused by a driver without insurance. UMPD coverage handles the cost of replacing or repairing your vehicle even though you aren’t at fault.
What Doesn’t Car Insurance Cover?
Car insurance is mandatory in most states and usually helpful during an accident, but there are certain things it doesn’t cover. In this guide to auto insurance, we provide you with all the information you need, including what typically isn’t covered:
- Custom or upgraded parts – You may need a supplement to cover the cost of any upgrades or custom parts added to your car if you want them replaced or to recoup the cost in a total loss.
- Mechanical issues – Your car insurance won’t cover breakdowns unless you can prove the mechanical issues are from a covered incident, such as your engine no longer working because you hit a tree.
- Pet injuries – If your pet is in your car during an accident and sustains injuries, your car insurance company may not cover the costs. Always ask about this if you travel with your pets.
- Intentional damage – If the insurance company has evidence you intentionally damaged your car, they can deny your claim.
- Losses above the coverage amount – Your car insurance is only as good as your selected coverage. So, if the damages exceed the amount of coverage you paid for, you will be responsible for the difference.
- Business use of your car – If you use your car for business purposes, your car insurance company could deny any claims made when you’re working. This includes rideshare drivers. If you use your vehicle for commercial purposes, tell your insurance company to ensure you have the proper addendums.
- Personal property – If someone steals your car, your comprehensive insurance may cover the replacement cost. However, any personal belongings inside the car aren’t covered under this protection. Instead, you’d need renter’s or homeowner’s insurance to cover the loss of personal belongings.
Understanding the Car Insurance Deductible
The car insurance deductible is an important part of your car insurance coverage. It’s the amount you’re responsible for paying if you file a claim and are responsible for the accident. Liability coverage doesn’t have a deductible, but typically comprehensive, collision, PIP, and underinsured/uninsured coverage does.
For example, if you cause a fender bender and have $1,000 in damages to your car and have a $1,000 deductible on your insurance, you’d be responsible for 100% of the damages. However, if the damages were $5,000 and you had a $1,000 deductible, you’d pay the first $1,000 and the insurance company would pay the difference.
Determine how much you have set aside or can save quickly to cover the deductible and keep it in a safe place. If you take a deductible that’s too high, you may cause financial strain during an already difficult time if you file a claim.
What Must You Know Before Buying Car Insurance?
Before buying a car a car, shop for car insurance first. It may sound backward, but this ensures you can afford the car’s monthly payment and the insurance. Some makes and models have much higher insurance rates because of their history of theft or safety issues. Knowing this can help you purchase a car with affordable insurance rates.
You’ll likely pay higher insurance rates on your first policy than you will as you get more experience. Insurance companies determine your rates based on your driving and insurance claim history. If they don’t have anything to use, they will charge higher rates until they get to know you better.
When you buy car insurance, your insurance company will need more information than the make and model; they’ll ask questions including:
- The number of miles you’ll drive the car annually
- Where you will drive the car
- Any safety features the car has
- Any courses you’ve taken, such as a defensive driving course
- Where the car will be stored (garage or outside)
How you answer these questions will play a role in your premiums. Always tell the truth about your car and driving habits because if you file a claim, the insurance company will ensure the details you provided are true.
How Much Car Insurance Should You Carry?
At a minimum, you must meet your state’s insurance requirements. However, they are typically much lower than the average person needs for an insurance claim.
Every driver should consider his/her own insurance needs, but here are some suggested coverage amounts to discuss with your insurance agent:
- 100/300/100 – 250/500/250 liability coverage – The numbers stand for per person injury liability/per accident injury liability/property damage coverage. The higher the numbers, the higher the limits and the lower the risk of putting you on the hook for some of the damages to a person or property.
- Personal Injury Protection – Consider coverage up to $40,000 or your state’s maximum allowed coverage.
- Uninsured/underinsured – Consider higher limits than your state requires, choosing coverage of 100/300 – 250/500, which means per person for bodily injury and per accident for bodily injury or property damage, depending on the chosen coverage.
What is a rule of thumb When Choosing Car Insurance?
Most experts agree that a good starting point for car insurance is 100/300/100, but if you can afford more, consider it. 100/300/100 is above most state minimum requirements and adequately covers the average bodily injury liability claim of $22,734.
What are the 5 Tips of Buying Car Insurance?
It can feel overwhelming to purchase car insurance. Here are five tips to make it easier.
1. Determine your coverage needs
Evaluate your financial situation and how much protection you need. You are responsible for any liabilities you cause when you’re on the road. Having adequate coverage is essential to prevent serious financial strain.
2. Shop around with at least three carriers
Every insurance company charges different premiums and has different packages available. Get quotes from at least three carriers to see how they rate you as a driver and what discounts you can get.
3. Compare different coverage options
Look at all available coverage options and compare the premiums. You may find that getting an exponentially higher amount of coverage only costs a few more dollars each month. Look at the big picture when choosing coverage rather than only taking the lowest coverage amount.
4. Ask for discounts
Don’t take car insurance at face value; always ask what discounts you may get. The most common is the bundled discount for purchasing a car and renter’s or homeowner’s insurance, but each company has different options. You may also qualify for discounts for having a security system or certain safety features, driving less than average miles, or being a good student.
5. Compare quotes and customer service
After choosing the ideal coverage, compare quotes for the exact coverage from several companies. Choose the company that offers good premiums AND great customer service. Remember, if you need to file a claim, you want to work with a company that will easily handle the process and not make a stressful situation more stressful.
What Does Car Insurance Cost?
The average cost of full coverage car insurance is $2,014 per year, and the average for minimum state-mandated coverage is $622 per year. If you choose monthly premiums, this works out to $52 – $168 per month.
When choosing car insurance, be sure to factor in your deductible and the coverage amounts. The key is to get enough coverage so you aren’t on the hook for any of the damages, with a deductible you can comfortably afford.
What car insurance is best for beginners?
Beginners are like any other driver and need adequate car insurance. However, Allstate, State Farm, and GEICO typically offer the most affordable premiums for new drivers in their teens or early twenties.
Is car insurance required?
Car insurance is required in every state except New Hampshire and Virginia. In New Hampshire, you aren’t required to prove liability insurance, but you are still legally responsible for any damages you cause, so insurance is the more affordable way to go.
In Virginia, you must pay the DMV $500 to drive uninsured, but again, it makes more financial sense to purchase at least liability insurance to avoid costs into the hundreds of thousands of dollars from an accident.
Can you have liability-only car insurance?
You can have liability insurance only, and sometimes, it makes sense if you drive an older car that isn’t worth much. If your insurance premiums annually are more than you’d get for the value of your vehicle if it was totaled, liability insurance only makes more sense. You’re still protected if you cause an accident and damage to people or property but aren’t paying for coverage you won’t use on your own vehicle.
This guide to auto insurance should help you find the perfect policy for your first auto insurance coverage. The key is to have enough coverage to protect you financially should you cause damage to someone or something and have adequate coverage to protect yourself if you’re injured, or there is extensive damage to your car.