When purchasing or leasing a vehicle, safeguarding that investment is crucial. Obtaining auto insurance can provide peace of mind in the event of an accident, theft, vandalism, or damage caused by a natural disaster. Instead of covering accident-related costs personally, individuals pay yearly premiums to an auto insurance provider, which then handles all or a significant portion of the expenses associated with an accident or vehicle damage.
What Is Car Insurance?
Car insurance is essentially an agreement between you and an insurance provider where you consent to pay premiums in return for protection against financial losses resulting from an accident or other vehicle damage. Auto insurance can cover:
- Damages to vehicles, including your own car and another driver’s vehicle
- Property damage or physical injuries resulting from an accident
- Medical costs and/or funeral expenses related to injuries incurred in an accident
- The specific coverage details depend on the minimum requirements set by your state and any additional coverage options you elect to include. Every state, with the exception of New Hampshire, requires drivers to have a minimum level of bodily injury liability coverage and property damage liability coverage.
Not obtaining the required minimum car insurance as per your state’s laws could lead to the suspension of your license, fines, or even imprisonment for repeated violations.
Auto Insurance Costs
There are two main expenses associated with acquiring car insurance: premiums and deductibles.
The cost of auto insurance premiums fluctuates based on the assessment of various factors. These factors include the applicant’s gender, age at application, driving experience, history of accidents, moving violations, and other considerations. Once again, most states require a minimum amount of auto insurance. That minimum amount varies from state to state, but many individuals opt for additional coverage for further protection.
Moreover, if you are financing a vehicle, the lender might require you to carry specific types of car insurance. For example, you might need gap insurance if you are purchasing a high-value vehicle that is likely to depreciate rapidly once driven off the lot. Gap insurance can assist in covering the difference between the vehicle’s worth and the amount you still owe if you have an accident.
A poor driving record or a preference for comprehensive coverage can lead to increased premiums. However, you can lower your premiums by opting to assume more risk, which entails increasing your deductible.
Your deductible is the sum you must pay when making a claim before the insurance company will provide any compensation for damages. For instance, your policy might include a $500 or $1000 deductible. Choosing a higher deductible can result in lower premiums, but you must be reasonably confident in your ability to afford the greater amount if you need to file a claim.
How Auto Insurance Works
In return for your premium payments, the insurance firm agrees to cover your losses as detailed in your policy. Policies are tailored individually to allow you to customize coverage amounts according to your specific needs and budget. Policy durations are typically six or twelve months and are renewable. The insurer will inform a client when it is time to renew the policy and pay the next premium.
Regardless of whether they require a minimum amount of auto insurance, nearly every state mandates that vehicle owners carry bodily injury liability, which addresses costs related to injuries or fatalities that you or another driver cause while operating your vehicle. They may also require property damage liability, which compensates others for damage caused to another vehicle or property by you or another driver using your car.
Some states take it a step further by mandating that vehicle owners obtain medical payments or personal injury protection (PIP), which covers medical expenses for injuries sustained by you or your passengers. It will also pay for lost wages and other related costs.
Uninsured motorist coverage compensates you when an accident occurs due to a driver lacking auto insurance. Underinsured motorist coverage is intended to safeguard you in the event of an accident with a driver who has some insurance but insufficient to cover the total cost of a claim.
Note
Opting for a car insurance policy that exceeds the minimum limits established by state law may raise your coverage costs, but it could be advantageous if you find yourself in an accident.
Who Is Covered by Auto Insurance?
An auto insurance policy protects you and family members listed on the policy, whether they’re driving your vehicle or someone else’s (with their permission). Your policy also extends coverage to an individual who is not listed on your policy and is driving your car with your consent.
Personal auto insurance solely covers driving for personal use. It will not cover instances where you use your vehicle for commercial activities—like making deliveries. Additionally, it won’t provide coverage for work with ride-sharing services such as Uber or Lyft. Some auto insurance providers now offer supplementary insurance options (for an added cost) that extend coverage to vehicle owners who work with ride-sharing services.
Although other types of insurance, like health and homeowners, might appear more essential, having an auto insurance policy can save you considerable amounts of money and hassle in the future if you own a car, regardless of your state’s insurance requirements. Be sure to compare various car insurance rates to discover the coverage that meets your needs at a price you can manage.
As stated by Progressive Insurance, certain coverage types are mandatory, while others are optional. Getting acquainted with your state’s insurance regulations can help you refine your choices while seeking insurance.
Collision Coverage
Collision coverage will address damage to your vehicle while in operation. If you collide with another vehicle or a stationary object, collision coverage will take care of the repairs for your vehicle. For instance, if your car’s windshield needs fixing due to a rollover, collision coverage will apply. However, collision coverage will not address any related property damage you caused. Collision coverage isn’t typically a state-required coverage, but Wallet Hub notes that if you have an outstanding car loan, your financing company may mandate it.
Comprehensive Coverage
Many individuals acquire comprehensive and collision coverage together, but they serve different purposes. For one, comprehensive coverage does not address damage from accidents involving your vehicle. Instead, comprehensive coverage protects against damage from events such as natural disasters like hail, earthquakes, fires, and floods, among others. If your vehicle is stolen, vandalized, or harmed by contact with wildlife, comprehensive coverage will handle the repairs.
Liability Coverage
Liability insurance safeguards you from accidents that you cause. If another person requires medical assistance or has property damage due to your actions, your liability coverage will compensate for their damages. Most states require liability coverage. Liability coverage consists of three main components, each with its own policy limit:
- The highest amount any single individual can claim in an accident.
- The total amount available for claims from all injured parties in an accident.
- The upper limit for any property damage resulting from an accident that you cause.
- To illustrate the limits more clearly, consider the example of 15/30/5. This means $15,000 is the maximum for one individual injured, $30,000 for all injured parties combined, and $5,000 for property damage.
Uninsured and Underinsured Motorist Coverage
Uninsured motorist (UM) and underinsured motorist (UIM) coverage is typically sold as a package. UMBI will pay for your injuries if an uninsured driver hits you, while UMPD will cover vehicle damages from an uninsured motorist. UIM provides extra coverage if the at-fault driver does not have sufficient policy limits to adequately cover your damages.
Medical Payments (MedPay)
Medical payments coverage is similar to personal injury protection but much more limited in scope. MedPay will cover medical bills for you, your passengers, household members, and any other policyholders. It can complement those who have health insurance that includes accident-related expenses. For those without health insurance, MedPay serves as a beneficial alternative. Additionally, MedPay can cover deductibles and co-pays associated with other policies, such as your health insurance.
Personal Injury Protection (PIP)
Often known as no-fault insurance, personal injury protection (PIP) is a mandatory coverage in states with no-fault accident laws. PIP will cover your injuries and costs resulting from an accident, no matter who is at fault. Coverage extends to other drivers listed on your policy, household members, and additional passengers. PIP coverage is broader than MedPay and may include compensation for lost wages, childcare costs, funeral expenses, and more.
Factors That Influence Your Insurance Premium
According to How Stuff Works, several elements can affect your potential car insurance costs. It’s important to understand these elements to get a clearer picture of how your premiums are determined. Some crucial factors are:
- The make and model of your vehicle. Certain vehicles may have higher repair costs, or may be more prone to theft. You can use an online resource like the car insurance calculator from Cover to compare vehicle premiums.
- The annual mileage you drive. Longer commutes can lead to increased premiums due to a greater likelihood of accidents.
- The cleanliness of your driving history.
- Your location. Living in densely populated areas can lead to higher theft and vandalism rates. Additionally, rates can differ across states due to variations in medical expenses and legal costs.
- Your age. Typically, drivers who are under 25 or over 65 face higher insurance rates.
- Your gender. Men are generally classified as higher risk and often tend to insure more expensive vehicles.
- The duration of your credit history. Younger individuals usually have shorter credit histories and consequently pay higher premiums.
- Your marital status. Married individuals often benefit from lower premiums as they are seen as less risky and are likely to have multiple policies with the same provider.
- The types of coverage and deductibles you select.
- The number of previous claims you’ve made.
- Your insurance background. Any lapses in coverage can lead to increased premiums.
- The primary use of your vehicle. If you utilize your vehicle for business purposes, you’ll require a higher level of coverage. Conversely, if you drive for rideshare services, you will probably need a distinct policy.
