Auto insurance is a type of insurance policy that protects policyholders from costs associated with a vehicle accident. When an accident happens, as opposed to paying out-of-pocket to repair your vehicle or another involved parties’ vehicle, policyholders pay monthly, quarterly, or annual premiums to an auto insurance provider. The provider then pays costs (all or most) of vehicle repairs associated with the accident or other damages.

How much the insurer covers is based on your individual policy and can look quite different than someone else’s car insurance coverage. There are a few options to consider when looking for car insurance, let’s look at what makes up an individual policy.

Auto Insurance Basics

There are many different factors that will determine how much you will pay annually for car insurance. Things like your age, your location, your vehicle, your driving record, and more; determine how much an insurer will charge you monthly for coverage in an accident. There are also different levels of coverage that you can choose or not. Things like collision coverage, road assistance, and your deductible amount all have different costs that can vary greatly from person to person.

Although car insurance is not a requirement in all 50 states it is in most states and you cannot legally drive a car without auto insurance in those states (like New York for example). It’s still a very smart idea to have even if not a legal requirement because the costs associated with paying out of pocket for car repairs following an accident can be exceedingly high.

How Does Auto Insurance Work?

You pay the car insurance company a premium and the insurer agrees to pay for repairs or costs following an accident based on your individual policy. The three main types of coverage are:

  • Liability: protection from liability regarding property damage or bodily harm/injury.
  • Property: damage to your car or theft of your vehicle
  • Medical: coverage on costs of treatment following an accident (rehabilitation, hospital costs, lost wages, and funeral expenses on some occasions)

You can customize your insurance policy to specifically match your needs and meet your monthly budget. They are typically provided in 1 year or 6-month increments in terms of payments. Policies are also renewable, and the insurer will remind you when your policy requires a renewal.

Most states do require you to have auto insurance to cover bodily harm liability. This will cover some or all the costs associated with death or injury caused by yourself or another driver using your vehicle. Some states also require some level of liability coverage for property damage which pays other individuals for damages to their vehicle or property following an accident.

Other states also require PIP (personal injury protection) which reimburses medical expenses due to injuries received following an accident.  There are also options for “uninsured motorist” coverage when an accident happens or is caused by someone who does not have auto insurance and would therefore have no way to pay any expenses if they don’t have assets. Also, not a bad idea.

Buying Car Insurance

There are many different car insurers these days so it can be a bit daunting when shopping for the right car insurer. There are lots of factors to consider so let’s look at each of them individually.

Injury & Liability Coverage

Putting you and your family’s safety first is incredibly important. This is one of the more important aspects of auto insurance (especially if you don’t have health insurance). Medical professionals will request health insurance first when an accident happens. If you don’t have any the costs of medical bills can be incredibly high so beefing up your personal injury and liability coverage is a smart option. It will cover the medical bills associated with a major accident so be sure to add more personal injury coverage especially if you don’t have health insurance.

Serious Accidents

Always consider the worst first when shopping for auto insurance. If your car is totally wrecked (if it’s not your fault), the other driver’s insurance will cover the costs. If they are uninsured hopefully you’ve been paying for “uninsured motorist coverage” which will cover your expenses. There are other circumstances however where there is no other driver involved in a major accident and you will have to rely on your own car insurance for repairs or replacement of your vehicle. Having enough coverage to completely repair or replace your car is the only way to avoid paying additional out of pocket expenses following a wreck. You should have insurance that covers the entire cost of your car’s value for this reason (or close to its value).

Premium vs. Deductible

These two figures have an inverse relationship. Meaning that if the premium goes up than the deductible goes down. You will need to decide how much you can afford to pay monthly for the premium in relation to what you can afford in terms of coverage should an accident happen. It is common to pay a higher monthly premium so that when an accident does happen you have a lower out of pocket deductible expense to get your car repaired. No matter how you decide to do this, be sure you can pay on both ends. Be sure your monthly premium payment is affordable but also look at the other end. Will you be able to pay the deductible in the case of an accident? Be sure to consider both sides.

Roadside Assistance

Getting stranded is never fun but some insurance policies can cover this scenario when you’re on the road. Being prepared for a breakdown is typically an option you can cover within your auto policy. Things like roadside assistance, towing, flat tire repair, and more can be selected as optional insurance add-ons. For some people, this will work better than a separate AAA roadside assistance membership for example. However, some insurer roadside assistance doesn’t make that much sense and AAA would be a better option despite a separate yearly fee.

Driving Experience and Age

For some individuals, insurance companies have set recommended coverage levels. One example is for young people under the age of 18. Because their experience is lower and they tend to drive more aggressively, having high personal liability coverage (with a lower deductible) is smart because younger drivers are more likely to get into an accident. It’s not just teens who have their driving experience affect their coverage costs.

Drivers who have had a history of moving violations (speeding, DUI, etc.) will have higher premiums for the same coverage. Some car insurers will not even accept you as a client if you’ve had a DUI within 3 years. Esurance, for example, requires no DUI’s in a 5-year time period where Geico is only 3 years. So, driving history is also a factor when it comes to your individual policy offers.

Choosing an Auto Insurance Company

We’ve all seen ads claiming one auto insurer or another can save us money if we choose them for insurance. It’s a competitive market and there are many different insurers to consider. It’s smart to look for some particular attributes when considering any auto insurer.

Cost and Reliability

The cost from person to person, insurer to insurer, state to state; can be vastly different in states where there are no state insurance mandates. You should be looking for insurers who are reputable and have fair costs for coverage. Each car insurance company will likely have a different price quote for the same sort of coverages so it’s smart to shop around. Also, some insurance companies have better track records for ease of filing a claim, while other smaller companies can be more difficult or unwilling to pay. So be sure to choose a known reliable provider. You don’t want to have to fight your car insurance company to pay for auto repairs just because you went with a cheap quote with little coverage.

Buy the Coverage You Need, Not More

Insurers will be more than happy to sell you more insurance than you need. (Check out our article on The Right Amount of Insurance to Have here). Your level of insurance should match up with the cost of your car. If you have an old car that is worth less than $1,000 you don’t need a huge amount of coverage for collision. If you have a brand-new Mercedes, you should have more coverage. Remember if you don’t have health insurance you should increase your level of personal injury liability coverage.

Don’t Let Your Coverage Lapse

You don’t want to drive without car insurance, especially in a state where it is legally required. Be sure you’re up to date with your car insurance and do not let it lapse. Staying current is important for the legality concerns but also to make sure you protected in the case of an accident. There is never a good time for a wreck but it’s even worse if your car insurance just lapsed and all the costs are now on you to pay out of pocket. So be sure you’re current on your car insurance.

Car Insurance Verdict

Even if car insurance is not required by law where you live it’s a good idea to have. When you get into an accident you want to be thinking of you and your family’s health and recovery, not how you are going to pay for auto repairs. That is where car insurance comes into play. Be a smart insurance shopper. It costs you nothing to get multiple quotes and you can save quite a bit for the same coverage from one provider to the next. Also, be sure to get new quotes every few years because you may be overpaying currently.