Auto Insurance Explained: Coverage Types, Costs, Discounts, and How to Save Money
A complete guide to auto insurance. Learn about liability, collision, comprehensive coverage, uninsured motorist protection, state laws, teen drivers, and money-saving tips.
Auto Insurance - Keeping Yourself Safe on the Road
Auto insurance is one of those things that appears simple until you go to purchase it. Then all of a sudden you’re wading through jargon such as liability limits, collision coverage and uninsured motorist protection. Let’s simplify things and discuss what you actually need to know about auto insurance.
Why Auto Insurance Is Required by Law (And Why That’s Actually a Good Thing)
Nearly all states mandate you to have at least basic auto insurance. Why? Because when there are accidents somebody has to cover the damage and injuries. In the absence of insurance individuals would be suing each other left and right and accident victims may never receive compensation.
The minimums change from state to state but will generally include liability coverage, which compensates for damages and injuries you inflict on other people. These minimums will typically be in the form of three numbers such as 25/50/25. This means:
- $25,000 for each person’s injuries
- $50,000 for all injuries per accident
- $25,000 for damage to property
Here’s the catch, though: those minimums are usually way too low. If you’re in a serious accident you can easily go beyond those limits and be personally on the hook for the excess. That’s why most insurance professionals suggest purchasing much higher limits of coverage.
The Main Types of Auto Insurance Coverage
Liability Coverage is the basic one. It pays for damage and injuries that you inflict on other people but not your car or your injuries. That’s the legal minimum in most states.
Collision Coverage covers repairs to your car if you get into an accident even if it’s not your fault. Bang into a guardrail? Collision coverage takes care of it. Optional, but typically mandated if you have an auto loan or lease.
Comprehensive Coverage pays for damage due to non-collision incidents such as theft vandalism, fire weather damage and striking an animal. Found your car window broken on a parking lot? That is comprehensive coverage.
Uninsured/Underinsured Motorist Coverage covers you if you’re hit by someone who doesn’t have insurance or lacks sufficient. This is really crucial because roughly 13% of drivers are uninsured.
Personal Injury Protection (PIP) or Medical Payments Coverage covers your and your passengers’ medical bills no matter who is at fault. PIP is mandatory in some states and covers such things as lost wages and rehabilitation fees.
Rental Reimbursement reimburses you for a rental vehicle while yours is being fixed following a covered claim. Rental Reimbursement is optional but very handy if you have to use your vehicle for business.
How Insurance Companies Determine Your Rates
Ever wondered why your friend pays half of what you pay for car insurance? Insurance companies employ a complicated mathematical formula to evaluate risk and establish premiums. These are the primary factors:
Your Driving Record is gigantic. Accidents tickets and DUIs will drive your rates up dramatically. One at-fault accident could cost you a 20-40% increase in premiums. Multiple infractions and you may be facing doubled premiums or even coverage denial.
Your Age and Experience are relevant because data demonstrate that young drivers (particularly males under the age of 25) have more crashes. Premiums normally decrease as you mature and accumulate experience.
Where You Live influences your rates more than you realize. Those areas with more traffic and crime experience higher premiums. Certain zip codes have prices twice or three times what you would pay just a short distance away.
Your Credit Score is applied in all but a few states to assist in predicting risk. Research indicates individuals with lower credit scores make more claims. I know it does not seem right but enhancing your credit can actually reduce your insurance premiums.
Your Vehicle comes into play. Sports cars and high-priced cars are more expensive to cover since they’re costly to repair and more likely to be stolen. Family sedans and minivans are generally lower-rate vehicles.
Your Deductibles and Coverage Limits naturally affect cost. Greater coverage and smaller deductibles increase costs but provide enhanced protection.
Annual Mileage is significant since more miles traveled mean more chance for accidents. If you drive little or work at home notify your insurance company.
Money-Saving Auto Insurance Tips
Auto insurance is pricey but there are legitimate means to lower your bill without cutting corners on coverage.
Shop Around Frequently since rates fluctuate widely between companies. Obtain quotes from a minimum of 3-5 insurers annually or bi-annually. I changed companies last year and pocketed an extra $600 yearly for basically the same protection.
Bundle Policies by obtaining your auto and home (or renters) insurance from one company. Most insurers provide substantial discounts for bundling usually 15-25% off.
Raise Your Deductible if you can afford it. Increasing your deductible from $500 to $1,000 might reduce your premium by 10-30%.
Ask for Every Discount since there are plenty of them offered by insurers:
- Good student discount for students with good grades who drive
- Safe driver discount for those with clean records
- Defensive driving course discount
- Low mileage discount
- Safety feature discounts for anti-theft systems and high-tech safety features
- Employer or organizational affinity discounts
Drop Unnecessary Coverage on your older car. If your vehicle is not worth more than $3,000-$4,000, it may not be worth the expense of carrying collision and comprehensive coverage. The deductible plus premium may be more than your car is worth.
Improve Your Credit Score because this influences premiums in most states. Timely payment of bills and eliminating debt can decrease your insurance premiums.
Look into Usage-Based. Your rates are set based on how you drive. Progressive (Snapshot) and State Farm (Drive Safe & Save) have special devices or apps that monitor your driving. If you’re a good driver you may be able to save as much as 30%.
What To Do in an Accident
Being involved in an accident is stressful but being prepared helps make the insurance process go much more easily.
First ensure safety. Look for injuries and call 911 if anyone is injured. If possible, move cars off the road and engage hazard lights.
Exchange Information with the other driver. Obtain their name, phone number insurance company, policy number and license plate. Photograph the damage to each vehicle and the crash site.
Don’t Admit Fault even if you believe the accident was your fault. Allow the insurance companies to investigate and place blame. Apologizing or uttering the words “I’m sorry” can be used as evidence against you.
Report the Accident to your insurance company immediately even if you do not intend to make a claim. A majority of policies have a time limit in which the accident must be reported and delays will lead to issues.
Document Everything including the date, time location weather conditions and what happened. Write down names and contact info for any witnesses.
Get a Police Report if there’s significant damage or injuries. The report number and police assessment can be valuable during the claims process.
Understanding No-Fault vs. Fault States
Auto insurance laws vary significantly by state. Most states use a “fault” or “tort” system where the driver who caused the accident is responsible for paying damages through their liability insurance.
But a dozen or so states have “no-fault” insurance systems. Under those systems the insurance of every driver pays for his or her own injuries no matter who caused the accident. This is designed to minimize lawsuits and process claims more quickly but can also drive up insurance costs.
Other states employ a hybrid system in which there is no-fault coverage up to a certain point and then you can sue for damages above that amount.
Knowing your state’s system will make you aware of what coverage you require and what to anticipate after a crash.
Special Teen Driver Considerations
Insuring a teenager on your car policy is costly - as in really costly. Teenagers can add 50-100% or more to your premium.
To save money:
- Leave teens on your policy instead of getting them individual insurance
- Make them drive older cheaper cars
- Leverage good student discounts
- Use usage-based insurance to incentivize safe driving
- Include them as occasional drivers if they don’t drive frequently
Also be sure to educate them in insurance fundamentals. Knowing that one ticket or accident can raise prices for years may promote safer driving.
Auto insurance is not thrilling but with proper coverage at the correct price, you can drive in peace. Read your policy thoroughly, go through it every year and ensure you’re well covered without paying too much.