What Is Car Insurance? A Comprehensive Guide

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Contributor, Benzinga
Updated: December 3, 2021

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No matter where you live, basic personal car insurance is mandated by most states. Car insurance provides you with protection in the event you are involved in an accident. Is it enough, though? Are there options? Learn all about the question of what is car insurance, how it works and what types of coverage is available to you with Benzinga’s guide below.

Car Insurance Definition

If you have other forms of insurance, you are probably familiar with how insurance works. If not, let Benzinga explain. Similar to most insurance policies, car insurance is a contract between you and the insurer. In exchange for your monthly premium, or payment, the car insurance company offers protection to you and your vehicle under terms and conditions outlined in your policy.

Main Types of Auto Insurance Coverage

Generally, car insurance offers 3 different types of coverage options. This falls in line with each state’s minimum mandates. The following coverage options listed might be available to you:

  • Property coverage: Should you fall victim to theft or damage to your car, this option will protect.
  • Medical: This coverage provides financial protection extended to you or others involved in an accident.
  • Liability protection: This covers any legal responsibilities you have for the bodily or property damage of others.  

Types of Car Insurance Coverage

If you aren’t already aware, insurance is governed at the state level, with most states requiring a minimum level of coverage (learn more in our state-by-state guide to minimum car insurance coverage.)You will see that many types of car coverage insurance offers similar or overlapping coverage. What type of coverage you'll need depends on several factors, including your state's car insurance law, your driver profile, what type of car you're driving and more.

Here, we'll go over common types of car insurance, including the 3 main types of coverage listed above.

What is liability car insurance?

Almost every car insurance policy includes liability protection. Drivers need to carry it on their plans in just about every state. Liability insurance helps pay the other driver’s property costs and medical injuries should you be at fault in the accident. Your insurance will cover the costs for the property damage and injuries up until the covered limit.

  • Drivers are required to purchase the minimum amount of liability. The minimum amount will depend on where you reside, your financial situation and the value of your car.
  • Under liability insurance, there are 2 kinds of protection offered: bodily injury and property damage. Bodily injury liability pays for the costs of injuries for which you are legally responsible in an accident. Property damage liability pays for damages done to another person or company’s property.
  • You are legally mandated to carry a minimum amount of liability coverage. However, that minimum varies by state. If you purchase additional liability insurance, your premium may rise as well. That is also determined by the state in which you reside.
  • What makes liability insurance great is not only what it protects you against but also how it allows you to choose the limits of what your insurer will cover so long as it is at least equal to your state’s minimum coverage limits. Liability insurance policies will display 3 numbers. For example, if you have a policy with 100/300/100 liability limits, you would be covered for $100,000 for injuries for each person, $300,000 for injuries total for each accident and $100,000 for property damage for each accident.
  • Affordable liability insurance varies depending on your insurance carrier and preferences. For example,  you may find that State Farm Insurance’s quote of $356 is for a 6-month policy for you than Geico’s price of $409 for the same term. It is essential to do your research and compare quotes to get the most out of your money.

What is collision coverage?

Collision coverage insures only your car for the cost of repairs. No other driver involved in the accident is covered under your collision coverage. It is essential to know that it only applies when you are at fault in an accident or if your car is damaged and you do not know what caused it.

  • You will most likely need collision insurance on your policy if you lease a car or borrow money from the bank to buy one. The lender hopes to protect collateral for the loan or financing. Collision coverage is best for everyone and is suggested among additional insurance to add to your policy.
  • Many cases can be defined as collisions that fall under this policy, such as car crashes, potholes, trees, guard rails, trenches and ditches. Should your car be subjected to damage from any of those listed above, collision coverage will assist you.
  • Collision coverage is not required by law in any state. However, it can provide valuable protection, so you should consider adding it to your policy. Whether it is worth the price depends on a few key elements like your personal financial situation, your car’s value and how much it would cost to fix it.
  • Damages incurred to your car from an accident with another driver, a collision with an object like a tree or mailbox, your car rolling over or another driver hitting your vehicle all fall under collision insurance.
  • In terms of affordability, collision coverage varies depending on your deductible — the higher your deductible, the cheaper your collision insurance. If you have a deductible of $500 and are involved in an accident that causes roughly $2,000 in damage to your vehicle, you pay $500, and the insurance company would pay $1,500.

What is comprehensive coverage, also known as full-coverage car insurance?

Comprehensive insurance helps pay to replace or repair your car if it is damaged or stolen in an incident unrelated to a collision. It usually covers fire, vandalism or falling objects.

  • If you are leasing or financing a car, it is your best and only option because you must have it. Even if you’re not leasing or financing your vehicle, you can still buy comprehensive coverage to provide additional protection to your vehicle.
  • Comprehensive covers: theft, vandalism, fire, natural disasters, falling objects, damage done to your car by animals and civil disturbances like riots.
  • Unless you are leasing or financing a car, it is required. Otherwise, it is an optional coverage you can add to your policy.
  • The coverage limit is the actual cash value of your car.
  • Comprehensive insurance is known to be expensive if you are purchasing it along with collision coverage. If your car is older and paid off, you very well could save money by not purchasing comprehensive coverage if theft and weather-related incidents do not apply to where you live.

What is personal injury coverage?

Personal injury protection (PIP) coverage is an essential part of your insurance if you are involved in an accident and injured. It covers medical costs for you and your passengers.

  • This type of protection is best for those injured in an accident with steep medical expenses.
  • As mentioned above, PIP will cover the costs of medical procedures, treatment and rehabilitation for all injuries sustained in an accident. Hospital stays, surgeries and operations, doctor visits, ongoing care or rehab, lost earnings and funeral costs all fall under what is covered under personal injury protection.
  • Personal injury protection is only required in certain states like Delaware, Florida, Hawaii, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania and Utah.
  • Amounts can vary, but generally speaking, PIP provides up to $200 per week, or $10,000 total for income replacement coverage. Claims can be filed for up to one year after someone has been disabled for 14 consecutive days after the accident.
  • When researching insurance carriers, you will find that most companies offer PIP at very affordable rates. It is highly recommended for drivers who do not possess health insurance.

What is uninsured or underinsured motorist coverage?

Uninsured or underinsured is part of your car insurance that will pay for your or another’s injuries resulting from an accident if the at-fault driver is uninsured or underinsured.

  • If you were to ask an expert on who should have uninsured or underinsured car insurance, the answer would be everyone. Regardless of whether it is required in certain states, you truly never know when you will have a run-in with an uninsured driver.
  • It is valuable in covering the costs of medical bills and the cost to repair or replace your car if you are hit by a driver who is either uninsured or underinsured.
  • This type of insurance is only required by law in some states. In others, it is optional but highly encouraged.
  • An excellent way to determine what uninsured or underinsured coverage protects against is to refer to this example: If the at-fault driver has $15,000 in bodily injury coverage per person but you have $50,000 in medical bills related to your injuries, that driver’s insurance would pay for the first $15,000 in medical expenses, and your insurance would pay for the remaining $35,000. This is assuming your limit per person is $35,000 or higher.
  • Costs tend to vary, but the overall price for uninsured or underinsured insurance is affordable. On average, it costs roughly 5% of your annual car insurance premium. For example, if a yearly car insurance premium costs $800, adding uninsured or underinsured coverage will be $40 per year.

Important Car Insurance Terms To Know 

As you continue with Benzinga’s guide, it is essential you become familiar with car insurance terms that will most likely appear in your search for the right coverage.

What is a car insurance premium?

The car insurance premium is the total cost of maintaining your car insurance policy. Factors like the type of car you drive to your age and gender all influence your premium amount.

What is a deductible in car insurance?

A car insurance deductible is the amount a driver is responsible for paying when making an insurance claim. You are permitted to choose your deductible when you purchase insurance coverage as well. Note that the higher the deductible, the lower the car insurance premiums and vice versa.

What is a car insurance quote?

A car insurance quote is a rough estimate of the amount you will pay for a policy period. When you are shopping for car insurance, you can get multiple quotes from insurers.

Other Types of Car Insurance

Understanding all aspects of car insurance will expand your knowledge and assist you in selecting the best policy and option for you. Below Benzinga addresses the following terms:

What is nonowner car insurance? 

Nonowner car insurance is primarily for people who don’t have a vehicle but still need to drive every once in a while. In most cases, nonowner car insurance costs less than what you would pay for the same level of liability coverage for your car. The costs will be higher for you policy until you no longer need it if you need the insurer to file an SR-22 or FR-44.

What is rental car insurance?

Rental car insurance is an optional protection option that you can purchase in case you have an accident while driving a rental vehicle. Research the rental car company you are using to compare rental insurance prices. Companies like Allianz Global Assistance and Bonzah charge $11 per day and $7.99 per day, respectively.

What is gap insurance on a car?

Gap insurance on a car is an optional coverage that will help pay off your auto loan if your vehicle is totaled or stolen and you owe more than the car’s depreciated value. Add-on coverage does increase the cost of your car insurance. However, gap insurance is very affordable and won’t raise your rates. Gap insurance costs around $20 per year.

What is supplemental liability insurance on a rental car?

It is defined as a car rental insurance policy that covers claims made by 3rd parties. The claims could seek damages for physical damage to the 3rd party’s property or injuries sustained by the 3rd party resulting from an accident with the rental vehicle. Costs for this add-on average about $25 per month.

What is SR-22 car insurance?

Otherwise known as a certificate of financial responsibility, SR-22 insurance is required by the state that verifies you are carrying, at the very least, the state-mandated amount of car insurance. The fee to file SR-22 ranges from $15 to $50 and will be displayed on your insurance bill as a one-time charge.

What is classic car insurance?

Classic car insurance coverage pays for damage and injuries you cause to other drivers, protects against theft, vandalism, collisions with animals, fire, flood, hail and falling objects and medical bills. Classic car insurance comes at a lower cost because these cars are not on the road often. Typically, you can save between 20% and 40% on traditional car insurance.

How To Compare Car Insurance Policies

The type and amount of coverage you choose will determine your rate as well as other factors like your driving record, age, credit history, type of vehicle and the risk levels in your area. Many insurance companies weigh these elements differently, and that is reflected in your premium. If you have a limited driving history or poor credit score, your rates will increase drastically. Listed below are the factors you should consider when you compare car insurance policies.

Factors to consider

Before you begin to analyze insurance options, look at the brand reputation of the insurance companies. Suppose you choose an insurance company that has a good reputation in the market. In that case, the chances of it delivering on its promises to you are high in comparison to lesser-known companies.

State car insurance law

The state you reside in is one of the most significant factors affecting car insurance rates. Premiums for state minimum coverage vary up to 318%. Each state has its laws regarding car insurance, all with different minimums and categories of mandated coverage. In other words, the more range you are required to buy, the more expensive your policy will be.

Your location

The area you live in also factors into car insurance rates. This is because the area you live in affects the probability of your vehicle being damaged. In big cities, crime rates are higher, and crowded roads are commonplace resulting in more accidents.

Your budget

Depending on your budget, you might need to look for low-income car insurance. You will need to research multiple policies for the lowest premiums without sacrificing coverage. Take a long look at deductibles, too. You might not be able to afford to pay a lot of money out of your pocket when you need to file a claim.

The type of car you drive

Some cars are cheaper to insure than others. A truck, for instance, is 3% more affordable to insure than a sedan on average because insurance companies prefer to insure safe vehicles that are less likely to lead to expensive claims.

Your driver profile

Unique attributes that are related to you can also affect car insurance rates like:

  • Age: Depending on your age, car insurance rates can differ by up to 367%. Young drivers pay more for insurance because they are less experienced and more likely to be involved in accidents. After age 25, driver’s insurance rates decrease.
  • Gender: In some states, men around age 45 pay an average of 6% less for car insurance than women. Teenage male drivers pay the most for car insurance. By the time drivers are in their 30s, the gender gap tends to even out.
  • Driving record: If you have a clean record, you might pay 40% less than a driver with a poor record because of the availability of safe driver discounts.
  • Credit-based insurance score: Drivers with poor credit scores pay 71% more than drivers with good credit. Some states such as California, Massachusetts and Hawaii do not consider your credit history.
  • Insurance history: When insurance companies see that you have changed insurance multiple times, it raises red flags. It is vital to remain in good standing with your insurance company and avoid high-risk violations. Being involved in more traffic violations or car accidents can increase the cost of car insurance coverage anywhere from 20% to 200%.
  • Marital status: Married drivers are statistically the least risky drivers to insure. With up to 50% fewer accidents than other drivers, make sure you let your insurance company know you are married because it could help you save money.

How To Get Car Insurance

Now that you are finally ready to purchase car insurance, you can take the following steps to guide you through the process.

  • Step 1: Decide how you want to buy car insurance.
  • Step 2: Determine how much coverage you need.
  • Step 3: Get a car insurance quote.
  • Step 4: Work on lowering your car insurance quote.
  • Step 5: Compare quotes.
  • Step 6: Select the best insurance provider for you.
  • Step 7: Cancel previous car insurance if applicable.
  • Allstate
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    SR-22 Insurance
    Yes
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    securely through Allstate's website
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  • The AARP Auto Insurance Program from The Hartford
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    SR-22 Insurance
    Yes
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    securely through The AARP Auto Insurance Program from The Hartford's website
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  • Progressive
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    SR-22 Insurance
    Yes
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  • AAA
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    Best For
    Roadside assistance
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    securely through AAA's website
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Drive with Confidence

Car insurance is an essential part of getting behind the wheel of a car. You want to ensure you have the proper amount of protection to save you from injuries and financial stress. Always evaluate your situation and compare quotes to find the best option for you.

Frequently Asked Questions

Questions & Answers

Q
Can you get car insurance without a license?
A

Yes, there is no law against buying car insurance without a license.

 

Q
Do you need insurance to rent a car?
A

No, you can rent a car without having car insurance. Many rental car companies offer their own option for additional coverage at the desk

Q
Can I insure a car that is not in my name?
A

You first want to determine whether it is legal in the state you live to get insurance on a car that isn’t in your name. If your state allows it, then you want to shop around for coverage. You will have to speak to more than one insurance agent before you find a company and make your final decision.