What Is Car Insurance?
Every driver behind the wheel of a car should know about car insurance.
- How it works
- What it covers (coverages)
- What it doesn’t cover (exclusions)
- Who it covers
- If it’s mandatory in your state
- How car insurance is priced
- How to read a coverage breakdown
- How to decide how much coverage you need
- And where to go to find affordable coverage
Like many other insurance policies, car insurance indemnifies policyholders involved in car accidents against covered damages. That simply means that if you or someone driving your car causes a car accident, your insurance provider will pay for the injuries to you or any others involved and any property damage.
This is the basic idea of car insurance. But, policyholders have many options when purchasing a policy. Top of mind should be purchasing adequate coverage for their needs while maintaining state insurance requirements or better.
Quick Facts About Car Insurance
- Car insurance is required in all states, except for New Hampshire
- Liability insurance is the mandatory minimum in most states, while liability plus uninsured motorists coverage is required in many states
- Location, provider, car type, age, gender, driving record, and credit score are influential factors in determining your car insurance premiums.
Insurance Terms You Need to Know
Here are just a few common terms used in the insurance world. Insurance may at first seem complex, but many of the concepts are used in everyday life; only insurance uses its own vocabulary so that everyone involved is on the same page. There are many other valuable terms to learn in this helpful glossary.
- At-fault — The party who’s considered legally responsible for damages caused in a car accident
- Carrier — The insurance company which provides coverage
- Claim — A request by a policyholder or a claimant for payment under a policy of insurance
- Coverage — Protection and benefits provided in an insurance contract
- Deductible — The amount of loss on a claim which is paid out of pocket by the insured
- Exclusion — A circumstance or peril that is not covered by the policy
- Indemnity — Indemnity is the sum paid by party A to party B by way of compensation for a particular loss suffered by B
- Policyholder — The person or entity entitled to covered benefits in case of an accident or loss
- Premium — The amount of money an insurance company charges to provide coverage in a policy
How Car Insurance Works
A car insurance policy is a contract between the policyholder, usually the car’s main driver, and the insurance provider. The insurer agrees to protect the policyholder against financial losses outlined within the policy (this is an important note because if it’s not in the contract, insurance companies will not cover it).
As a policyholder, you are concerned with your premiums, coverages, exclusions, and payouts. The premiums are what you pay to keep the policy. Coverages are those conditions outlined explicitly in the policy, where your insurance company will payout. Exclusions are special cases that will nullify your policy, such as driving while intoxicated, preventing you from receiving payouts. And the payout is the amount up to which an insurance provider will make you whole.
The policy is usually set for a term of 6 or 12 months, where the insured pays monthly premiums to keep it enforced. If the insured stops paying premiums, the insurance provider will stop coverage immediately. If the uninsured driver causes an accident while driving, then they are personally on the hook for the costs of damages.
Car Insurance Information by State
Freeway provides simple and affordable insurance options in all 50 states. See state-by-state information on affordable auto insurance and find out more about coverage and benefits in your state.
What to do if You’re in an Accident and Have Insurance
If you get in an accident and it is a life-threatening situation, you or someone else is seriously injured, immediately call the emergency hotline—dial 911 from any phone.
Otherwise, if you are covered by car insurance, exchange information with the other parties involved in the accident. Contact your insurance provider to seek assistance and start a claim. Often, insurance companies will offer to take over from this point and handle the situation if there are no injuries.
How Your Car Insurance Rates can go up
In the section below, “How Is Car Insurance Priced?” the listed factors can impact how your rates go up or down, depending on which factors are allowed at the state level. You may see your rates go up if you move to a zip code prone to car accidents or car theft. Or, your rates can drop when you pass the age of 25.
Periodically, insurance companies review the status of policyholders to determine appropriate rates. In practice, this happens when renewing policies every 6 or 12 months. When an insurance provider reviews a policyholder’s records for renewal and finds accidents, traffic violations, or drops in credit score (some states disallow the credit check practice), they will adjust the policyholder’s rates to reflect the increase in driver risk. Accidents and violations will only make your rates go up; avoiding them is the most effective way to keep paying low premiums.
Since insurance providers mostly use the same databases to determine driver premiums, shopping around for a new provider after an accident may only yield slightly better rates. In DUI cases, derogatory marks on your record may require you to file an SR-22 and find insurers who serve high-risk profiles.
How Your Car Insurance Rates can go down
After a period of time holding a clean driving record following an accident, typically 3-5 years, you’ll see your rates start to decrease. Along with a clean driving record, there are other steps you can take to lower your car insurance premiums over time.
- Shop Around for cheap car insurance — The first step to lowering your insurance premiums is to shop around for a better one. If you feel you’re paying too much, don’t skip this step. Find out if you are paying too much by asking. This is simple and easy, considering most reputable insurers will often give you an instant quote online. And competition in the car insurance world is fierce; providers are always looking for new policyholders.
- Enroll in a Driving Course — Some states and insurance providers reward drivers for successfully completing approved driving courses. This can result in reduced points on your record and insurance discounts. Inquire with your insurance provider and state DMV website.
- Downgrade to a Less Expensive Car — If you’ve been driving a luxury car, you’re paying more for car insurance than a less expensive car. Sell your car and buy a cheaper one. If you make a profit, then apply that to your new cheaper car insurance policy.
- Stop Owning a Car Altogether — By getting rid of your car, you can purchase non-owner operator car insurance. You’ll have to borrow someone’s car to drive, but your insurance will be cheaper, and so will your transportation expenses.
Make no mistake, though; a clean and safe driving record is the most important way to ensure you are paying the lowest rates. You should do everything you can to reduce your premium after an at-fault accident; however, it will likely be some time before you enjoy the rates you did before it.
What Does Auto Insurance Cover?
Auto insurance can cover a wide range of situations with many optional coverages for particular circumstances. Learn more about the types of car insurance coverages that are available. The typical driver will have the following liability coverages simply because they are mandatory in most states. Considering the destructive potential of car accidents, it’s easy to see why liability insurance is mandatory:
- Property Damage Liability Coverage – If you damage someone’s car or property (i.e., a fence), you are considered liable for those damages. Liability coverage will pay out an amount up to what is stipulated in the policy to cover property repairs for others.
- Bodily Injury Liability Coverage – If you injure someone, you are considered liable for their injuries. Liability coverage will pay out an amount up to what is stipulated in the policy to cover medical expenses or property repairs for others.
Mandatory requirements mainly only cover injuries and property damages sustained by others, not the policyholder. The Law says that all drivers are liable for the damages they cause to anyone and anything around them. Driving is a privilege that makes the driver accountable.
When it comes to a policyholder’s health and property, the Law is more lenient. The following coverages help protect the policyholder’s health and property, coverages that may not be mandatory in your state.
- Collision Insurance Coverage – If you’re driving and your car is in an accident, collision insurance will cover the repairs to your vehicle, regardless of who is at fault. Back up into a dumpster, this will help you fix your bumper.
- Comprehensive Car Insurance Coverage – If your car is damaged from non-accident-related causes like a tree falls on it, hail damages it, rioters vandalize it, or someone steals it, comprehensive coverage will pay for repairs.
- Medical Payments (MedPay) Coverage — Auto MedPay covers medical and funeral expenses following a car accident and can protect the driver, family, and additional drivers.
Advice Point: Because it is minimally required and the premiums may be less, it is tempting to only insure for property and bodily injury liability coverage and not protect yourself with comprehensive and collision coverage. However, seriously consider your circumstance if you were in an accident and your car was totaled. Would you have enough financial savings to cover your own injuries and damages and purchase a new car? Do you have primary medical insurance? Will you have to stop working? Knowing the answers to these few questions will go a long way in bringing perspective to how vital car insurance coverage is.
What is Full Coverage Car Insurance?
The first four coverages are so commonly packaged together, Liability + Collision and Comprehensive, that together it’s called full coverage insurance.
What Does Car Insurance Not Cover?
Car insurance only covers what is included in the policy. Warning, always read your policy for the most relevant details. Outlined above, the bare minimum of car insurance, liability alone, will only cover those who are injured and not at fault, as well as their property. This means, with minimal coverage, you, the driver, and your car are not covered, and you are liable for your own repairs and medical expenses. You can pay out of pocket for them, or if you have comprehensive and collision coverage, you can file a claim to cover those expenses.
Who Pays for Lawyers if They are Involved?
Another interesting coverage question is whether lawyer fees are covered by insurance. The short answer is “yes” if you are being sued and there is reasonable cause to say you are not at fault. Insurance companies have a “duty-to-defend” written in their policies, which generally states they have the right and are supposed to defend a claim, even if it is groundless. But the devil is in the details. Often, if your coverage has no deductible, then the provider does not have a duty-to-defend requirement.
However, if you want to sue another driver because you think they are at fault, the insurance company will not cover ligation fees. You will have to do that out-of-pocket. Questions about lawyer fees are a complex facet of insurance, and it is best to direct them to a representative of your insurance provider.
Who Does Auto Insurance Coverage Protect?
Commonly, your car insurance will cover you and your family members for the purposes of using the covered vehicle for personal use. Often this is extended to cover people you permit to drive your car, like a family member visiting for the holidays. But like all contracts, confirm that these are indeed the facts your policy guarantees. No longer is there a standard auto policy, and as the following suggests, policyholders cannot afford to misunderstand when their policy is applicable.
Does my insurance follow me or my car?
Coverage is made complicated because of what different coverages protect. Liability coverage protects the insured and should follow them if they operate a vehicle owned by someone else. Comprehensive and collision coverage covers the car rather than the driver and should follow the vehicle if operated by someone other than the owner. Similar to liability, MedPay and Personal Injury Protection (PIP) insure the driver and should follow them if they are driving someone else’s car.
Review your policy closely, and pay particular attention to how and when each coverage is valid. Ask your insurance provider to explain these details before you’re in an accident and need the information.
Is Auto Insurance Coverage Mandatory?
Although insurance requirements are set at the state level, therefore different in each one, in practice, if you are driving a vehicle, there is little difference; you need to have car insurance. You can’t go wrong with getting full coverage auto insurance as this will almost always be modeled to cover your state’s mandatory requirements.
The minimum car insurance required is typically liability insurance, including property and bodily injury liability coverage. This means that your insurance provider will be able to pay for injuries and damages that you cause to other people and property but not you.
Do I Really Need Car Insurance? Some States Don’t Require it.
Auto insurance coverage is mandatory in all states except New Hampshire. Car insurance liability can be handled in different ways in these states. Other methods for covering for liability are setting a bond or paying an “uninsured motorist” fee and taking the risk personally. However, in both cases, liability is still a concern and must be assumed by the driver. In these states, it is not required to purchase insurance, but you cannot escape liability.
It is best to refer to your state’s department of insurance to determine mandatory requirements. You can use the National Association of Insurance Commissioners website to locate your state’s official insurance department.
Here’s a quick look at state car insurance requirements.
|AL, AK, AZ, AR, CA, CO, GA, ID, IN, IA, LA, MS
MT, NV, NM, OH, OK, RI, TN, TX, WA, WY
|BI and PD|
|CT, IL, MO, NB, SD, WI||BI, PD, and UIM BI|
|DC, MD, NC, SC, VT, VA, WV||BI, PD, UIM BI, and UIM PD|
|KS, ME, MA, MN, NJ, NY, ND, OR||BI, PD, UIM BI, and PIP|
|DE, HI, KY, MI, PA, UT||BI, PD, and PIP|
|FL||PD, and PIP|
BI: Bodily Injury, PD: Property Damage, UIM BI: Uninsured/underinsured Motorist Bodily Injury, UIM PD: Uninsured/underinsured Motorist Property Damage, PIP: Personal Injury Protection Insurance
How Is Car Insurance Priced?
Car insurance providers use a proprietary set of factors in calculating premiums. Although each provider comes to prices differently for their own rate sheet, the following factors are the most influential on your insurance premiums.
- Driver Location — Both the state and zip code play essential factors. Regulations impact all rates at the state level, while each zip code’s unique characteristics, like driver density, contribute to how providers calculate overall risk.
- Insurance Provider — Not all providers are created equal; everyone offers their own benefits vs. price. Be sure to compare providers along with price and coverage benefits. You might find one gives more significant benefits, especially if the price is only a few dollars more. Also, compare customer reviews; there is a lot of value in responsive customer service. Find out if your provider is proactive when it comes to fulfilling claims.
- Car Type — Driving a sports car? Expect to spend more on insurance. Family vehicles, like minivans, will fetch a better rate thanks to their safety record.
- Age — Not an insignificant factor; age is one of those things you have no control over. Typically, the younger the insured, the more the insurance premium will be. Luckily, as you age and prove to be a safe and responsible driver, the lower premiums will go.
- Gender — Less of a factor than others on this list is gender. Though it has been shown that female drivers see a bump in their premiums compared to their counterparts, it is not as significant as other factors such as driver history, like getting speeding tickets. Men are ticketed 50 percent more than women across all age groups.
- Driving History — Speeding tickets, DUIs, and reckless driving are just some violations that inflate a driver’s rates. Insurance providers use a driver’s history as a predictor for their future behaviors, and ultimately how risky they are. Fortunately, this is one factor that drivers have control over.
- Credit Score — Another factor that impacts their premiums, but is within the control of drivers, is their credit score. Insurance providers found that drivers with poorer credit scores file more claims than drivers with high credit scores. And more, they file claims of more significant amounts than drivers with high credit scores.
How Does My Car Insurance Coverage Breakdown?
Car insurance policies give their coverage limits as a string of numbers separated by a slash and will look similar to 25/50/25 or $25,000/$50,000/$25,000.
These numbers breakdown into the policy limits, as so:
- $25,000 of coverage for bodily injury (per person)
- $50,000 of coverage for bodily injury (per accident)
- $25,000 of coverage for property damage (per accident)
How Much Car Insurance Do I Need?
Choosing how much car insurance to get is a question of how much risk you want to take on and what deductible you want to pay. A deductible is a portion of damages you pay before the insurance provider begins paying for the rest. For instance, if you wind up in an accident and your deductible is $1,000, but the repairs come to $800, then the insurance company will pay nothing. Had your deductible been $500, the insurance would have kicked in for the remaining $300.
Deductibles work like a risk barometer for insurance companies. If you choose a lower deductible, the company will assume you are riskier and increase your premiums. If you choose a higher deductible, then your premiums should be lower. It is best to consider deductibles, max payout limits, and monthly premiums together when determining the amount of insurance coverage to get.
Discounts for Car Insurance
Drivers can save money on their auto insurance if they take advantage of every possible discount available. Some examples of discounts include:
- Anti-theft discount
- Good driver discount
- Student discount
- Multi-car discount
- Military discount
- Multi-policy discount
- Mature, retired, or senior discount
Get a Custom Car Insurance Quote Today!
Car insurance is more than just a legal requirement; it’s also an inexpensive way to protect yourself from the tremendous risks of daily driving. Freeway Insurance can help you navigate the car insurance maze with an online quote or by calling us at (800) 777-5620. You can also visit us at an office near you.