Car Insurance Basics: Everything You Need to Know (2024)

What Is Auto Insurance?

An auto insurance policy is an agreement between an insurance company and the policyholder. The insurance provider agrees to pay compensation for losses specified in the policy, while the policyholder agrees to pay a certain premium. According to the Insurance Information Institute, car insurance provides three basic types of protection, including:

Liability coverage: Covers medical expenses and repair costs the policyholder is liable to pay if they're responsible for causing an accident.
Property damage coverage: Pays for vehicle damage or theft.
Medical coverage: Covers the treatment of injuries, rehabilitation, lost wages, and funeral expenses.

What Are the Different Types of Auto Insurance Coverage?

When you're buying auto insurance, it's essential to know which types of coverage you should get to properly protect yourself from financial losses. Below are the most common car insurance coverage options:

Bodily Injury Liability

Bodily injury liability coverage pays for the cost of treating the injuries of other drivers involved in an accident that results from your negligence. You'll also be covered when you're driving another person's vehicle with permission. Since you can be sued for large sums of money if you cause a major accident, you may want to purchase more bodily injury liability than the state-required minimum to protect yourself from losing your savings and home.

Personal Injury Protection (PIP) or Medical Payments (MedPay)

PIP or MedPay covers the medical bills incurred in treating you and passengers' injuries after an accident. Besides medical payments, PIP also pays for lost wages and funeral expenses if applicable.

Property Damage Liability

If you have property damage liability coverage, you're protected against repair costs after you cause damage to someone else's property in an accident. This usually means vehicle damage, but it also includes damage to buildings, fences, lamp posts, telephone poles, and other structures.

Collision

Collision insurance covers damage to your car as a result of a collision with another vehicle or object, a rollover, or potholes. Generally, this type of coverage comes with a deductible that ranges from $250 to $1000. Opting for a higher deductible will reduce your premium.

Even if you're the at-fault party in an accident, collision coverage enables you to claim compensation for the cost of repairing your car, minus the deductible. If you didn't cause the accident, your insurance provider may try to get back the amount it paid for repairing your vehicle from the at-fault driver's insurance company. If your insurer is successful, you'll receive reimbursem*nt for the deductible.

Comprehensive

Comprehensive coverage provides financial protection against losses due to theft or vehicle damage resulting from a non-accident event, such as vandalism, falling objects, animals, fires, floods, earthquakes, windstorms, and explosions. This kind of insurance usually has a deductible of $100 to $300, but you can choose a higher deductible to reduce your premium. If you have comprehensive coverage, you may be covered if your windshield is cracked or shattered.

Note that your state doesn't require you to have collision coverage and comprehensive coverage. However, your auto loan provider may insist you carry these coverages until you pay off your loan.

Full Coverage

Generally, a full coverage auto insurance policy includes liability, collision, and comprehensive coverages.

Other Coverages

Depending on your personal needs, you may want to better protect yourself by getting the following coverages:

Rental reimbursem*nt: Rental reimbursem*nt covers the cost of renting a vehicle if your car is damaged or stolen. To get good value for your money, make sure you check the daily dollar limits and overall maximum.
Towing and roadside assistance: This coverage pays for the costs incurred due to a vehicle breakdown. Bear in mind that getting reimbursed for a towing or roadside assistance service is regarded as a claim on your record, says Insure.com.
Gap insurance: If your vehicle is declared a total loss, gap insurance covers the difference between your vehicle's actual cash value and the remaining amount on your car loan.
SR-22 or FR-44: An SR-22 or FR-44 is an insurance certificate that proves to your state that you carry at least the required auto insurance. You may have to obtain this certificate if you were previously caught driving uninsured or had a reckless driving or DUI conviction. Not every insurance company offers SR-22 or FR-44 insurance, so you may have to do some research online.
High-risk car insurance: If you've had multiple accidents or traffic tickets in the past, auto insurance providers may regard you as a high-risk driver. This means you'll have to pay significantly higher premiums until your accidents or tickets drop off your record. Many insurance companies offer high-risk policies.

What Is a Deductible?

A deductible refers to the out-of-pocket amount you need to pay before your auto insurance kicks in. For example, if your deductible is $500 and you sustain $2000 worth of vehicle damage in an accident, you'll pay the first $500 and then your insurance provider will take care of the remaining $1500. Deductibles are most common in collision coverage and comprehensive coverage.

What Does No-Fault Insurance Mean?

If you live in a state with no-fault insurance laws, you're required to have PIP. If you're involved in an accident, you have to first use your own PIP rather than the at-fault driver's liability coverage to pay for the treatment of your injuries.

Many drivers choose to purchase only the minimum auto insurance required in their states so that they can save money. However, it's recommended that you purchase higher amounts of liability coverage. This can help you avoid hefty out-of-pocket expenses if you cause damage to an expensive vehicle in an accident. Depending on your situation, it may also be worthwhile to get comprehensive or collision coverage.

FAQs

What is the basic knowledge of auto insurance? ›

Auto insurance provides property, liability and medical coverage: Property coverage pays for damage to, or theft of, the car. Liability coverage pays for the policyholder's legal responsibility to others for bodily injury or property damage.

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What does a basic car insurance policy include? ›

While different states mandate different types of insurance and there are several additional options (such as gap insurance) available, most basic auto policies consist of: bodily injury liability, personal injury protection, property damage liability, collision, comprehensive and uninsured/underinsured motorist.

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What are the three things about auto insurance? ›

Understanding auto insurance—the basics

Auto insurance provides coverage for: Property – such as damage to or theft of your car. Liability – your legal responsibility to others for bodily injury or property damage. Medical – the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.

What is insurance explained for beginners? ›

Insurance is a way to protect yourself from financial risks by paying a company a small amount of money, called a premium. If something bad happens, like a car accident or a house fire, the insurance company helps cover the costs so you don't have to pay for everything yourself.

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What is the most important part of auto insurance? ›

Liability Coverage and California Law. Liability coverage helps pay for injuries or damage that you cause to others . If you own and drive a vehicle, you must follow the financial responsibility laws in the state Vehicle Code. The most common way to do this is to buy auto liability coverage.

What's the best coverage for auto insurance? ›

You should carry the highest amount of liability coverage you can afford, with 100/300/100 being the best coverage level for most drivers. You may need to carry additional coverages to protect your vehicle, including comprehensive, collision and gap coverage.

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Which type of car insurance is best? ›

Yes, the premium for comprehensive care insurance is on the higher side when compared to the other types of car insurance in India. This is only because comprehensive car insurance offers more protection for your car than other types of motor insurance.

What are the 3 most important insurance? ›

As you hit certain life milestones, some policies, including health insurance and auto insurance, are virtually required, while others like life insurance and disability insurance are strongly encouraged.

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What 5 factors determine the premium for a car insurance policy? ›

Understanding what determines your auto insurance premiums can uncover new ways to save. Auto insurance rates depend on factors such as your age, gender, location, the kind of car you drive, your driving record and possibly even your credit score.

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What 3 factors determine the cost of your auto insurance? ›

Some factors that may affect your auto insurance premiums are your car, your driving habits, demographic factors and the coverages, limits and deductibles you choose.

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What is comprehensive vs collision? ›

Collision coverage pays for damages to your vehicle that are the result of a collision with another vehicle or a road hazard. Comprehensive coverage pays for other damages to your vehicle such as theft, vandalism, animal damage, falling tree branches and other environmental damage.

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What is the most basic type of vehicle insurance coverage? ›

1. Liability coverage. Auto liability coverage is mandatory in most states. Drivers are legally required to purchase at least the minimum amount of liability coverage set by state law.