When you buy or lease a car, it’s important to protect that investment. Getting auto insurance can offer reassurance in case you’re involved in an accident or the vehicle is stolen, vandalized or damaged by a natural disaster. Instead of paying out-of-pocket for auto accidents, people pay annual premiums to an auto insurance company; the company then pays all or most of the costs associated with an auto accident or other vehicle damage.
Key Takeaways
Car insurance is designed to protect you against financial losses if you’re involved in an accident or the vehicle is damaged in some way.
Most states require you to have minimum amounts of liability insurance coverage; some also require you to have other coverage types, such as uninsured motorist coverage.
Premiums are what you pay monthly, biannually or yearly to maintain a car insurance policy while deductibles are amounts you pay when you file a claim.
It’s important to shop around for the best car insurance rates to find the right coverage for your vehicle at the right price.
What Is Car Insurance?
Car insurance is effectively a contract between yourself and an insurance company in which you agree to pay premiums in exchange for protection against financial losses stemming from an accident or other damage to the vehicle. Auto insurance can offer coverage for:
Vehicle damages, including your car or another driver’s vehicle
Property damage or bodily injuries caused by an accident
Medical bills and/or funeral expenses associated with injuries sustained in an accident
The exact details of what’s covered depend on the minimum coverage requirements for your state and any additional coverage options you choose to include. Every state except New Hampshire requires drivers to have a minimum amount of bodily injury liability coverage and property damage liability coverage.1
Failing to obtain the minimum car insurance required by the laws in your state could result in a suspension of your license, fines or even jail time for repeat offenses.
Auto Insurance Costs
There are two primary costs associated with purchasing car insurance: premiums and deductibles.
Auto insurance premiums vary depending on the evaluation of several factors. Such factors include the applicant’s gender, age at the time of application, years of driving experience, accident and moving violation history, and other factors. Again, most states mandate a minimum amount of auto insurance. That minimum varies by state, but many people purchase additional insurance to protect themselves further.
Additionally, if you’re financing a car, the lender may stipulate that you carry certain types of car insurance. For instance, you may need gap insurance if you’re purchasing an expensive vehicle that will likely depreciate very quickly once you drive it off the lot. Gap insurance can help to pay off the difference between the vehicle’s value and what you still owe on it if you’re involved in an accident.
A poor driving record or the desire for complete coverage will lead to higher premiums. However, you can reduce your premiums by agreeing to take on more risk, which means increasing your deductible.
Your deductible is the amount you have to pay when filing a claim before the insurance company will pay out anything to you for damages. So, for example, your policy may have a $500 or $1000 deductible. Agreeing to a higher deductible can result in a lower premium but you’d have to be reasonably sure you could cover the higher amount if you need to file a claim.