Takeaways
- Car insurance helps cover unexpected expenses that come from car accidents.
- Car insurance is required by most states in the U.S., and coverage requirements range.
- Car insurance can vary dramatically depending on what type of insurance you purchase.
- Car insurance is an annual transportation expense you should consider while budgeting.
- Selecting the best car insurance coverage is a balance between premiums and coverage.
What Is Car Insurance?
Anybody who has ever owned a vehicle is familiar with the sinking feeling that comes after a car accident. Even if you are lucky enough to escape unharmed, the material damage to your car and possible legal costs or fines can be daunting if you haven’t prepared for them. That is where car insurance comes into play.
Automobile accidents are expensive and unexpected events that happen every day. In 2021, over 5 million people in the U.S. suffered injuries as a result of car accidents.[1] Luckily, vehicle owners can rely on auto insurance, also called car insurance, to protect them in the event of unforeseen accidents.
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Why You Need Car Insurance
Car insurance protects vehicle owners from financial setbacks. It provides coverage if you are involved in an accident or if your car is damaged in another way. The insurance company agrees to pay for the damages if you pay regular premiums and the deductible.
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Your premiums and deductibles are the two expenses that policyholders must pay regularly to be eligible for car insurance coverage.
- Premium: A fixed sum you pay at regular intervals (typically monthly or annually) in exchange for car coverage.
- Deductible: A limited amount you pay if you file an insurance claim. The deductible varies according to policyholders and is agreed upon when the policy is created.
According to data from the Insurance Information Institute, the average cost of auto insurance in 2022 was $1,588.[2] However, many factors determine how much your auto insurance will cost, such as your car’s make, model, color, and year. Your past driving record is also factored into your cost, as well as your age and gender.
Insurance companies charge different rates based on these factors, which makes it critical to shop for the best car insurance rates available. Don’t be fooled by low-cost options. They might be low-cost for a reason. Make sure you compare the full breadth of the coverage options between plans because plans can change tremendously between premiums and deductibles required.
Smart Tip:
Keep your car insurance deductible in a high-yield savings account. Not only will this help grow your savings with interest payments, but (because you must pay the deductible in full before your insurance kicks in) it also ensures you are financially prepared. Saving your deductible will help you avoid financing deductibles with a credit card and increasing your debt load suddenly.
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6 Types of Car Insurance
Having some form of car insurance is a requirement for owning a car in every state. However, auto insurance laws vary from state to state, so check with your state to ensure your coverage is appropriate for local laws and regulations.
Some states require motorists to have more than one type of coverage. Here are the different types of auto insurance to consider:
1. Liability Insurance
Liability insurance covers your expenses when an accident involving your vehicle leads to property damage or injury to others.
Perhaps your brakes malfunctioned at a stop light, and you rear-ended the car in front of you. Liability insurance will pay for the medical expenses of the other car’s passengers and cover costs if you are sued after the accident.
2. Uninsured Motorist Insurance
If you’re ever in an accident with an uninsured or inadequately insured driver, you can be left bearing the expenses even if you didn’t cause the accident.
For instance, when the other party is uninsured, an uninsured motorist insurance policy covers medical fees for you and your passengers and, in some cases, also covers the damage to your car.
3. Collision Insurance and Comprehensive Insurance
Most people who finance their cars with a car loan are required to get collision insurance and comprehensive insurance. Both types provide financial coverage in case there is damage to the vehicle.
Collision insurance covers accidents where you accidentally run into objects like a fire hydrant or garage door. It also covers other vehicles hitting you.
For example, if a car backs into your vehicle in the grocery store parking lot or slams their car door accidentally into your car. However, comprehensive insurance covers other non-collision-related damage like fire, theft, and vandalism.
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4. Personal Injury Protections
While liability insurance covers bodily harm to others, it does not cover personal injuries. For personal injuries, you need additional injury protection insurance, which pays for accident-related medical bills. It also covers expenses related to an accident, such as lost wages due to missed time at work and physical rehabilitation sessions.
5. Medical Payments Coverage
While the material costs of getting in a car accident can be high, so can the associated medical bills for you or other passengers. Medical payment coverage is an optional part of an auto insurance policy that helps cover these expenses and can cover medical expenses whether you caused the accident or not.
Some car insurance plans refer to medical payment coverage as “med pay” and might not be included or required under all plans and states, respectively.
Medical Payment Coverage helps pay for expenses like:
- Ambulance and emergency fees
- Hospital visits
- Surgery or X-rays
- Doctor and nursing services
Of course, coverage limits apply when it comes to medical payment coverage. You can usually select from different coverage amounts. Depending on your health insurance plan, medical payment coverage limits might help pay for health insurance deductibles.
6. Gap Insurance
If you have recently bought a new or used car and financed the purchase, then you might want to consider Gap insurance. Gap insurance is usually optional and helps cover the cost difference between your car’s depreciated value and your current car note. If your note exceeds the depreciation amount, gap coverage helps pay for the difference in an accident.
For example, if your car is stolen or totaled (repair costs exceed the vehicle value) in a car accident, gap coverage would help cover the cost chasm.
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What Does Car Insurance Cover?
The exact extent of your car insurance coverage depends on your policy. As we have highlighted above, there are various types of car insurance, each with a specific type of coverage. You can add more coverage to your insurance policy if you frequently use your vehicle. Depending on your local laws and personal needs, your car insurance coverage includes:
- Damages to your vehicle
- Damage to others’ vehicles
- Property damage and bodily injuries
- Medical bills and related expenses
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What Car Insurance Does Not Cover
Car insurance only covers personal vehicle usage. You will need separate commercial auto insurance if you use your car commercially. Other car-related expenses that cannot be claimed under the insurance policy include:
- Routine maintenance
- Mechanical failures
- Gradual wear and tear
Car accidents and damage are stressful enough, especially when they involve other vehicles and individuals. Car insurance gives you some peace of mind. Even when accidents happen, you will not have to shoulder all the associated expenses.
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Smart Summary
Protecting yourself before an accident occurs is a smart money move. Car insurance is a critical component of a holistic financial approach to making sure you don’t have any financial blind spots. Supplementing basic car insurance can be a terrific financial decision and boost your confidence. Consider consulting with a financial advisor to contemplate what type of car insurance makes the most sense for you.
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(1) National Safety Council. 2021 Motor Vehicle Crash Highlights. Last Accessed January 22, 2024.
(2) Insurance Information Institute. Facts + Statistics: Auto Insurance. Last Accessed January 22, 2024.
