Why Is Auto Insurance Important?

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Updated: May 20, 2024

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Most states legally require drivers to keep auto insurance coverage. Insurance protects you financially by providing coverage for you and your passengers if you are in a crash.

There are different kinds of auto insurance policies that cover different things. The benefits of car insurance may depend on the type of policy you buy. Liability coverage will help you pay for covered losses related to the other party, such as medical expenses and vehicle damages, if you are at fault in a collision.

MoneyGeek breaks down why auto insurance is important, its purpose and the different types of coverage you may need.

Table of Contents

Key Takeaways

The purpose of auto insurance is to protect against possible financial loss if you are in a covered incident.

There are different types of auto insurance policies with varying coverage options. The best type for you will depend on your needs and circumstances.

Most states legally require drivers to have auto insurance. Each state has its own minimum coverage requirements.

Why Is Auto Insurance Important & Why Do I Need It?

Having auto insurance helps protect your finances so that you don’t have to pay out of pocket for damages resulting from a crash. Coverage may help pay medical and legal fees. Keeping insurance also prevents you from facing legal consequences for not having insurance.

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Car Insurance Is a Requirement in Most States

Most states require state minimum car insurance coverage by law. It is important to find out if you live in a no-fault state. If you do, you will have to pay for your injuries and damages regardless of who is at fault in a collision.

You should also evaluate your needs and circumstances to determine how much car insurance to buy. The best policy will vary per person. For some, the state minimum may not be enough.

It Helps Give You Financial Protection

Typically, the person who caused the accident will be held liable for its expenses. If you do not have coverage, you would likely need to pay all costs out of pocket. In no-fault states, each party is responsible for their own expenses.

How Insurance Protects You Financially

Car Insurance Protects You and Your Passengers

Auto insurance may protect anyone who drives your car. Depending on the coverage you choose, you can have additional protection, like roadside assistance.

Some insurance companies also offer rewards. Typically, driving safely or having safety features in your car could make you eligible for significant discounts.

Standard Insurance Coverages You May Need

For states where auto insurance is a must, there is a minimum coverage requirement. While this varies depending on the state, it typically includes bodily injury liability and property damage liability. However, there are other insurance types you may want to consider for more coverage, like comprehensive and collision.

Types of Auto Insurance
Classification
Best For

Bodily Injury Liability

  • Other than being a state requirement, it’s good to have this type of insurance because it pays for the injuries incurred by the driver and occupants of the other car.
  • Bodily injury liability coverage covers medical expenses, pain and suffering and lost wages.

Property Damage Liability

  • Most states require property damage liability.
  • This coverage pays for damages the policyholder may cause to another person’s vehicle or property.

Personal Injury Protection (PIP)

  • Drivers living in no-fault states are typically required to have PIP insurance.
  • Policyholders with PIP insurance get coverage for medical expenses related to injuries that they or their passengers may incur in an accident.
  • This coverage applies to the policyholder regardless of who is at fault for the accident.

Uninsured/ Underinsured Coverage

  • Individuals who want to protect themselves against motorists with not enough insurance or no insurance can benefit from underinsured or uninsured motorist coverage.
  • This type of coverage includes expenses incurred in an accident, including medical bills, lost wages, funeral expenses, pain and suffering and car damage (in some states).
  • Some states may require this type of coverage.

Comprehensive Auto Insurance

  • If you want protection against possible damages to your car, you may want to consider comprehensive insurance.
  • This coverage pays for repairs caused by non-collision incidents, such as fire, vandalism or weather-related events like floods or hail.

Car Insurance Coverages You May Want to Add

Apart from the usual car insurance coverage, you may also want to consider additional coverages. Keep in mind that these are optional and may require you to pay extra. These types of coverage also depend on the car insurance provider.

Auto Insurance Add-Ons
Classification
Best For

GAP Insurance

  • Having GAP insurance can be a good thing because it covers the difference between your car’s value and the amount you owe on it.
  • This type of insurance is best for individuals who purchased a vehicle using a loan or those leasing their vehicles.
  • It is also good for drivers whose cars depreciate faster than the average vehicle.

New Car Replacement

  • Getting new car replacement insurance is an excellent idea if you want to protect the value of your new car.
  • This coverage applies to newly bought cars. Insurance companies may have a required period to allow an individual to buy this coverage.
  • The policyholder needs to have full coverage insurance to be eligible for this type of insurance.

Roadside Assistance

  • Roadside assistance insurance provides protection for unexpected circumstances.
  • It covers various situations, such as towing, lockouts, flat tires and fuel delivery.

Rental Car Insurance

  • Individuals renting a car may benefit from rental car insurance.
  • This is typically available in rental car companies, but you may also get it from a third-party provider.
  • This coverage protects you from covered losses due to certain accidents or even theft.

Frequently Asked Questions About the Importance of Car Insurance

Auto insurance offers various benefits. MoneyGeek answers some of the frequently asked questions to help you better understand the importance of auto insurance.

Do I have to pay for auto insurance?
Who needs auto insurance?
Should you get auto insurance?
What are the different types of insurance?
Why do I need auto insurance?

About Mark Fitzpatrick

Mark Fitzpatrick headshot

Mark Fitzpatrick has analyzed the property and casualty insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. Currently, he leads P&C insurance content production at MoneyGeek. Fitzpatrick has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.

Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.

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