When buying auto insurance for the first time, it is important to understand what it is, what it covers, how it works, how much you need and how to buy it. MoneyGeek created a car insurance guide to help you navigate these topics and find the right policy for your needs.
Car Insurance 101 Guide: What a Beginner Needs to Know About Car Insurance
Auto insurance can protect you against financial loss after a covered peril, such as an accident on the road or an off-road disaster. Depending on the state you live in, it may be required by law.
In short, car insurance is crucial to have. However, it can be challenging to understand how it covers you, what it means to make a claim, how much coverage you should buy and how much a policy costs. This car insurance guide can help you understand more about your insurance so you can make informed decisions when selecting and utilizing your policy.
Car insurance protects you and your family against financial loss in the event of a covered accident that causes bodily injuries or property damage.
Auto insurance coverages may vary depending on your needs as a driver. A policy may include liability insurance, comprehensive and collision coverage, personal injury protection and uninsured/underinsured insurance.
Various factors affect the cost of car insurance — like your age, location, car model and driver profile — so shopping around is essential.
Car Insurance 101: What Is Car Insurance?
Car insurance is a contract between the policyholder and the insurance provider. Under this contract, you agree to pay a certain monthly or yearly premium for your policy. In turn, your insurance carrier agrees to pay for losses and expenses related to covered accidents when you file a claim. An insurance claim is a formal request that a policyholder files to their insurance carrier for compensation for all covered losses.
Your needs and situation as a driver determine the right coverage for you. Depending on the type of policy you purchase, your insurance could cover vehicle damage, medical expenses and property damage for yourself or others.
Insurance premiums can seem expensive, but the coverage you receive from it far exceeds what you pay. For instance, the average cost of insurance across the country is $4,272 over three years. For this much, you could potentially receive up to $100,000 in bodily injury coverage per person, $300,000 per accident and $100,000 in property damage from your insurance provider.
A Beginner’s Guide to What Car Insurance Covers
Accidents can happen anytime. Whether it’s your fault or not, it's essential to have the proper protection against possible expenses. Auto insurance covers these expenses. The type of insurance you purchase determines which costs are covered under your policy. The core coverages for auto insurance are:
- Liability insurance
- Comprehensive and collision insurance
- Personal injury protection (PIP) or medical payments insurance
- Uninsured or underinsured motorist insurance
States have different auto insurance laws. In most states, having liability insurance is a requirement for drivers. This coverage offers essential protection against possible financial loss due to a car accident where the policyholder is at fault. It includes bodily injury liability and property damage liability to the other party but does not cover damage to you or your vehicle.
Comprehensive and Collision Insurance
For many drivers, having liability-only insurance is not enough. Comprehensive and collision insurance provide financial protection to both you and the other party involved in an accident.
The comprehensive portion of coverage takes care of damages to your car caused by an accident you have not caused, such as theft, vandalism and hail damage. Meanwhile, collision coverage protects you against expenses related to damages to your car, person or any passengers after an at-fault accident.
Personal Injury Protection or Medical Payments Insurance
Among all states, 18 require motorists to purchase personal injury protection (PIP). Also known as no-fault insurance, PIP covers medical payments related to injuries you and your passengers sustain in the event of an accident, regardless of who is at fault. It also covers other related expenses, such as health insurance deductibles, lost wages, childcare and funeral services.
Uninsured or Underinsured Motorist Insurance
In some states, drivers need to carry uninsured/underinsured motorist coverage. But even if it is not a requirement, having this type of insurance will give you and your family additional protection. About 12.6% of drivers are uninsured in the United States. If you ever get in an accident where the at-fault driver is uninsured or has limited coverage, this insurance will cover the medical fees, lost wages and car damage you incur.
What Is a Claim? How Do Car Insurance Claims Work?
When discussing car insurance for beginners, it is necessary to include claims. A car insurance claim is a formal request that a policyholder files with their insurer. It allows them to get compensation for covered loss as defined in the policy. Insurance providers review claims and determine their validity. Once approved, the provider will issue payment to the policyholder.
Here are the steps you need to take when making a car insurance claim:
Gather Evidence and Documentation
To ensure approval of your claim, you need to provide evidence from the accident scene. Obtain contact and insurance information from the other driver. Be sure to call authorities right after the accident and have them file a police report. Take pictures of the scene and any damage, if possible. Try to record the names and contact information of witnesses.
Call the Insurance Company
Next, check your auto insurance policy. Make sure you understand the filing process of your insurance company. Some companies prefer to call your agent directly, while others have an online claims portal available. Once you’ve determined the best way to reach out, contact your insurance company or agent.
Settle the Claim
Cooperate with your claims adjuster, the person assigned to handle your claim. Make sure to get your adjuster’s contact information as they will be in charge of investigating the accident and reviewing the estimates for vehicle repairs and claims settlement. They will inform you whether your claim is accepted or rejected.
How Does a Deductible Work?
Many factors affect the cost of your car insurance. One of these is your deductible or the cost of damages you’re responsible for when you file a claim. Unlike in health insurance, you have to pay a car insurance deductible for every claim.
Having a higher deductible usually results in lower insurance premiums because you will be paying more out-of-pocket when you file a claim. Lower deductibles cost more in premiums but cover more expenses after an accident.
Not all coverage types have deductibles. Liability insurance, for example, does not have a deductible. Deductibles only apply to:
- Comprehensive and collision coverage
- PIP coverage
- Uninsured motorist coverage
If you get involved in an auto accident, your insurer will help cover related expenses after you meet your deductible. For instance, say you file a collision insurance claim for $6,000 worth of damage, and your deductible is $500. You must pay $500 out-of-pocket, while your insurer will cover the remaining $5,500.
What Car Insurance Coverage Do You Need?
Each state has its own laws that determine the minimum auto insurance coverage requirements that every driver must have. Most states require some form of liability insurance. However, other states require PIP or uninsured/underinsured motorist coverage. Failure to carry and maintain the necessary coverage limits can lead to penalties and fines.
Car Insurance by State
Note that a state minimum coverage will only provide baseline protection. While this will ensure compliance with state regulations, it does not determine how much coverage you should buy. A liability-only policy will not cover you and your vehicle in the event of an accident, so we highly recommend purchasing additional comprehensive and collision coverage.
How Much Does Car Insurance Cost?
The average cost of car insurance across the country is $1,424 per year or $119 per month. However, the actual cost of car insurance will vary per person. Insurance providers use individual factors, like location, ZIP code, age, gender, credit score, driving history and coverage level to determine premiums for each policyholder.
Drivers can save money on car insurance by shopping around and comparing quotes, maintaining a clean driving history and improving their credit scores. You can also save money by bundling home and auto insurance and receiving other discounts. See which companies offer the best home and auto bundle discounts with our handy analysis and rankings.
Where Do You Buy Car Insurance?
Before choosing an insurance company, you have to determine what you want in an insurer. For the most part, insurance providers offer similar core coverages. Your decision will depend on how much you value cost versus quality of service.
For some drivers, the best car insurance for beginners is a policy that fulfills their state obligations and allows them to save on their monthly bills. MoneyGeek collected average rates from various companies to determine the cheapest car insurance companies.
Others may opt for a company offering a balance in value and quality service. MoneyGeek also created a car insurance guide that ranked the best car insurance.
Learn More About Car Insurance
About the Author
- Insurance Information Institute. "Background on: Compulsory Auto/Uninsured Motorists." Accessed July 22, 2021.