What car insurance does and why you need it
Car insurance is a contract between you and an insurance company. You pay a monthly or annual fee — called a premium — and in return, the company agrees to pay for certain costs if you get into an accident, your car is damaged or stolen, or you injure someone else. The specific costs they cover depend on which type of coverage you choose.
Every state except New Hampshire requires you to carry at least a minimum amount of liability insurance before you can legally drive. Liability coverage pays for damage or injuries you cause to other people or their property. If you don't have it and cause an accident, you could be sued personally, and the court could order you to pay damages out of your own pocket — potentially for years.
If you financed or leased your car, your lender will require you to carry additional coverage beyond the state minimum. If you own the car outright, you can legally choose to carry only liability, though that leaves your own vehicle unprotected.
Key Takeaways
- Liability insurance is required by law in most states and covers damage you cause to other people or their property, not damage to your own car.
- Collision and comprehensive coverage protect your own vehicle but are optional if you own the car outright — though lenders require them.
- Your premium depends on your age, driving record, the type of car you drive, how much you drive, and the coverage limits and deductibles you choose.
- A deductible is the amount you pay out of pocket before insurance kicks in, and choosing a higher deductible lowers your monthly premium.
- Bundling home and auto insurance, maintaining a clean driving record, and shopping around every few years can significantly reduce what you pay.
The three main types of coverage
Liability coverage pays for injuries and property damage you cause to other people. It has two parts: bodily injury liability (which pays medical bills and lost wages for people you hurt) and property damage liability (which pays to repair or replace their vehicle or property). Your state sets a minimum amount you must carry — for example, some states require 25/50/25, which means $25,000 per person for injuries, $50,000 total per accident for injuries, and $25,000 for property damage. These minimums are often too low to cover a serious accident, so many people carry higher limits.
Collision coverage pays to repair or replace your own car if you hit another vehicle or object — a telephone pole, a guardrail, or a parked car. It does not cover damage from weather, theft, or hitting an animal. You choose a deductible, usually $500 or $1,000, and you pay that amount out of pocket before the insurance company pays the rest.
Comprehensive coverage pays for damage to your car from events other than collisions: theft, weather (hail, flooding, wind), vandalism, hitting an animal, or falling objects. Like collision, you choose a deductible. Many people carry a lower deductible for comprehensive than for collision because comprehensive claims are less frequent.
How your premium is calculated
Insurance companies use several factors to decide what you pay each month. Your age and driving record matter most: younger drivers and those with accidents or traffic violations pay significantly more. The type of vehicle you drive affects your rate — a sports car costs more to insure than a sedan, and a car with safety features may cost less. How much you drive (measured in annual miles) and where you live (urban areas have higher rates than rural ones) also factor in.
Your coverage limits — the maximum the company will pay — directly affect your premium. Higher limits cost more. Your deductible works the opposite way: choosing a $1,000 deductible instead of $500 lowers your monthly payment because you are taking on more of the risk yourself.
Some companies offer discounts for bundling (combining auto and home insurance), maintaining a clean driving record for a set period, completing a defensive driving course, or having safety features in your car. A few companies offer usage-based programs that track your driving habits and lower your rate if you drive safely.
Understanding deductibles and how they work
A deductible is the amount you agree to pay toward a claim before your insurance company pays the rest. If you have a $500 deductible and your car needs $3,000 in repairs after a collision, you pay $500 and the insurance company pays $2,500.
Choosing a higher deductible lowers your monthly premium because the insurance company's risk is lower — you are absorbing more of the cost yourself. The trade-off is that when you do need to file a claim, you will pay more out of pocket. If you have an emergency fund and can afford to pay $1,000 or $1,500 if something happens, a higher deductible can save you money over time. If you live paycheck to paycheck, a lower deductible protects you from a sudden large expense, even though your monthly payment is higher.
You do not pay a deductible for liability claims — those cover other people's costs, not yours. You only pay a deductible when you file a collision or comprehensive claim on your own vehicle.
What does not get covered
Standard car insurance does not cover routine maintenance, wear and tear, or damage caused by neglect. It does not cover damage from racing or using your car for commercial purposes (like delivering food or passengers for a rideshare service) unless you have a commercial or rideshare policy. It does not cover medical bills for you or your passengers — that is what medical payments coverage or personal injury protection (available in some states) is for.
Liability coverage does not protect you if you cause an accident while driving someone else's car without permission, or if you are driving under the influence. In most states, your insurance company can deny a claim if they find you were breaking the law at the time of the accident.
If you cause an accident and the other person sues you for more than your liability limits cover, the extra amount comes out of your own pocket. This is why many people carry higher limits than their state requires.
How to lower your insurance costs
Shop around every two to three years. Insurance companies price differently, and your rate with one company may be much higher than with another, even for identical coverage. Getting quotes from at least three companies takes about 15 minutes and can save you hundreds of dollars per year.
Bundle your auto and home insurance with the same company — most insurers offer a discount of 10 to 25 percent for bundling. Maintain a clean driving record: accidents and traffic violations stay on your record for three to five years, and each one raises your rate. If you have an older car that is paid off, dropping collision and comprehensive coverage (keeping only liability) can lower your premium significantly, though you lose protection for your vehicle.
Ask your insurance company about discounts you may not know about: good student discounts, discounts for completing a defensive driving course, discounts for low annual mileage, or discounts for safety features in your car. Some companies offer small discounts for paying your premium in full rather than monthly, or for setting up automatic payments.
What happens after an accident
If you are in an accident, first check for injuries and call 911 if anyone is hurt. Take photos of the damage to both vehicles, the accident scene, and any visible injuries. Get the other driver's name, phone number, address, driver's license number, license plate, vehicle make and model, and insurance company name and policy number. If there are witnesses, get their contact information too.
Report the accident to your insurance company as soon as possible — most companies have a phone line or app for this. Provide them with the information you collected. Do not admit fault or apologize for the accident; let the insurance company investigate. If the other driver files a claim against you, your insurance company will handle the legal side.
If you file a claim on your own policy (collision or comprehensive), you will pay your deductible, and the insurance company will either repair your car or pay you the cash value if the car is totaled. Keep records of all communication with your insurance company and any repair estimates or invoices.
Frequently Asked Questions
Do I need insurance if I only drive occasionally?
Yes. In most states, you must have liability insurance to legally drive, regardless of how often you drive. If you cause an accident and do not have insurance, you could face fines, license suspension, and personal liability for damages. Even one accident can cost tens of thousands of dollars.
What is the difference between actual cash value and agreed value?
Actual cash value is what your car is worth on the used market at the time of the accident, minus depreciation. Agreed value means you and the insurance company agree in advance on what your car is worth, and that is what they pay if it is totaled. Agreed value is usually available for classic or collectible cars and costs more.
Can I get insurance if I have a bad driving record?
Yes, but you will pay more. Insurance companies in every state will insure drivers with accidents, violations, or even a DUI on their record. Some companies specialize in high-risk drivers. Your rate will be higher, but it will gradually decrease as years pass without new violations.
What happens if someone hits my car and drives away?
This is called a hit-and-run. If you have collision or comprehensive coverage, you can file a claim and pay your deductible. If you only have liability, you have no coverage for your own car. Report the accident to police and get a police report number to give your insurance company.
Do I need to insure a car I am not driving?
If the car is parked and not being driven, you can ask your insurance company about suspending or reducing coverage temporarily, which lowers your premium. However, most companies require at least liability coverage if the car is registered and could legally be driven, even if you do not plan to drive it.