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 premium, and the company agrees to pay for certain costs if you cause an accident, your car is damaged, or someone is injured. Every state except New Hampshire requires you to carry at least a minimum amount of liability coverage before you can legally drive on public roads.

The insurance company does not pay for everything. Your policy has limits — the maximum they will pay for a single claim — and a deductible, which is the amount you pay out of pocket before the insurance kicks in. Understanding what your policy covers and what it does not is the difference between being protected and discovering mid-claim that you are on your own.

Key Takeaways

  • Liability coverage pays for damage or injuries you cause to other people and their property, and is required by law in all states except New Hampshire.
  • Collision and comprehensive coverage protect your own vehicle but are optional; collision covers accidents and comprehensive covers theft, weather, and vandalism.
  • Your deductible is what you pay before insurance pays, and choosing a higher deductible lowers your monthly premium but raises your out-of-pocket cost if you have a claim.
  • Insurance companies use your driving record, age, location, and vehicle type to set your rate, and these factors change over time.
  • Comparing quotes from multiple insurers takes 15 to 30 minutes and can save you hundreds of dollars per year.

Liability coverage: what it pays for and why it is required

Liability coverage pays for injuries and property damage you cause to other people when you are at fault in an accident. If you hit another car, liability pays to repair or replace it. If you injure the other driver or a passenger, liability pays their medical bills. If you hit a building, a fence, or a parked car, liability covers that too.

Every state sets a minimum liability limit you must carry. These minimums vary — some states require as little as $15,000 per person injured and $30,000 per accident, while others require $25,000 and $50,000 or higher. You can carry more than the minimum, and most insurance agents recommend doing so. If you cause a serious accident and the damages exceed your limit, you can be sued personally for the difference.

Liability does not cover damage to your own vehicle. That is what collision coverage is for. Liability also does not cover your own medical bills — that is covered by a separate part of your policy called medical payments coverage or personal injury protection, depending on your state.

Collision and comprehensive: protecting your own car

Collision coverage pays to repair or replace your car if you hit another vehicle, a tree, a guardrail, or any other object. It covers accidents you cause and accidents caused by someone else. It does not cover theft or weather damage.

Comprehensive coverage pays for damage to your car from events other than collisions: theft, vandalism, weather (hail, flooding, wind), hitting an animal, or falling objects. If a tree branch falls on your car during a storm, comprehensive pays for it. If someone breaks your window, comprehensive pays for it. If your car is stolen, comprehensive pays its current value.

Collision and comprehensive are optional in every state, but if you have a car loan or lease, your lender will require you to carry both. If you own your car outright, you can choose to skip them, but that means any damage comes out of your own pocket. The trade-off is that both coverages have deductibles, so you pay something out of pocket anyway.

Deductibles: how much you pay versus how much insurance pays

Your deductible is the amount you agree to pay toward a claim before your insurance company pays the rest. Common deductible amounts are $250, $500, $1,000, and $2,500. If you have a $500 deductible and your car needs $3,000 in repairs after an accident, you pay $500 and insurance pays $3,000. If the repairs cost $400, you pay the full $400 because it is less than your deductible.

Choosing a higher deductible lowers your monthly premium. A $1,000 deductible costs less per month than a $250 deductible, sometimes by $20 to $40 per month depending on your insurer and location. The catch is that if you have a claim, you pay more out of pocket. Choose a deductible you can actually afford to pay if you need to — there is no point in saving $30 a month if you cannot pay $1,000 when your car is damaged.

Your deductible applies separately to collision and comprehensive. You might have a $500 deductible for collision and a $250 deductible for comprehensive, or any other combination. Some insurers offer a $0 deductible for comprehensive (meaning you pay nothing for theft or weather damage), which can be worth the small premium increase if you live in an area with frequent hail or high theft rates.

What affects your insurance rate

Insurance companies use several factors to calculate your premium. Your driving record is the biggest one — accidents and traffic violations raise your rate, sometimes for three to five years. A clean record keeps your rate low. Your age matters too: drivers under 25 and over 65 pay more because statistics show they have more accidents. Location affects your rate because some areas have more accidents, theft, or vandalism. Urban areas usually cost more than rural ones.

The type of vehicle you drive changes your rate. Sports cars and luxury vehicles cost more to insure because they are expensive to repair. Older, common vehicles like a 2010 Honda Civic cost less. Safety features like automatic braking or stability control can lower your rate. How much you drive matters too — some insurers offer lower rates if you drive fewer than 10,000 miles per year.

Other factors include your credit score (in most states), whether you have had a lapse in coverage, and whether you bundle car insurance with home or renters insurance. You cannot change your age or location easily, but you can shop around for better rates, maintain a clean driving record, and ask your insurer about discounts you might may have access to for.

How to compare insurance quotes and find a better rate

Insurance rates vary significantly between companies for the same coverage. Getting quotes from at least three insurers takes 15 to 30 minutes and can reveal differences of $500 to $1,000 per year. You can get quotes online from most major insurers — State Farm, Geico, Progressive, Allstate, USAA (if you are military or a veteran), and others. Some insurers also offer quotes by phone or through an agent.

When you get a quote, use the same coverage limits and deductibles for each one so you are comparing the same thing. For example, if you are comparing $100,000 liability limits and a $500 collision deductible at one company, use those same numbers at the next company. Write down the total annual premium, not just the monthly payment, because some companies advertise a low monthly rate but charge higher fees.

After you have a few quotes, check each company's customer service ratings through the National Association of Insurance Commissioners (NAIC) or J.D. Power. A slightly higher premium from a company with better customer service can be worth it if you need to file a claim. Once you choose an insurer, ask about discounts: bundling with home insurance, paying in full instead of monthly, completing a defensive driving course, or having safety features in your car can all lower your rate.

What happens when you file a claim

If you have an accident or your car is damaged, contact your insurance company as soon as possible. Most insurers have a claims phone line that operates 24/7. You will need to provide basic information: when and where the accident happened, what damage occurred, and whether anyone was injured. If another vehicle was involved, get the other driver's name, phone number, address, insurance company, and policy number.

The insurance company will assign an adjuster to your claim. The adjuster inspects the damage, reviews police reports if applicable, and determines what the insurance company will pay. You will be asked to choose a repair shop — you can use the insurer's preferred shop or pick your own. Once repairs are approved, you pay your deductible and the insurance company pays the rest directly to the shop.

The entire process usually takes one to four weeks, depending on how busy the insurance company is and how complex your claim is. If you disagree with the adjuster's assessment, you can request a second opinion or hire an independent appraiser, though you may have to pay for that yourself upfront.

Frequently Asked Questions

Do I need to carry liability insurance if I do not drive often?

Yes. Every state except New Hampshire requires liability coverage before you can legally register and drive a vehicle on public roads. If you do not drive, you do not need insurance, but the moment you drive, you need it. Some insurers offer low-mileage discounts if you drive fewer than 10,000 miles per year.

What is the difference between actual cash value and agreed value?

Actual cash value is what your car is worth today, accounting for depreciation. If your car is totaled, the insurance company pays that amount minus your deductible. Agreed value means you and the insurer agree on a value upfront, usually for classic or collectible cars. Most standard policies use actual cash value.

Can I get insurance if I have a bad driving record?

Yes, but you will pay more. Insurance companies in every state are required to offer coverage to drivers with accidents or violations on their record. Rates for drivers with violations can be 50% to 100% higher than rates for clean records. Some insurers specialize in high-risk drivers and may offer better rates than others.

What does uninsured motorist coverage do?

Uninsured motorist coverage pays for your injuries and vehicle damage if you are hit by a driver who has no insurance or whose insurance does not cover the full cost. It is required in some states and optional in others. If you live in a state where it is optional, it is usually worth the small additional premium.

How long do accidents stay on my insurance record?

Most insurance companies look back three to five years when calculating your rate. An accident from six years ago typically will not affect your premium. However, some insurers have longer lookback periods, and serious violations like DUI can stay on your record longer. Ask your insurer how far back they look.