What auto insurance does and why you need it
Auto 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, hit someone else's car, or your vehicle is damaged or stolen. In every U.S. state except New Hampshire, you are required by law to carry at least a minimum amount of liability coverage before you can legally drive. Liability coverage pays for damage or injuries you cause to other people or their property — it does not pay for damage to your own car.
The reason states require this is straightforward: if you cause an accident, the other person should not have to pay their own medical bills or car repairs out of pocket. Auto insurance protects them. It also protects you, because if you cause serious injury or damage without insurance, you can be sued personally and have your wages or assets taken to pay the judgment.
Beyond the legal minimum, you can purchase additional coverage that protects your own vehicle and covers costs the basic requirement does not. Understanding what each type covers — and what it does not — helps you decide how much protection makes sense for your situation.
Key Takeaways
- Liability coverage is required by law in all states except New Hampshire and pays for damage or injuries you cause to others, not to your own vehicle.
- Collision and comprehensive coverage protect your own car but are optional; collision covers accidents you cause, and comprehensive covers theft, weather, and vandalism.
- Deductibles are the amount you pay out of pocket before insurance kicks in, and choosing a higher deductible lowers your monthly premium.
- Your premium depends on your driving record, age, location, the type of car you drive, and how much coverage you choose.
- Insurance companies use a report called a CLUE report to track your claims history, which affects your rates even if you were not at fault.
The types of coverage and what each one pays for
Liability coverage has two parts: bodily injury liability and property damage liability. Bodily injury liability pays medical bills, lost wages, and pain-and-suffering claims if you injure or kill someone in an accident you cause. Property damage liability pays to repair or replace the other person's car or other property. States set minimum amounts you must carry — these vary widely, from $15,000 per person in some states to $50,000 or more in others. Most insurance agents recommend carrying higher limits than the legal minimum because a serious accident can easily exceed the minimum and leave you personally responsible for the rest.
Collision coverage pays to repair or replace your own car if you hit another vehicle, a tree, a guardrail, or any other object — regardless of who caused the accident. If you cause the accident, collision pays after your liability coverage pays the other person. If someone else causes the accident, their liability coverage should pay, but if they are uninsured or underinsured, your collision coverage protects you. Collision coverage comes with a deductible, usually $500 or $1,000, meaning you pay that amount and insurance pays the rest.
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. Like collision, it has a deductible. Comprehensive is often cheaper than collision because theft and weather damage happen less often than accidents.
Uninsured and underinsured motorist coverage protects you if you are hit by a driver who has no insurance or not enough insurance to cover your injuries. This coverage pays your medical bills and lost wages up to the limit you choose. It is required in some states and optional in others, but most insurance agents recommend it because roughly one in eight drivers on the road is uninsured.
How deductibles work and why they matter to your premium
A deductible is the amount of money you agree to pay toward a claim before the insurance company pays the rest. If you have a $1,000 deductible and your car needs $5,000 in repairs after an accident, you pay $1,000 and insurance pays $4,000. If the damage is only $800, you pay the full $800 and insurance pays nothing — you do not get a refund for the unused deductible.
Choosing a higher deductible lowers your monthly premium because you are taking on more of the risk yourself. A $500 deductible costs more per month than a $1,000 deductible on the same car and coverage. The trade-off is that if you do have an accident, you will pay more out of pocket. People who drive older cars or have limited savings often choose higher deductibles to keep their monthly payment affordable, accepting that a major accident would be expensive. People with emergency savings or newer cars often choose lower deductibles so they are not hit with a large bill if something happens.
Liability coverage does not have a deductible — if you cause an accident, insurance pays the full amount (up to your coverage limit) and you do not pay anything out of pocket for the other person's claim. You only pay a deductible if you are using collision or comprehensive coverage on your own vehicle.
What affects your insurance rate
Insurance companies use several factors to calculate your premium. Your driving record is the single biggest factor: accidents and traffic violations you caused stay on your record for three to five years and raise your rate. Even one at-fault accident can increase your premium by 20 to 40 percent, depending on the company and the severity. A serious violation like a DUI can raise rates by 50 percent or more.
Your age and gender matter because statistics show that young drivers (under 25) and male drivers have more accidents. Rates are highest for teenage drivers and gradually decrease as you age. At around age 65, rates may start to increase again.
Your location affects rates because some areas have more accidents, theft, or vandalism than others. Urban areas typically cost more than rural areas. Even moving to a different neighborhood in the same city can change your rate.
The type of car you drive affects your rate. Sports cars and luxury vehicles cost more to insure because they are expensive to repair and are stolen more often. Older, common vehicles like a Honda Civic or Toyota Camry usually cost less. Insurance companies also consider safety ratings — cars with high crash-test scores and good safety features may may have access to for discounts.
How much coverage you choose directly affects your premium. Higher liability limits, adding comprehensive and collision, and choosing a lower deductible all increase your monthly cost. Your claims history also matters: if you have filed multiple claims in the past few years, even if you were not at fault, your rate may go up because the company sees you as higher risk.
How insurance companies investigate accidents and set fault
When you report an accident to your insurance company, they assign an adjuster to investigate. The adjuster reviews the police report (if one was filed), photographs of the damage, statements from you and any witnesses, and medical records if anyone was injured. They may also obtain a statement from the other driver's insurance company.
Based on this investigation, the adjuster determines fault — who caused the accident. In some states, fault is straightforward: the person who violated a traffic law caused the accident. In other states, fault can be shared (called comparative negligence), meaning both drivers bear some responsibility. The percentage of fault assigned affects how much each insurance company pays.
If you disagree with the adjuster's decision, you can request that they review their findings or file a complaint with your state's insurance commissioner. You can also hire your own accident reconstruction informed, though this is expensive and usually only done in serious cases.
Why your claims history affects your rates even if you were not at fault
Insurance companies track every claim you file — whether you caused it or not — using a report called a CLUE report (Comprehensive Loss Underwriting Exchange). This report stays on file for five to seven years and is shared among insurance companies. If you file multiple claims in a short period, even if you were not at fault, some companies will raise your rate or drop you as a customer because they view frequent claims as a sign of higher risk.
This is why some people choose not to file a claim for minor damage. If your deductible is $1,000 and the damage is $1,200, you might pay the $1,200 out of pocket rather than file a claim, because the rate increase over the next few years could cost you more than $1,200. Before filing a claim, ask your insurance company what impact it will have on your rate.
How to shop for auto insurance and compare quotes
Insurance rates vary significantly between companies for the same driver and car. Getting quotes from at least three different insurers is the most direct way to find a lower rate. Most companies offer free quotes online or by phone in minutes. When you get quotes, use the same coverage limits and deductibles for each so you are comparing the same thing.
Beyond price, consider the company's customer service reputation and claims process. You can check ratings on the National Association of Insurance Commissioners (NAIC) website or read reviews on independent sites. Some companies offer discounts you may not know about: bundling home and auto insurance, paying in full upfront instead of monthly, maintaining a good driving record for a certain number of years, completing a defensive driving course, or having safety features on your car.
If you have been with the same company for several years, ask about a loyalty discount or straightforward call and ask if they can lower your rate. Sometimes companies will reduce your premium to keep you as a customer, especially if you have a clean driving record.
What to do if you have an accident
If you are in an accident, first check for injuries and call 911 if anyone needs medical help. Move your car to a safe location if possible. Take photographs 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, and insurance company and policy number. Get contact information from any witnesses.
Report the accident to your insurance company as soon as possible — most policies require you to report within a certain timeframe, often 24 to 72 hours. Provide the adjuster with all the information you gathered. Do not admit fault or apologize for the accident, even if you think you caused it, because anything you say can be used against you. Let the investigation determine fault.
Keep records of all medical treatment, repair estimates, and communication with the insurance company. If the other driver's insurance company contacts you, you can speak with them, but you are not required to give a recorded statement. If you hire a lawyer, let your insurance company know.
Frequently Asked Questions
Do I have to carry collision and comprehensive coverage?
No, these are optional in all states. However, if you have a car loan or lease, the lender or leasing company will require you to carry both as a condition of the loan or lease agreement. If you own your car outright, you can choose to carry only liability coverage, though this means you pay for any damage to your own vehicle out of pocket.
What happens if I let my insurance lapse?
Driving without insurance is illegal in every state except New Hampshire. If you are pulled over, you can face fines, license suspension, and vehicle impoundment. If you cause an accident while uninsured, you are personally liable for all damages, and the other person can sue you. Your license can also be suspended for up to three years in some states.
Can I get insurance if I have a bad driving record?
Yes, but you will pay more. Some companies specialize in high-risk drivers and will insure you even with multiple accidents or violations. You may also be required to carry higher liability limits than the state minimum. As your driving record improves over time, you can shop around for better rates.
How often should I review my insurance coverage?
Review your coverage at least once a year or whenever your situation changes — a new car, a move to a different state, a major life event, or a change in how much you drive. Your needs may have changed, and rates vary by company, so shopping around periodically can save you money.
What is gap insurance and do I need it?
Gap insurance covers the difference between what you owe on a car loan and what the car is worth if it is totaled. If you owe $20,000 on a car worth $15,000 and it is destroyed, gap insurance pays the $5,000 difference. It is most useful if you put down a small down payment or have a long loan term. If you put down 20 percent or more, gap insurance is usually not necessary.