Owning a car isn’t a necessity everywhere in the U.S., but if you do own one, you need auto insurance. There are few other purchases we spend so much money one but hope we never have to use. Fortunately, there are ways you can save if you shop around and choose the right coverage for your needs.
This complete guide to auto insurance explains everything you need to know.
Why do you need auto insurance?
Car insurance can be costly. But not having it could be even more costly. If you’re unsure whether you need auto insurance, here are three reasons why you should:
- In most states (all except Virginia and New Hampshire), you’re required by law to have insurance if you drive a car.
- If you have an auto loan, your lender will usually require you to have car insurance. If you don’t, your lender could buy insurance for you and then charge you for it – you’ll probably pay more and get less coverage if this happens.
- A car accident could wipe you out financially if you don’t have insurance, even if the accident isn’t your fault. Insurance can reimburse you for damage to your car, accident-related medical bills, and other costs.
What does auto insurance cover?
Which states don’t require auto insurance?
An auto insurance policy is a collection of different protections, called “coverages.” Standard coverage will depend on the lender and policy you choose. There are also optional features that you can add on for an additional cost.
A good insurance agent can help you decide which auto insurance coverages you want. Here are some examples:
Bodily injury liability
This coverage protects you from having to pay the full cost of medical bills if other people get injured in an accident for which you were at fault. It also protects against other claims, such as lost wages and pain and suffering, due to an accident that you caused.
Property damage liability
This coverage protects you from having to pay the full cost to repair any damage that you cause to someone else’s property, including their vehicle, fence, or any other object/structure.
Uninsured and underinsured motorist
This coverage protects you from losses caused by someone who doesn’t have car insurance or whose insurance isn’t adequate.
Medical payments or personal injury protection
This coverage protects you from having to pay the full cost of medical bills if you or your passengers are injured in an accident, and you were at fault.
This coverage will help pay costs for any damage done to your car as a result of a collision with another vehicle or object (i.e., telephone pole, guardrail, tree, etc.).
This coverage reimburses you for car damage caused by something other than a collision, such as fire, theft, vandalism, hail, flood, windstorm, and falling rocks/trees. It also covers damages caused by animals (i.e., accidentally hitting an animal while driving).
Towing and rental car
This coverage helps you if your car isn’t drivable due to an accident. It doesn’t cover maintenance work to your car.
If your vehicle is a motorcycle, all-terrain vehicle (ATV), off-road vehicles, or recreational vehicle (RV), or if you drive your car for commercial purpose (e.g., you’re a driver for Uber or Lyft), you’ll usually need a special type of auto insurance policy or some additional coverage, called a “rider.”
You can also add other types of riders to your auto insurance. The choices vary, depending on what your insurer includes in your policy and offers only as an extra.
Riders usually don’t cost much, but they can add up if you pile them on. So think about which riders make sense for your needs and which don’t before you decide.
Examples of riders include:
- Rental car reimbursement. This rider pays for you to rent a car while yours is being repaired due to an accident or other loss that’s covered by your policy.
- Roadside assistance. This rider provides quick roadside repairs to your car, such as jump-starting a dead car battery or changing a flat tire so that you can drive on to a repair shop. If your car needs more help, this rider will cover towing services.
- Windshield glass coverage. Windshield dings and cracks can be dangerous because the windshield could shatter, tossing glass into your face while you’re on the road. This rider pays to repair or replace a damaged windshield and waives your deductible for this repair or replacement.
- Custom parts and equipment. This rider pays for repair or replacement of after-market accessories, such as a high-end stereo, custom wheels, or a fancy navigation system that you’ve installed in your car.
- Gap insurance. This rider pays the difference between the actual cash value of your car and the amount you owe on your car loan or lease if your car is totaled in an accident or stolen. You don’t need this rider if you don’t have a car loan or your car’s cash value is less than you owe on your loan,
8 factors that determine how much your auto insurance will cost
How much you’ll pay for auto insurance depends on several different factors, including:
Your driving record
A significant predictor of whether you’re going to get into an accident is your driving history and the driving history of other drivers on your policy. For example, if you’ve been ticketed for speeding or running red lights, you’re much more likely to get in an accident than someone who is violation-free.
Your gender, age, and how long you’ve had auto insurance
Young males are much more likely to get in an accident than anyone else. In contrast, older men are less likely to get into accidents than older women. As a result, the company will use predetermined tables based on your age and gender to know how to weigh this factor.
Whether you’re married or single
Some insurers view married male drivers as safer than single. This is based on data showing that singles are more likely to get into motor accidents and drink while driving.
Your car’s make, model, and age
The type of vehicle you drive isn’t going to improve or decrease your chances of getting in an accident, but it can determine whether personal injury happens. Cars with excellent safety ratings are likely to get lower insurance rates. On the other hand, flashy cars that are focused more on performance than safety, are more likely to get high rates.
Older cars aren’t more likely to get in an accident than newer cars. But because the car’s value declines the older it gets, there’s a lower threshold for damage to classify the car as “totaled.” This is especially the case if the vehicle is no longer in production and getting parts to repair it is more expensive. As a result, collision and comprehensive coverages are pricier on older cars.
Where you live
Insurance companies are regulated by states, so rates can vary wildly depending on where you live. For example, drivers pay an average of $1,264 in New Jersey and $572 in Idaho, according to the Insurance Information Institute.
The majority of accidents happen close to home. So, if you live in an urban area where population density is high, you’re more likely to get in an accident. Alternatively, if you live in a rural area, your rates will be cheaper because of the lower likelihood of an accident. What’s more, some states have different requirements for what type of and how much insurance coverage you should have.
The number of miles you drive per year
One of the questions you’ll get during the application process is an estimate of how much you drive per year. Included in that is your daily commute. The more time you spend on the road, the higher your chances are of getting into an accident.
It can be hard to make that estimate but resist the urge to fabricate the numbers. Insurance companies can use third-party vendors to verify how much you’re driving and revoke any discounts you’ve received for low mileage.
How many auto insurance claims you’ve submitted
Insurance companies consider drivers who have a history of making claims as a higher risk. The size of the claim also matters. So, expect to pay a higher premium, if you have several large claims in your insurance history.
Your policy’s limits and coverage deductibles
A deductible is an amount that you pay out of pocket before your insurer pays out for your claim. If your policy has higher deductibles, your premium should be lower.
Auto insurance alternatives
Only New Hampshire and Virginia don’t require drivers to have auto insurance as long as they can afford to self-insure in case of an accident. However, 32 states also allow drivers to deposit money into a bond instead of buying insurance.
Which states allow you to deposit a bond instead of buying car insurance?
Auto insurance discounts
Some insurers offer discounts for auto insurance if you:
- Insure more than one car with the same company.
- Insure your car and home with the same company.
- Have airbags, anti-lock brakes, or anti-theft devices on your car.
- Complete a defensive driving class, especially if you’re an older driver.
How much can I save with auto insurance discounts?
|Discount||Average Savings||Discounts||Average Savings|
|Affinity (i.e.teachers, firefighters)||5% to 15%||Safety features||Up to 10%|
|Alternative fuel vehicle||Up to 10%||Senior||5% to 10%|
|Autopay||Up to 5%||Student away from school||Up to 30%|
|Full payment||Up to 5%||Telemetrics device||Up to 30%|
|Good driver||10% to 25%||Accident-free||Up to 5%|
|Good student||Up to 20%||Anti-lock brakes||Up to 10%|
|Low mileage||Up to 20%||Anti-theft||Up to 10%|
|Military||8% to 15%||Defensive driving course||Up to 10%|
|Multi-policy||Up to 8%||Early signing/renewal||Up to 10%|
|Multiple vehicles||Up to 25%||Emergency road assistance||Up to 5%|
|New vehicle||10% to 30%||Homeowner||5% to 15%|
|Safe driver||Up to 10%||Single annual payment||5% to 10%|
|Students away from home||Up to 30%||Paperless||Up to 3%|
Scoring a discount or two could help you save on auto insurance. But the real savings come from shopping around for the best auto insurance coverage for your needs.
Shopping around for auto insurance
Shopping around is important because the factors that affect your rate are always in flux. Maybe you were responsible for a fender-bender, your credit score improved, you bought a different car, you got married (or divorced), you added another driver to your policy, or your insurer raised its rates. Whether or not you can control the factors, shopping around may still save you money.
And make sure you notify your insurer if you change jobs or stop working and expect to drive fewer miles because that could affect your rate as well.
It’s also smart to call your insurer or agent before you purchase a new car. That way, you won’t be unpleasantly surprised at how much your auto insurance premium will be. And remember, the lowest premium might not be the best value. Choose a highly-rated company to protect yourself from any unexpected difficulties if you have a claim. For example, a disreputable insurer might force you to use a poor mechanic or pay only for after-market parts that aren’t as reliable as what your car’s manufacturer installed.
Finding the right auto insurance policy takes some legwork. Shop around and read your policy, so you know what it covers before you ever have to submit a claim.
Make sure to ask questions about the coverages that are offered, both standard and as add-ons. And think about whether you prefer a higher premium and lower deductible or higher deductible and lower premium.
To find the best policy for you, compare leading auto insurance companies side-by-side.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.