Congratulations on buying your first car! To start off on the right foot, you’ll need to protect your investment, and that means finding the perfect car insurance policy.
But what should a first-timer know about car insurance before signing up? Read on to learn the basics so you can make an informed decision on what you need. Then, you can get back to enjoying your new car with peace of mind!
How does car insurance work?
Car accidents aren’t just scary and stressful — they’re also expensive. There is a reason auto insurance has some of the most expensive premiums of all insurance types.
How does it work? You pay a relatively small monthly fee for your insurance policy. If you need to file a claim, you pay your deductible and your insurance kicks in to pay for the rest, up to your policy limit.
Fault and liability
If you are in an accident that is not your fault, the person who was at fault will be liable for the damages. Their insurance will cover your costs up to their policy limits.
Likewise, if you are at fault, your insurance covers the other person’s damages. As such, most states require liability coverage (coverage for the other person’s damages).
There is one big exception: no-fault auto insurance.
What is no-fault insurance and how does it work?
This is an extremely confusing part of auto insurance that even seasoned drivers don’t fully understand. So if you’re new to driving and you live in a no-fault state, here is what you need to know.
No-fault auto insurance will pay for medical expenses, wage loss benefits, replacement services, and the damage you do to other people’s property. It does not matter who caused the accident.
Which states are no-fault auto insurance states?
Currently, 12 states and Puerto Rico have no-fault insurance laws. These include Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah.
These states require drivers to buy no-fault insurance policies. No-fault insurance will pay for medical expenses, wage loss benefits, replacement services, and the damage you do to other people’s property. It does not matter who caused the accident. These laws were designed to reduce the hassle and expense of working out who is at fault in an accident. However, notice that your basic no-fault insurance will not pay for repairs to your car.
What types of no-fault insurance are there?
If that already sounds complicated, we are just getting started. There are really four types of states based on their no-fault laws. You have 1) true no-fault, 2) choice no-fault, 3) tort liability and 4) add-on states. The major differences between state laws are the restrictions on the right to sue and whether the policyholder’s own insurer pays first-party benefits regardless of who is at fault in the accident.
The table below attempts to clarify this mess of state legislation.
First-party benefits (PIP) (1)
Restrictions on lawsuits
Thresholds for lawsuits
|Kentucky||X||X||X (2)||X (2)|
|New Jersey||X||X||X (2)||X (2), (3)|
|Pennsylvania||X||X||X (2)||X (2)|
|D.C.||X||X (4)||X (4)|
|(1) Personal injury protection.|
(2) Choice no-fault state. The policyholder can choose a policy based on the no-fault system or traditional tort liability.
(3) Verbal threshold for the Basic Liability Policy, the Special Policy and the Standard Policy where the policyholder chooses no-fault. The Basic and Special Policies contain lower amounts of coverage.
(4) The District of Columbia is neither a true no-fault nor add-on state. Drivers are offered the option of no-fault or fault-based coverage, but in the event of an accident, a driver who originally chose no-fault benefits has 60 days to decide whether to receive those benefits or file a claim against the other party.Source: American Property Casualty Insurers Association.
Covering yourself and your property
Unfortunately, not everyone has adequate insurance. In fact, according to III’s last survey, about one in eight drivers is uninsured or underinsured.
If someone causes an accident and you suffer damages that they can’t afford to cover, the responsibility falls on you. In this case, it helps to have insurance coverage for yourself and your property.
Further, if you are at fault for an accident and can’t pay out-of-pocket, you’ll need coverage to pay for damages to yourself, your passengers, and your property.
Impact of claims on your policy
If you file a claim for an accident and are found to be at fault, the cost of your insurance will go up. In some states, like California and Massachusetts, prices can go up by more than 80%.
However, your price shouldn’t go up if you file a claim but are not at fault. Why might you file a claim with your own insurance if you aren’t at fault?
If you aren’t at fault but the other person doesn’t have adequate insurance, you might file a claim with your own insurance to have the damages covered. However, you will have to have the coverage in place beforehand.
Alternatively, if another person is at fault but you have coverage for your own damages (medical and property), you can file the claim with your insurance through a process known as subrogation.
What is subrogation?
Subrogation allows you to pay your deductible and quickly fix your car and tend to any medical needs from the accident. Your insurance will then pursue the other person’s insurance to cover the costs. If they recover the money, your insurance policy can refund your deductible.
Now that you know the basics of how insurance works, let’s take a closer look at the types of coverage you might want.
Auto insurance coverage types
Below, find the most common types of coverage offered by auto insurance companies.
Coverage for damages you cause to others
Coverage for the damage you cause to another person or their property while driving your car is called liability. It is usually broken down into two categories: bodily injury liability and property damage liability.
- Bodily injury liability covers the person’s medical bills, lost wages, and legal fees up to policy limits. There are often two limits on the policy, one per person and one for the overall cost of the accident.
- Property damage liability covers damages to another person’s property, which can include their vehicle, mailbox, fence, garage, etc. Property damage liability coverage is also subject to policy limits.
Both types of liability coverage are required by most states. When you apply for insurance, most insurers will inform you of these minimum requirements. Find out which auto insurance companies offers the best rates and terms.
Coverage for damages you cause to yourself
If you get hurt in an accident that is your fault, liability will not cover your expenses. For that, you’ll need additional coverage. The most common types of coverage for bodily injury include:
- Personal Injury Protection (PIP) covers health insurance deductibles, medical costs if they exceed your health insurance limits, lost wages, loss of services, and funeral expenses (in the worst case scenario).
- Medical payments coverage covers medical bills for you and your passengers. It can also cover medical bills for a family member if they were driving your car when the accident occurred.
This coverage also comes in handy if someone else caused an accident but doesn’t have adequate insurance.
Coverage for damages to your vehicle
If you want to protect your vehicle against damages, you can opt for the following coverage types:
- Collision coverage covers the costs of repairing or replacing your vehicle after a collision, regardless of who was at fault.
- Comprehensive coverage covers the repair or replacement of your vehicle due to damages which are unrelated to an auto accident. This might include a tree falling on the car, fire damage, etc.
- Guaranteed Asset Protection (GAP) insurance is designed for situations in which a car is totaled and you owe more than the fair market value. It covers the difference between the settlement you get and how much you owe your lender.
If you are financing your vehicle with an auto loan, most lenders will require you to carry collision and comprehensive coverage.
Protect yourself from drivers without insurance
If you are in an accident caused by a driver without adequate insurance, you’ll be left to cover the damages. For cases like these, many insurers offer uninsured/underinsured motorist coverage options for bodily injury and property damage.
In some states, these options are bundled together in a package, while in others, they are sold separately. Further, some states require one or more of the uninsured/underinsured coverage types.
If you have collision or medical payments coverage, the respective uninsured/underinsured coverage will be redundant. However, uninsured/underinsured policies often have lower deductibles than medical payment and collision policies, which motivates some policyholders to get them instead.
How much car insurance coverage do you need?
Now you understand all of the coverage options that are available. But which ones do you really need? Ask yourself the following questions.
Which policies does your state require?
First, check the laws in your state to find out what you are required to have.
Typically, states only require liability insurance, though some also require some form of uninsured/underinsured motorist coverage.
Which policies does your lender require?
This only applies if you are financing your vehicle with an auto loan. If you do not yet fully own your vehicle, your lender may require you to hold certain types of insurance.
Most commonly, lenders require collision and comprehensive coverage. This way, they know that the vehicle will be repaired or replaced if unexpected damages occur.
Which policies do you want?
Lastly, take some time to consider what you need and want. If you own your car in full and your state only requires you to have liability insurance, the other types are 100% optional. You might be tempted to go with the minimum required amount in order to minimize your monthly payments. But before you make this choice, consider the risks.
If you cause an accident and are hurt or if your car is damaged, you will be left to pay out of pocket. If other people in your car are hurt, you may be liable for their medical costs as well. And these medical costs are far greater than most people can afford out of pocket.
How to determine your ideal coverage?
Paying more per month for medical payments, collision, and comprehensive coverage can give you peace of mind. However, your decision also depends on your vehicle’s value, the cost of the insurance, and your income.
Weigh the costs and benefits to determine what is the best fit for you. For example, if your car is old, you have a great driving record, and you have no assets, minimum liability would probably be best. However, if you have a home, money in savings, and a new car, full coverage would enable you to protect everything.
Limits, premiums, and deductibles
When considering your insurance options, you’ll also have to factor in coverage limits, premiums, and deductibles.
Your premium is the amount you pay for your insurance per year. In 2016, the Insurance Information Institute (III) reported that the average auto insurance expenditure in the U.S. was $935.80. Premiums are often broken down into 12 monthly payments. How much you pay each month depends on personal factors like your credit score and age, as well as your deductible, your policy limits, your coverage options, and your insurer.
Your policy limit is the maximum amount that your insurer will pay out for a covered loss. For example, say you have a $100,000 limit on your medical payment insurance. If you have an accident and the damages total $125,000, you would only receive a settlement up to $100,000. The extra $25,000 would be your responsibility. The higher your policy limit, the more expensive your premium.
Your deductible is the amount you pay out-of-pocket before you receive a settlement on an approved claim. After you pay the amount, insurance kicks in to pay the rest. Deductibles often range from $250 to $1,000, and you can select the deductible amount you prefer.
The cost of your deductible and the cost of your premium are linked. That means that you can opt for a higher deductible to lower your premium and vice versa. If you don’t have many claims, a high deductible will benefit you, because it would lower your premium.
Car insurance is expensive! But there are ways to lower the cost. One key strategy is to pursue car insurance discounts. When comparing insurance quotes, investigate all of the discounts an insurer offers, and factor them into the price you will pay.
For example, Esurance offers a full lineup of discounts. These include cost reductions for paying for your premium in full, holding multiple policies, not having any claims, owning a home, getting a quote online, driving an alternative fuel vehicle, and more.
Other auto insurance tips
Always read your contract in full. It may be boring, but it’s essential that you read through your contract and understand all of the details. If you don’t understand something, ask your agent about it. The fine print will become very important if you ever get into an accident.
Review your insurance periodically to see if you can save more. The cost of your premium depends on a number of personal factors which change constantly. For example, if your credit score improves, you get married, you take a defensive driving course, or you buy a house, your premium will go down. Check in at least once per year to find out if you can save.
Check out the add-on features that auto insurance companies offer. Most companies offer valuable features that you can add on to your car insurance, like emergency roadside assistance, car rental coverage, modified vehicle coverage, and more. Be sure to consider these coverage options before picking an insurer.
How to find the best deal on car insurance
Now that you know what you want out of your car insurance, how can you find the best deal? As with any financial decision, you need to shop around. Once you identify the coverage you need for your situation, research leading insurance companies and get quotes. Compare the quotes side-by-side to figure out which offers the best overall value. And be sure to consider the company’s reputation and customer satisfaction ratings in addition to the cost and coverage.
Ready to get started? Compare industry-leading insurance companies all on one easy page here.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.