Car Insurance 101: Everything You Need to Know
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I don’t know about you, but I’ve yet to meet someone born understanding all the ins and outs of auto insurance. I love how insurance agents and websites assume we know what “comprehensive” and “liability” are supposed to mean, let alone how they affect our auto insurance quote.
This led to the inspiration to create Car Insurance 101 for you. We know understanding a policy and purchasing the right coverage can get overwhelming. There are some things about insurance that we simply don’t know or understand.
In this guide, we will cover basic terminology, how to choose the right policy and different tools you can use to navigate the insurance world. It’s time to put all the basic information at your fingertips so you can make your policy decision.
Or maybe you enjoy reading about car insurance solely for fun. Don’t worry, we are here for that.
Related: Car Insurance Calculator
In this article
Understanding the basics of car insurance
Car insurance provides financial protection in case your automobile causes physical or property damage. Without proper auto insurance, you risk ruining your financial future.
This might sound dramatic, but unfortunately, it’s true. Although different states have their own laws for not carrying insurance, nothing good comes from not having insurance. If you’re involved in an accident and you don’t have insurance, you could:
- Be sued by a victim in the crash
- Be fined
- Lose your license
- Drive up your future auto insurance rate
Again, each state is different. But car insurance should be viewed as a non-negotiable for your peace of mind and wallet.
Car insurance is obtained to provide yourself with proper coverage by purchasing a policy.
A car insurance policy is a contract between you and the auto insurance company. You agree to make the payments, and the insurer agrees to provide the outlined coverage as long as you make payments.
Similar to the consequences of not having insurance, each state varies on the requirements for the minimum coverage levels of your policy. This is why one of the first questions you’re asked when purchasing a policy is where you live. The agent or online portal will need to know this, so your state’s requirements are met.
Save $1,604 (or more) per year on car insurance today.
- 2-minute quote
- State minimum coverage
- Full coverage
- Explore top brands
Car insurance policy terms
Purchasing proper car insurance means working with an agent (or online) to determine the auto insurance coverage you need. As you navigate a policy, here are common terms you will see.
Premium
Your premium is the amount you (the policyholder) pay to keep the coverage from the car insurance company active.
Premiums can be paid monthly, quarterly, or yearly. As you can imagine, numerous factors affect insurance premiums. These factors range from your driving history and age to your location and credit score. Your premium also depends on your deductible.
important: As you’re negotiating your policy, double-check if you receive an additional discount for paying your premiums annually, versus monthly. Most carriers offer this as an incentive.
Deductible
That leads us to the next term. What is a deductible? This is the amount you would be responsible for out of pocket before any insurance coverage kicks in.
So, if you are involved in an accident and property damage occurs, your deductible is the amount you will have to pay before the insurance carrier pays what’s covered under your property damage policy. And FYI, this is per claim.
In general, the lower your deductible, the higher your premium. And vice versa. No matter your deductible, it’s financially wise to always have the deductible amount covered in your savings so you can pay it if an accident occurs.
Policy
The policy refers to the contract between you and the insurance carrier. You are the policyholder.
Insurance limit
Not surprisingly, insurance companies limit the amount they will pay for damages. Each type of coverage on your policy is subject to a limit.
Each state has requirements regarding the minimum insurance limit you can carry. If you’re working with an insurance agent, they will make sure your policy meets the minimum coverage and insurance limits required by the state.
Car insurance coverage terms
You have the actual policy, but then you have the layer of coverage added to it. These insurance options allow you to change your policy and customize it for your lifestyle and budget. Here are the most common coverage options and what they mean for you.
Collision coverage
Collision covers damage to your vehicle from a collision with another vehicle, an object, or something falling onto your car. It also covers you for damage from potholes. Collision pays for the repairs on your vehicle due to this type of damage, minus your deductible.
Your insurance policy will cover collision damage even if you’re at fault. However, if the accident is the other driver’s fault, the insurance company will pursue reimbursement from the other driver’s liability coverage.
Collision typically involves a deductible. So if you are involved in a collision with a car, or something else, you’ll be responsible for your deductible before the coverage kicks in. Your deductible may be reimbursed if your insurance company can recoup it from the other driver’s policy (if it was the other driver’s fault).
Comprehensive coverage
Comprehensive coverage covers you when your car is damaged by something other than a crash. Think of the coverage as anything your collision coverage wouldn’t cover. Examples of comprehensive damage are:
- Storms and natural disasters
- Theft and vandalism
- Damage from fire
- Damage from animals
- Damage from falling objects
States don’t require comprehensive coverage. However, if you owe money on your car, the lender will likely require you to add it to your policy. Make sure you review what your carrier covers if you elect to keep comprehensive coverage in your policy.
Bodily injury liability
You’ll hear insurance agents or online guides talk about the liability portion of a policy. But liability is two separate categories: bodily injury and property damage.
Bodily injury liability pays towards someone else’s injury if you’re in a car accident and it’s your fault. It does not pay for your injuries.
This type of coverage is for the policyholder and any family members listed on the policy. You’ll sometimes see it listed as “BI.” Most states require liability, although the limits vary from one to another.
Generally speaking, most experts recommend carrying at least $100,000 in bodily injury liability per person and $300,000 per accident.
Property damage liability
Sometimes listed as “PD,” property damage liability covers you for the damage a policyholder (or someone else who is driving your car with permission) might cause to someone else’s property.
This can mean damage to someone else’s car, but the coverage also includes damage to property like lamp posts, telephone poles, fences, structures, or buildings that were hit in an accident. Like bodily injury, it doesn’t pay for damage to your car.
Property damage liability helps cover expenses such as vehicle repair and replacement, damage to buildings, and repair and replacement of damaged stationary objects.
Also, like bodily injury liability, most states require this type of coverage.
important: Some states will allow you to purchase a liability-only auto insurance policy. This is typically only available if you own your car outright. You can find out more about liability insurance by reading this guide.
Medical payments
Medical payment coverage covers medical care costs for you, passengers, or family members in the car during an accident. This coverage applies regardless of who is at fault for the accident.
Medical payments also help pay for gaps where your healthcare insurance doesn’t pay, for costs such as co-pays. The coverage can also help pay for doctor visits and rehabilitation due to injury from the accident, lost wages, and funeral expenses if necessary.
Personal injury protection (PIP)
PIP is similar to medical payments; however, it typically has higher comprehensive coverage and coverage limits, and the premium for it is higher.
Twelve states require PIP coverage, although it also provides medical expenses, 60-80% of lost wages, and funeral expenses. This coverage usually kicks in before your medical or health insurance payments.
Uninsured and underinsured motorists
What if you’re involved in a hit-and-run or someone hits your car, and they don’t have insurance? Uninsured motorist coverage kicks in and will reimburse you (the policyholder), a member of the family, or a designated driver if one of you is hit by an uninsured motorist or hit-and-run driver.
Underinsured motorist coverage works differently but protects you if the other driver isn’t adequately insured. This coverage is used when the at-fault driver doesn’t have enough insurance to pay for the other driver’s total loss.
Uninsured motorist coverage protects a policyholder if they are hit as pedestrians.
Other common coverage options
When you’re purchasing your policy, trust me when I tell you that you will have more options given to you than you ever dreamed of. Some of the options are quite useful, while others are unnecessary. It’s a personal choice which ones you want, but here are the more common options.
- Roadside assistance. This service assists you if you ever find yourself broken down or needing assistance with your car. It provides services such as towing, battery jumping, gas refill, or lockout.
- Car rental reimbursement. This optional coverage provides money for a rental car if you’re involved in an accident.
- Personal umbrella coverage. This extra liability insurance would cover additional amounts above and beyond your current liability coverage.
- Gap insurance. Popular among new car owners, if you owe more on your car than your car is worth to the insurance company, this gap coverage would pay the difference if you’re involved in an accident and total your car.
- Rideshare coverage. Gig drivers like Uber or Lyft can relax knowing you have additional coverage while on the job. This is usually additional liability coverage if your car is damaged or you damage someone else’s vehicle. Some companies offer this option if you are a driver for meal delivery too (UberEats, DoorDash), so if you have a side hustle with your vehicle, you might want to consider adding this to your policy.
Related: How to Buy Car Insurance
Choosing the right auto insurance policy
I hate to break it to you, but it might not be the best choice for you if you’re choosing the right auto policy based on the company with the cutest mascot in their commercial.
I love the gecko as much as the next person, but there are specific requirements to look for with an auto insurance carrier and policy. A good agent will walk you through different scenarios while keeping you within the state requirements and presenting auto insurance discounts you may not know about. You can view some of your state requirements here or use a service like Gabi.
You should also know several factors that affect your car insurance rates. Some of these factors you can control, but most you can’t. Here are the top factors determining how much you pay:
- Age
- Location
- Driving history (at-fault accidents and tickets will increase your premium)
- Marital status
- Gender
- Credit score
- Coverage choices, including optional items like car rental reimbursement and roadside assistance
- Qualifying car insurance discounts such as safe driving or bundling of life insurance and homeowners insurance
- If you own your car or there is a lender
Make sure your agent knows all your information so you can get the best coverage and discounts. When it comes to policies, be sure to:
- Get quotes. You would be shocked at how much the price varies from one carrier to another. It’s also good practice to get quotes once every year or two.
- Review discounts with a fine-toothed comb. Every carrier has standard discounts. Most of them offer discounts for policies with more than one vehicle, more than one policy (if you add renters' or homeowners' insurance), and for a good driving record. But some lesser-known discounts might include an extra 5% for getting a car insurance quote online, not driving your car while you’re at college, or taking a driver’s education class.
- Review the company’s financial strength. The A.M. Best credit rating website allows you to review every insurance company’s financial strength.
Staying on your parents’ policy
Should I stay or should I go... on my parents’ policy, that is. That is the question many young drivers face as they enter adulthood and living situations change.
Staying on your parent’s policy as long as possible is usually good for the budget. It’s much less expensive to roll up under their discounts and policy than being on your own.
But then again, there are certain situations where you need your policy. How do you know what to do? Here’s a simple guide:
Stay on your parent's policy if:
- They own your car, and you live with them
- They own your car, and you’re away at school
- You live with them, they own your car, and you’re married
You need your own policy if:
- You own your own car — even if you live with your parents
- Your parents own your car, but you no longer live with them
If you and your parents have joint ownership of your car, then the insurance company will determine if you’re classified as a dependent.
Related: Best Car Insurance for Young Adults
Available tools for car insurance
Our Car Insurance 101 guide is here to point you in the right direction if you want further information. Fortunately, the internet is full of places to help you along your auto insurance journey. Here are some of our favorite resources.
Insurance Information Institute (iii)
If you’re looking for straightforward, unbiased information without any ads or sign-ups required, then look no further than the Insurance Information Institute. It’s a site full of information from people within the insurance industry who know it firsthand. You’ll find information ranging from policy basics to statistics on states with the highest auto insurance premiums.
NAIC
The NAIC, the National Association of Insurance Commissioners, is the standard-bearer for all things related to insurance regulation. It’s an organization governed by all the regulators from the 50 states and D.C.
The NAIC site has a lot of information about all types of insurance, but you may find it helpful in your comparison shopping for auto insurance.
The NAIC puts out an annual index of customer service complaint records. You can see how the insurance company fares regarding the number of registered complaints. Generally, you want a company’s index to be less than 1.
A.M. Best financial ratings
When comparing insurance companies, financial strength matters, but how is the everyday consumer supposed to know whether a company can pay its bills? Fortunately, we don’t have to be financial gurus to get the scoop.
A.M. Best is an independent company that measures a company's financial strength, including its ability to pay its obligations, such as insurance payouts.
Companies can receive a Superior (A+ or A++ rating), Excellent (A), Fair (B, B-), Marginal (C+ and C++), Weak (C and C-), and Poor (D and D-).
Searching for a company's latest A.M. Best rating will give you the information. Insurance companies also post the ratings on their financial information tab on the company website. For instance, State Farm has an A.M. Best rating of A++, demonstrating its financial strength and stability.
Gabi
Gabi is your new best friend. If you’re shopping for a policy — even if you already have one in place — then you owe it to yourself to check out this site. Gabi is a nationwide auto insurance comparison site. And it uses artificial intelligence to give you lightning-fast results.
What sets Gabi apart from other sites is two things. First, you upload your current policy to Gabi, and it gives you quotes with true, apples-to-apples comparisons. You don’t have to guess if the quote is similar because you can see in black and white that you’re getting a quote for the same coverage.
Secondly, Gabi doesn’t profit from selling your information to companies or insurance agents. The site only makes money from an insurance company if you purchase a policy through Gabi.
It's also completely free to use, so you can get several free car insurance quotes to help you save money.
Check out our full review of Gabi here and see how Gabi can help you save maximum dollars on your auto insurance policy. Even if you’ve never purchased a policy before, you can still use Gabi to help you with your comparison shopping.
Save $1,604 (or more) per year on car insurance today.
- 2-minute quote
- State minimum coverage
- Full coverage
- Explore top brands
The bottom line
Taking the time to understand auto insurance better is a smart financial move. The more information you have, the better prepared you are to talk with insurance carriers and agents. You can also have confidence in your policy decisions if you purchase online without anyone’s help.
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Writer
Sara Coleman is a former corporate gal turned creative entrepreneur. She began writing professionally several years ago and now contributes to multiple websites, blogs, and magazines. She’s also an avid reader and can’t resist a great historical fiction novel. Sara holds a BA in journalism from the University of Georgia and can be found supporting her Bulldogs every chance she has. She resides in Charlotte, North Carolina, with her wonderfully supportive husband and three children. When she’s not ushering her kids to sports and dance lessons, she can be found creating content for her own website, TheProperPen.com.
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