Car Insurance 101: Everything You Need to Know to Purchase the Right Policy
I don’t know about you, but personally, I’ve yet to meet someone who was 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 it affects our auto insurance quote.
This led to the inspiration to create the 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 through 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.
Understanding the basics of car insurance
Car insurance is a way to have financial protection in case your automobile causes physical or property damage. Without proper auto insurance, you’re at risk of wiping out your financial future.
This might sound dramatic, but unfortunately, it’s true. Although different states have their own laws for not carrying insurance, there’s nothing good that 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
- Drives up your future auto insurance rate
Again, each state is different. But for your peace of mind and your wallet, having car insurance should really be viewed as a non-negotiable.
Obtaining car insurance to provide yourself proper coverage is done 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 as long as you make payments, the insurer agrees to provide the outlined coverage.
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 you’re purchasing a policy is where you live. The agent or online portal will need to know this so your state’s requirements are met.
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’re navigating through a policy, here are common terms you will see.
Premium
Your premium is the amount you (the policyholder) pays to keep the coverage from the car insurance company active.
Premiums can be paid on either a monthly, quarterly, or yearly basis. As you can imagine with insurance, there are numerous factors that affect how much your premiums are. These factors range from your driving history and age to your location and credit score. Your premium also depends on how much your deductible is.
JoyWallet tip: 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 steps in to pay 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 what deductible you have, 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 is referring to the contract between you and the insurance carrier. You are the policyholder.
Insurance limit
Not surprisingly, insurance companies put a limit as to how much they will pay out for damages. Each type of coverage on your policy will be subject to an insurance 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 are where you can make changes to 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. It’s possible your deductible will 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
Comprehensive coverage isn’t required by states. However, if you owe money on your car, it’s likely the lender will require you to add it to your policy. Make sure you review what your carrier covers if you do 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 actually 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 own injuries.
This type of coverage is for the policyholder and any family members also listed on the policy. You’ll sometimes see it listed as “BI.” Liability is required by most states, 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 own car.
Property damage liability helps cover costs for expenses such as vehicle repair and replacement, damage to buildings, and repair and replacement of the stationary objects damaged.
And also like bodily injury liability, most states require this type of coverage.
JoyWallet tip: 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 payments coverage covers medical care costs for you, any passengers, or any family members in the car with you during an accident. This is coverage no matter 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, higher coverage limits, and the premium for it is higher.
There are 12 states that require some level of PIP coverage, although It also provides medical expenses, 60-80% of lost wages, and funeral expenses. This coverage usually kicks in before your medical payment or your 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 still protects you if the other driver isn’t adequately insured. When the at-fault driver doesn’t have enough insurance to pay for the other driver’s total loss, then this coverage is used.
Uninsured motorist coverage also protects a policyholder if they are hit as a pedestrian.
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, others are unnecessary. It’s a personal choice which ones you want, but here are the more common options you’ll find.
- Roadside assistance. Assists you if you ever find yourself broken down or needing assistance with your car. Provides services such as towing, battery jumping, gas refill, or lockout.
- Car rental reimbursement. This optional coverage provides you with money for a rental car if you’re involved in an accident.
- Personal umbrella coverage. This is extra liability insurance that 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, then this gap coverage would pay the difference if you’re involved in an accident and total your car.
- Rideshare coverage. Gig drivers, such as with Uber or Lyft, can relax knowing you have additional coverage while you’re 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.
Choosing the right auto insurance policy
I hate to break it to you, but if you’re choosing the right auto policy based on the company that has the cutest mascot in their commercial, then it might not be the best choice for you.
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 also view some of your state requirements here or use a service like Gabi.
You should also know there are 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, or not driving your car while you’re at college, or taking a driver’s education class.
- Review the company’s financial strength. You can review every insurance company’s financial strength by going to the A.M. Best credit rating website.
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 into adulthood and living situations change.
Staying on your parents’ policy as long as possible is usually good for the budget. It’s a lot less expensive for you to roll up under their discounts and policy than it is for you to be on your own.
But then again, there are certain situations where you need your own policy. How do you know what to do? Here’s a simple guide:
Stay on your parents’ 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 or not.
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, which stands for 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 each of the 50 states and D.C.
There’s a ton of information on the NAIC site, and it deals with all types of insurance. But when it comes to auto insurance, you may find the NAIC helpful in your comparison shopping.
The NAIC puts out an annual index of customer service complaint records. You can see for yourself how the insurance company fares when it comes to the number of registered complaints. Generally speaking, you want to look for a company’s index to be less than 1.
A.M. Best financial ratings
When you’re comparing insurance companies, financial strength matters. But how in the world is the everyday consumer supposed to know if a company can pay its bills or not? Fortunately for us, we don’t have to be financial gurus to get the scoop.
A.M. Best is an independent company that measures the financial strength of a company, including the ability to pay its obligations like 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-).
A simple search 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 make money off selling your information to companies or insurance agents. The site only makes money from an insurance company if you decide to purchase a policy through Gabi.
And it's completely free to use so you get a number of 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.
The bottom line
Taking the time to gain a better understanding of auto insurance is a smart financial move. The more information you have upfront, the better prepared you are to talk with insurance carriers and agents. Or, you can have confidence in your policy decisions if you decide to purchase online without anyone’s help.