Each year, millions of consumers make decisions about insurance. And it’s actually one of the more complicated decisions we make as consumers. Whether it’s auto, health, or life insurance, the options, features, and pricing can all be a bit overwhelming.
When you're paying for insurance, you're basically paying for financial protection. It's a less straightforward financial product than, say, a loan or checking account. But it's also one of the most important.
Our goal here is to help you figure out how to find the best auto insurance at the best rate. Before you can do that, though, you need to understand exactly what it is that you’re shopping for.
Car Insurance State by State
One thing you should know about car insurance is that it's regulated at the state level. Each state has its own car insurance expectations, but it's now mandatory on some level in every state. Massachusetts was the first state to make car insurance mandatory way back in 1927.
These days, all states require motorists to carry at least liability insurance. We'll go into more detail later. But for now, know that this is the type of insurance that generally protects other people's property and physical damage should you cause an accident.
All states require basic liability coverage. But their requirements can vary dramatically. Arizona's requirement, for instance, is 15/30/10. But Idaho's is 25/50/15. What do these numbers actually mean? Let's start there, and then we'll move into other options you can pay for when it comes to car insurance.
Basic Liability Insurance
Liability insurance is the type of insurance states require drivers or vehicle owners to carry. This type of insurance covers someone else's expenses if you cause an accident. We'll talk later about the type of insurance that covers your own expenses. For now, know that this basic insurance basically acts as financial protection for other drivers. If you cause an accident, your liability insurance will cover two things: bodily injury and property damage.
So if you get into a minor fender bender that causes the other driver to get whiplash, your liability insurance will cover repairs to the other driver's vehicle and their doctor's visits to have their neck looked after.
You'll notice in the state minimum discussion above that we listed insurance minimums as three numbers. But doesn't liability insurance only cover these two things? Yes. But the three numbers stand for the following:
- Bodily injury maximum for one person injured in an accident
- Bodily injury maximum for all injuries in one accident
- Property damage maximum for one accident
Say you’re carrying Arizona’s minimum 15/30/10 liability insurance. If you cause an accident, your insurer will pay up to $15,000 in medical bills for one person injured, or up to $30,000 for all parties injured in the accident. It will also pay for up to $10,000 worth of property damage.
Each state has different minimum requirements for liability insurance. And you have to carry at least this minimum, of course. But you can, for an additional premium, get additional liability coverage through your car insurance company. In fact, many companies will show you quotes comparing various levels of coverage when you're shopping around for car insurance.
Related: How Often Should I Shop for Car Insurance?
What if It's Not Enough?
It may sound like 15/30/10 is a lot of insurance coverage, but it's really not. Unless you run into a building, you're unlikely to max out the property damage portion of your insurance. But if you've ever been hospitalized, you know that you can reach a $15,000 medical bill in about two minutes.
So what happens if you cause an accident but don't have enough liability coverage to handle the other person's medical expenses?
In this case, you’ll be personally responsible for picking up the remaining tab. Typically, the injured party or parties will take you to court for a settlement. If you have absolutely no assets, you may be in the clear. But if you own a home or other assets, the injured parties could place a lien on them or seize them to settle the claim. Or if you have a job, they could garnish your wages or drive you to file bankruptcy.
This is why you may want to consider purchasing more than just the bare minimum of state coverage--especially if you're in a tight financial situation. Those with more money to spare can, ironically, afford cheaper insurance. They can pull money out of savings to cover additional liabilities. But if you're just scraping by, paying for more insurance coverage can be worth it if you get in even one moderately expensive accident.
Other Types of Liability Insurance Coverage
As we noted above, liability insurance is the minimal type of insurance you need just to drive a car. But it’s often a wise idea to have additional types of insurance, as well. In fact, some states are starting to require one more type of insurance--the kind that pays for your injuries or property damage if you’re in a not-at-fault accident with an uninsured or underinsured motorist.
For instance, in Kansas, you need 25/50/25 liability insurance plus 25/50 UM/UIM and $4,500/$900 work loss PIP insurance.
What do all those acronyms mean? Here's your quick guide:
- UM: Uninsured motorist coverage. This covers your personal injury or property damage if you’re hit by an uninsured motorist.
- UIM: Underinsured motorist coverage. This coverage jumps in to cover the difference if the at-fault drive doesn’t have enough insurance to cover your expenses.
- UM BI: Uninsured motorist bodily injury coverage. This coverage is only for bodily injury expenses caused by an uninsured motorist.
- UMPD: Uninsured motorist property damage coverage. This coverage is only for property damage caused by uninsured motorists.
- PIP: Personal injury protection. This insurance covers bodily injury claims in a no-fault situation.
- PPI: Property protection insurance. This is only required in Michigan, and it’s the property damage counterpart of PIP.
As noted above, some states require these types of coverage, as well. This can help cut down on your own expenses if you're in a no-fault accident or if the at-fault party doesn't have enough insurance to cover your claim.
PIP and PPI insurance are similar, except that they’re meant to cover your medical expenses even if you’re in a no-fault accident. This insurance will cover yourself, other drivers in your household, and people in your vehicle if you’re in a no-fault accident. It can sometimes also cover pedestrians in your household who are injured by other vehicles. This type of coverage is currently required in Arkansas, Delaware, Florida, Hawaii, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania, Texas, Utah, and Washington.
Even if your state doesn't require these types of coverage, you can choose to add them to your insurance policy when you purchase it.
A Note on No-Fault Laws
In some states, it's really hard to recover medical or property damage expenses if an accident is declared "no-fault." But in some states with no-fault laws, your insurance company is required to pay these expenses, even if no one is at fault for the accident. You should do some research into your state's laws and requirements before you choose your insurance coverage. No-fault coverage can be very helpful in an otherwise messy situation.
Other Types of Coverage
States only require combinations of the above-listed types of auto insurance. But if you owe money on your vehicle, your lender may require comprehensive and/or collision insurance. Even if you own your vehicle free and clear, these types of insurance can be a good option.
Comprehensive coverage covers damages to your own vehicle from certain types of damage not related to vehicle accidents. Coverage varies from policy to policy, but might include things like:
- Natural disasters like storms or tornadoes
- Fire, civil commotions, and explosions
- Vandalism and theft
- Damage from hitting animals, such as a deer
- Broken or shattered windows not related to an accident
- Falling objects
- Acts of terrorism
Collision coverage covers damages to your own vehicle from, you guessed it, collisions with other vehicles or objects while the car is being driven. If you crash into another car or another car crashes into yours while parked or you hit a stationary object or wind up in a ditch, this type of coverage kicks in to pay for damages to your vehicle. If you’re in a hit-and-run, this is helpful, too. In this situation, you can’t typically use uninsured motorist coverage since you don’t know who the motorist was. But collision coverage will typically pay for damages.
If you lease or finance your vehicle, you'll almost always need to pay for both comprehensive and collision coverage. But you might want this type of coverage if you drive a car that's new or one that you couldn't easily afford to repair or replace in case of an accident.
Totaling Your Car
You may have heard the term “totaled” when someone is talking about a car accident or damage. this basically means the damage to your car would cost more to repair than the car is worth. In this case, the insurance company figures out the value of the car at the time of damage. Then it gives that money to you.
If you owe money on your vehicle, you'll have to pay off the loan with some or all of that cash. If not, it's yours to go buy another car or do whatever you want with.
A Note on Gap Insurance
There’s one more type of car insurance we should cover: gap insurance. This is an optional policy that you can sometimes add as a rider to your existing coverage. Or you might choose to purchase it as an altogether separate policy. This insurance covers the difference between the car’s value and what you owe on it if the vehicle is totaled.
Say you buy a new car for $10,000. It’s worth $7,000 just a year later, but you still owe $8,000 on it. Then you total the car. The insurance company will pay you what the car is worth at the time of totaling it--$7,000. But you still owe the lender another $1,000. If you have gap insurance, that will cover the difference.
If you’re not putting a bit down payment on your vehicle so that you’ll be underwater quickly or for a long time, gap insurance can be worth it. But make sure you count the cost to see if it’ll actually be worth the extra expense over time.
So What Do You Actually Need?
We'll talk more in-depth in another article about figuring out how much car insurance you need. For now, know that the absolute bare minimum will be dictated by two things: your state and, if applicable, your lender.
Every driver is legally required to carry the state's minimum amount of insurance. This is, by the way, something you'll need to pay attention to if you move into a new state. You may need to change your insurance coverage. And if you owe money on a loan or lease for your vehicle, your lender will likely impose additional collision/comprehensive coverage requirements.
Beyond that, it's up to you to decide whether or not you need additional insurance coverage.