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Whether you’re a first-time driver or simply haven’t had to deal with car insurance before, you might be wondering how the whole process works. From understanding the different types of coverage to figuring out how much insurance you need, it can feel overwhelming. But don’t worry: We broke down the basics for you. Read on to learn more.

What is auto insurance?

Auto Insurance

Car insurance protects you against financial loss if your vehicle is involved in an accident or stolen, explained Mark Snyder, claims expert at Hi Marley, an insurtech company.

Car insurance can cover your expenses related to property damage, bodily injury and other medical expenses. Basic coverage is required in most states, but the exact rules vary.

How does car insurance work?

Essentially, you agree to pay a certain amount of money every six months to a year, known as your premium, in exchange for protection against sudden financial hardship after an accident, said Sarah George, an insurance writer and expert at finder.com.

Your premium is calculated by the insurance company based on how much coverage you need and your personal risk factors. “That includes the age of the vehicle, driver’s age, driving record and geographic location where the vehicle is housed or used, to name a few,” Snyder added.

If you’re involved in an accident, you file a claim on your insurance policy. Your insurer will then evaluate the situation and determine how much money you should be paid out to cover expenses. If applicable, a deductible (a certain amount you agree to pay out-of-pocket) is deducted from the payout. Often, filing a claim results in your premium increasing temporarily, especially if you were at fault.

Key Takeaways

  • The average cost of car insurance is $1,682 a year or $140 per month, based on a 2022 Insure.com rate study.
  • Car insurance rates are based on your personal risk factors, such as age, gender, location, vehicle, credit score, driving history and more.
  • Most states require drivers to carry at least minimum liability insurance before they get behind the wheel.
  • When looking for an auto insurance policy, it is a good idea to compare the insurance prices from different companies.

What does car insurance cover?

Car insurance isn’t a one-size-fits-all product – there are many different types of coverage that can be mixed and matched. Snyder says the premium for each coverage type is computed separately, based on certain personal and risk factors, then added together for your total annual premium.

Here are the most common types of auto insurance coverage.

Types of car insurance coverage What it pays for
 Comprehensive insuranceComprehensive coverage pays for damage not caused by accidents.
Collision coverageIt pays for the repair or damage to your car caused due to a collision.
Bodily injury liabilityIt pays for the bodily injuries you cause to others.
Property damage liabilityThis coverage pays to repair the damage you do to other’s property.
Personal injury protectionThis coverage pays for medical expenses that are incurred as a result of an accident.
Uninsured/underinsured motorist coverageUM coverage pays for the medical bills if you are hit by an uninsured driver.

Comprehensive 

Comprehensive coverage pays for damage to your car that isn’t due to car accidents. That includes theft, fire, vandalism, natural disasters (for instance, hail damage or flood damage) and collisions with animals (such as hitting a deer).

Damage to your windshield may be covered under your comprehensive coverage as well. In some states, comprehensive coverage includes glass repair and replacement with no deductible, but it varies from state to state. Ask your agent about the specifics when you purchase your policy.

Collision

“This is a first-party coverage that is intended to cover damage to vehicles the policyholder owns or leases,” Snyder says. Unlike property damage liability, collision coverage pays to repair your own vehicle in the event of an accident. Your collision claim check will be reduced by the amount of your collision deductible.

When you have both comprehensive and collision coverage, it’s often referred to as “full coverage.”

Bodily injury liability

Liability coverage pays for the damage you do to others. It also pays for your legal bills if you cause an accident.

When it comes to bodily injury liability coverage, it will pay for others’ medical bills and lost wages when an accident is your fault, except in “no-fault” states, where your own Personal Injury Protection (PIP) coverage would pay for your injuries.

Property damage liability

Property damage liability protects the policyholder from financial losses if they damage someone else’s property. This includes other cars or property, such as fences. 

“This coverage does not pay for damages to the policyholder’s own vehicle,” Snyder says. He added that there is typically no deductible associated with liability coverage.

Personal injury protection (PIP) or medical payments

Personal Injury Protection (PIP) coverage pays for medical expenses for you and your passengers who are injured in an accident. It also covers funeral costs. PIP is required in 16 states.

“It can also bridge the gap in lost income, childcare, cleaning services and more, based on what’s listed in your insurance contract,” George says. “Medical payments coverage is similar to PIP since it covers your medical bills and health insurance out-of-pocket costs. But it doesn’t kick in for the other extras like lost income.” 

It applies no matter who caused the accident, though if someone else is at fault, your insurer may seek damages from the other party.

Uninsured/underinsured motorist coverage

Uninsured motorists (UM) coverage pays for your medical bills if an uninsured driver strikes your car or if you’re injured in a hit-and-run. According to the Insurance Information Institute, UM coverage is required by law in 20 states and the District of Columbia.

Similarly, underinsured motorists (UIM) coverage kicks in when someone causes an accident but doesn’t have enough insurance to cover all medical bills. In that case, the at-fault person’s insurance pays out to its maximum and then your UIM coverage pays for the remaining bills, up to your own limit.

UM and UIM also pay for pain and suffering claims. In some states, you can also buy uninsured motorist property damage (UMPD) to cover property damage.

Other types of car insurance coverage

A variety of extras are available. Just remember that making a claim for any of them, like towing, goes down as a claim on your record. However, depending on your insurance company, not all claims increase rates.

  • Rental reimbursement: Also known as loss of use coverage, it pays for a rental car when your vehicle is damaged or stolen. Check for the per-day dollar limits and overall maximum to make sure you’re getting a good value for your premium dollar.
  • Roadside assistance: If you get a flat or break down and need a tow, you can rely on roadside assistance to cover the fees associated with these issues.
  • Gap insurance: Available for newer vehicles, it pays the difference between your car’s actual cash value and the amount left on your car loan if your vehicle is totaled. While gap insurance is not required by law, it can be a wise investment for anyone who financed their car. 
  • Rideshare driving insurance: If you drive for a rideshare company such as Uber or Lyft, you can purchase extra coverage to protect you during the period when you’re driving but haven’t accepted a ride for a user yet.
  • Original Equipment Manufacturer (OEM) insurance: Sometimes following an accident, your insurance policy may only cover generic or aftermarket parts. If you want to ensure you get the factory-original parts, you can purchase this coverage, which is usually only available for newer cars.
  • Classic car insurance: If you have a classic or collector’s car that would require special transportation or antique parts following an accident, your regular insurance policy might not cover it. Some insurers provide classic car insurance to protect vintage vehicles.

How much car insurance do I need?

Every situation is different but in general, we recommend the following coverage limits:

  • up to $100,000 for the medical bills of those you injure
  • with a $300,000 cap per accident
  • and up to $100,000 to repair other drivers’ cars and property that you damage.

“The right amount of car insurance isn’t a one-size decision for every driver,” George said. Instead, you want to start with the types of coverage that your state and lender require. “Any extra coverage after that is based on how much you can afford and whether you’re able to pay for some repairs on your own.” Remember that when assessing what you can afford when it comes to an auto insurance premium, you should also assess what you can afford if you get stuck with repair or replacement costs, medical bills and other expenses that may come out of pocket if you don’t have adequate insurance.

One decision you need to make is how high to set your liability limits. That’s the maximum amount that your insurance will pay if you cause an accident. Most states’ liability limits are set low, so consider going above what your state requires.

“For property damage, think about how much you might have to pay to repair or replace someone else’s car,” George advised. “For bodily injuries, think about the likelihood that you could face a lawsuit for injuries and how much you might pay for medical expenses.”

How to get car insurance

When it comes time to get your own auto insurance policy, it’s a good idea to shop around and compare quotes from several companies. It’s easy to get car insurance quotes and compare prices from multiple insurers that can save you hundreds of dollars. Even if your driving record is less than stellar, shopping around can save you money.

You can get quotes from:

  • Local insurance agents
  • Sites that provide quotes from multiple insurers
  • Directly from car insurance companies

Insure.com’s annual customer satisfaction study can help you find the best car insurance companies.

In addition, many state insurance departments release annual reports showing the number of consumer complaints against each insurance company that does business in the state. Check your state insurance department’s website.

Once you’ve selected the best offer, review the policy in detail and sign. Your policy will become active after you pay the first premium.

Factors that determine car insurance rates

Car insurance companies spend considerable time and effort deciding how to price policies. Understanding the many elements and risk factors that influence car insurance rates might help you obtain the greatest discounts. The car insurance risk factors usually used are:

  • Your address
  • Your driving record
  • Your credit (except where state law bans the use of credit information in insurance pricing)
  • Your past claims
  • Your vehicle
  • Your daily commute and/or annual mileage
  • Your age

Other pricing factors also come into play, such as whether your car will be parked in a garage when you’re home.

How much does car insurance cost? 

The average car insurance cost for a full coverage policy is $1,682 a year or $140 a month. These rates are for a coverage level of 100/300/100, where $100,000 pays per person for bodily injury, $300,000 for bodily injury per accident, and property damage up to $100,000. 

The state minimum coverage costs $511 a year for the limits 25/50/25. Your minimum requirements vary by state, and most states have really low limits. But the amount of coverage you purchase is one of the most important factors determining your auto insurance costs. 

Full coverage insurance is more expensive than the state minimum because it includes liability, comprehensive, and collision coverage. It makes sense to purchase full coverage insurance as it provides more protection to your car than state-mandated coverage. 

How can I get lower rates on auto insurance?

Though your auto insurance premium is based on your personal risk factors, there are many ways to get the rate lowered. Here are a few ideas:

  • Drive safe and avoid accidents to score a safe driver discount. Some insurers also offer a discount for taking a defensive driving course.
  • Do well in school to receive a good student discount.
  • Install an anti-theft device such as LoJack, which can also get you a discount.
  • Increase your deductible – just be sure you can afford the higher amount.
  • Bundle your auto insurance with home, renters or another type of insurance policy at the same company.
  • Ask about affinity group discounts, which apply to certain professional groups, alumni organizations, club memberships and more.
  • Don’t drive often. Insurance companies often lower rates for drivers whose mileage is below average.
  • Maintain good credit, as insurers use credit information to price their policies.

However, the best way to save money on car insurance is to shop your policy at renewal time — especially if you’ve gotten a ticket or into an accident.

How do I read my auto insurance policy?

There are a couple of sections in your car insurance policy that are important to understand: liability coverage limits and policy exclusions.

Your liability limits are written as three numbers. For example, 50/100/50. The first 50 means that your insurance will pay up to $50,000 for injuries you cause to others, and the 100 means that it pays up to $100,000 total for all injuries per accident. The second 50 refers to $50,000 in coverage “for any property that you damage, like the other person’s car.

The recommendations we gave above are 100/300/100.

“Then, read through your list of exclusions thoroughly, looking for any situations that are likely to happen to you,” George said. For example, your policy may or may not protect other drivers who borrow your car, or it may specify that it doesn’t pay for original manufacturer car parts.

“If you don’t understand part of your policy, it’s a good idea to ask an insurance rep before any accidents happen with your car,” she added.

Final thoughts on car insurance

Even if certain types of coverage are optional, it’s important to select a policy with adequate coverage amounts so you don’t lose a ton of money (and maybe your ride) if you get into an accident.

“Collision and comprehensive are optional unless you have a car loan. Lenders usually require both types of coverage to protect their investment in your car,” George says.

Frequently asked questions

What is full coverage car insurance?

Full coverage car insurance is a policy that includes liability, comprehensive, and collision coverage, as well as any additional coverage options that your state requires. It pays for damage to your car and liability coverage, which helps pay for injuries and property damage you cause to others in an at-fault accident.  

How to compare car insurance quotes? 

It’s easy to get overwhelmed when you’re looking for car insurance. Along with comparing the price, you need to compare coverage types and features. You might be enticed to choose the cheapest option when buying insurance, but don’t let this influence your judgment. The cheapest deal may not provide the coverage you need. 

Price is only one factor to consider. It might be wise to pay a little more for insurance that offers better benefits. It’s important to shop around and compare quotes from different companies before choosing an option that will meet your needs. 

Do I need car insurance?

Yes. You’re typically required by your state to buy liability coverage before you can get behind the wheel.

Other requirements will depend on your state. For example, uninsured/underinsured motorist coverage may be required, opted out of or not required, while only a handful of states require PIP or medical payments. 

Methodology

Insure.com gathered average car insurance rates from Quadrant Information Services in 2022 for a male driver age 40, unmarried with a clean driving record and good credit score, driving a 2021 Honda Accord. The rates are for a full coverage policy of 100/300/100 with comprehensive and collision and $500 deductible.

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Shivani Gite
Contributing Writer

 
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Shivani Gite is a personal finance and insurance writer with a degree in journalism and mass communication. She is passionate about making insurance topics easy to understand for people and helping them make better financial decisions.

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