What Is Car Insurance?

Car insurance pays for the injuries and damage you cause in a crash, plus repairs to your own car if you add that coverage. You pay to keep the policy active, and the company picks up the bill after an accident instead of you.

Nearly every state makes you buy it before you can register a car or drive legally. The coverage they require pays other people, not you, so fixing your own car takes extra coverage that most drivers buy on top.

MoneyLion

What’s the main purpose of tax withholding?

Maximize refundsAvoid filingReduce tax ratesEliminate penaltiesPay taxes gradually through the year

89

When you're buying coverage, you need to decide how much protection to carry above the minimum, and how much of a repair bill you're willing to pay before the insurer steps in. This determines how much you pay for coverage. Shop around from a few different companies to know find the company that offers you the best price.

Key Takeaways

• Liability coverage pays other people, not you. It covers the injuries and property damage you cause, and it's the part nearly every state requires before you can register a car.

• Fixing your own car takes collision and comprehensive coverage. Collision covers crashes. Comprehensive covers theft, hail, fire, flooding, and hitting an animal.

• Drivers spent an average of $1,281.60 per car in 2023. That comes from the National Association of Insurance Commissioners, and it's up 19.21% since 2019.

• Your deductible is what you pay before the insurer pays anything. A higher one lowers your bill and raises what a claim costs you when you file.

• The state minimum rarely covers a bad crash. Once the medical bills and repairs pass your limit, the other driver can come after your paycheck and your savings for the rest.

Summary generated by AI, verified by MoneyLion editors

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

How Car Insurance Works

You pay a premium to keep a car insurance policy active, and the insurer pays your claims up to the limit you chose, after subtracting your deductible.

On a $2,400 repair with a $500 deductible, you get $1,900 and pay the first $500. Your limit is the most the insurer pays for a single crash, and you owe any damage above it.

Every time your policy renews, how much you pay can adjust depending on your driving habits for the past year. A claim, a speeding ticket, or a rate increase the company filed for your area will each raise it, but good driving habits may keep any impact minimal.

What Does Car Insurance Cover?

A standard car insurance policy pays the other driver's medical bills and repairs when you cause a crash, repairs to your own car, and losses like theft or hail damage that happen when you aren't driving.

Each of those is a separate coverage with its own limit, and you choose which ones to carry unless your state or your auto lender requires them. Companies use the same coverage names, so quotes only compare accurately when you price the same list at each one.

What Car Insurance Doesn't Cover

Car insurance pays for damage from a crash or a covered event, not for the car wearing out. Worn brakes, a dead battery, and a failed transmission are your expense regardless of how much coverage you carry.

• Belongings stolen from your car. A stolen laptop is a claim on your renters or homeowners insurance. The broken window is a claim on your comprehensive coverage.

• Driving for pay without telling your insurer. Delivery and rideshare work can leave you uncovered during a shift, and adding rideshare coverage keeps the insurer from denying a claim you file while working.

• Damage you cause deliberately. Racing and other competitive driving are excluded as well.

• A driver you excluded from the policy. If you signed a form removing someone in your household to lower your price, you pay the full cost of any crash that person causes.

How Much Car Insurance Do You Need?

Carry enough liability coverage to protect what you own, because a judgment above your limit is collected from your wages, your savings, and the equity in your home.

Most states set their minimum limits years ago and have not raised them to match current medical and repair costs. A single serious injury can exceed a minimum bodily injury limit before the patient leaves the hospital, and you owe the difference.

Collision and comprehensive coverage are required while you're financing or leasing. Dropping them puts you in default, and your lender can buy more expensive coverage on your behalf and add it to your monthly payment. On an older car you own outright, price what those coverages cost you each year. A claim never pays more than the car is worth, so when that value is close to your deductible, the same money covers more sitting in savings.

How Much Does Car Insurance Cost?

Drivers paid an average of $1,281.60 per car according to the most recent data from the National Association of Insurance Commissioners.

How much you pay for car insurance depends on where you keep the car, because insurers price theft rates, traffic density, and local repair costs street by street. Your driving record accounts for most of the rest, and an at-fault crash raises your rate for years afterward. The car you drive matters too, since sensors built into bumpers and windshields have made minor collision repairs far more expensive.

The limits you choose, your deductible, and the optional coverages you add also impact your premium. Insurers also use a credit-based insurance score where state law permits it, which is why two neighbors driving the same car get different quotes.

How to Lower Your Car Insurance Rate

Get quotes from three or four companies at renewal since different companies charge different rates. Insurers change their rates at different times, so the company that was cheapest when you signed up may not be anymore, and switching is the largest can help you save.

• Raise your deductible if you can absorb it. Moving from $500 to $1,000 lowers your premium every month and costs you an additional $500 on your next claim, so keep that $500 in savings before you change it.

• Ask which discounts you qualify for. Bundling with renters or homeowners insurance, paying the full term upfront, insuring a second car, and completing a defensive driving course all lower the price without reducing your coverage.

• Use a mileage tracking program if you drive rarely. These programs measure how far you drive and how hard you brake, and they lower premiums for low-mileage drivers. However, frequent hard braking and late-night driving can raise them instead.

• Reprice collision and comprehensive on an older car. A claim pays no more than the car is worth, minus your deductible, so once that difference gets small, you're paying premiums for a payout that won't cover a replacement.

Frequently Asked Questions

Is car insurance required by law?

Almost every state requires liability coverage before you can register a car, and driving without it can cost you your license, your registration, and the full cost of any crash you cause. One state allows you to prove you can pay for damages yourself instead of buying a policy, and coverage is still the cheaper option for most drivers there.

Does car insurance pay to fix my car if the crash was my fault?

Collision coverage pays for your repairs regardless of fault, minus your deductible. Liability coverage pays only for the other driver's damage, so a minimum policy leaves you paying for your own car after a crash you caused.

Does my policy cover someone else driving my car?

Coverage follows the car, so a friend who borrows it with your permission is generally covered, and the claim goes on your record and raises your rate. Anyone in your household who drives the car regularly needs to be listed on the policy, because an unlisted regular driver gives the insurer grounds to deny the claim.

What happens if my car is totaled?

The insurer pays what the car was worth immediately before the crash, minus your deductible, rather than what you paid or what you still owe. Gap coverage pays the difference when your loan balance is higher than that amount, and without it you keep making payments on a car you no longer have.

Key Terms to Know

• Premium. What you pay to keep the policy active, usually billed every six or twelve months.

• Deductible. The amount taken off a repair claim on your own car before the insurer pays the rest.

• Limit. The most your policy pays on a single claim. Anything above it is yours.

• Liability coverage. The part that pays other people for injuries and damage you cause.

• Collision coverage. Repairs to your car after a crash with another vehicle or an object, no matter who was at fault.

• Comprehensive coverage. Everything that isn't a crash, including theft, hail, fire, flooding, and hitting an animal.

• Uninsured motorist coverage. Pays your injuries and repairs when the driver who hit you has no insurance or not enough.

• Actual cash value. What your car was worth right before the loss, after depreciation. It's the number a total loss check is based on.

• Gap coverage. Pays the difference between that check and what you still owe on the loan or lease.

Sources

• National Association of Insurance Commissioners: NAIC Releases 2022/2023 Auto Insurance Database Report

• Insurance Information Institute: Facts + Statistics: Auto insurance

• National Association of Insurance Commissioners: 2023 Auto Insurance Database Average Premium Supplement