Nearly all states require drivers to have auto insurance. The few outliers allow other methods of demonstrating your ability to pay for damages in lieu of carrying insurance. Basically, it’s not an option: If you’re going to drive a car, you’re going to need auto insurance.
There are several components to auto insurance. The base form, that which is generally state mandated, is liability coverage.
Liability coverage protects you from claims against damage you make to automobiles or other property that doesn’t belong to you. It also covers you for medical claims from others for physical injury caused by you in an accident.
We generally view liability as important to protect us from having to pay these potentially large costs. The design, and the reason it’s mandated, is to protect others from us. The states aren’t so interested in protecting you from financial harm as they are in protecting others from financial harm caused by you.
Liability coverage is for both bodily injury and property damage.
The numbers are typically presented as a set of three, as in 25/50/30. In this example the first two numbers relate to bodily injury and the third to property damage. This would be a limit of $25,000 per person for their injuries suffered in an accident, and a total of $50,000 for the injuries of all persons hurt in the accident.
Neither of these numbers include injuries to yourself, only injuries to others. The third number in the series is the total property damage coverage per accident, in this example $30,000. Again, this does not include damage to your property — only damage to the property of others.
There may be a difference in presentation to meet some state’s requirements, but in each case your limits should still be addressing the same things.
Note also that these numbers are ridiculously low. Coverage for bodily injury at $25,000 per person and $50,000 per accident could easily be surpassed; nor does it take much to pass $30,000 in property damage. Most new trucks cost more than that.
From the standpoint of protecting yourself financially, these limits should be at least a couple hundred thousand dollars. You definitely want the insurer to have some serious skin in the game.
Comprehensive coverage is casually referred to as “non-moving” coverage, but that moniker isn’t completely accurate.
Comprehensive coverage protects the financial value of your vehicle in the event of fire or theft, and it also protects from damage caused by trees or falling objects. These coverages have earned it the non-moving coverage title.
But it also covers in the event you strike an animal. And to do that, you would have to be moving.
The limits on comprehensive coverage is the market value of your car less your deductible. This value changes across time and isn’t displayed as part of your coverages.
Collision protects the value of your car for accidents you may have with other cars or with objects. But not with animals, as noted above.
Since collision coverage protects you financially, it isn’t part of state-mandated coverage.
If you have an auto loan, this coverage will be mandated by your lender. They want the financial value protected. They will also generally prescribe minimum deductibles; they want to be sure the whole thing is covered.
The minimums they call for aren’t going to be outrageous; most will require that your minimum deductible be not more than $500 or not more than $1,000. Nothing outlandish.
Uninsured/Underinsured Motorist Coverage
They’re out there. People driving without auto insurance. Placing you and me at risk.
This coverage may be broken into two parts: one for bodily injury and one for property damage. This coverage protects against financial loss to you if you are hit by a driver who either has no insurance or insufficient insurance.
The bodily injury portion pays for your medical costs not covered by the other driver’s liability. It may or may not pay for the medical costs of other occupants.
The property protection part of this coverage protects the other driver’s insufficient liability to pay for the damage to your vehicle. This coverage isn’t available in all states.
Some states mandate a minimum level of uninsured/underinsured motorist coverage. Both the extent of coverage available and the mandates vary from state to state.
Medical and Personal Injury Protection
This is a one or the other thing; it’s either medical payments coverage or personal injury protection but not both.
Medical payments coverage is offered only in “no-fault” states.
This coverage is always optional. Medical payments coverage pays for your out-of-pocket medical expenses in the event you are at fault in an auto accident. This would include your medical deductibles and other out-of-pocket medical expenses.
Personal injury protection (PIP) is offered only in no-fault states and may or may not be state mandated. PIP pays for your out-of-pocket medical expenses if you are injured in an accident without regard to who is at fault.
This coverage is broader than medical payments coverage and often includes coverage for lost wages or essential services such as childcare if you are unable to perform these due to an accident.
Pricing of Auto Insurance
Auto insurance pricing is based on risk. If you are a higher risk to the insurer, the insurer will charge you more than someone who is a lower risk. There are several ways insurers assess risk.
Your driving history is a big indicator of risk.
If you have a clean driving record, you are less likely to file an insurance claim than a driver who has tickets, especially speeding tickets. If you have a history of filing claims, you are more likely to file future claims.
Your credit score can cost you on your insurance in most states. There is an inverse relationship between credit and claims. As your credit improves, you are less likely to file auto insurance claims.
Insurers use specific credit scoring models that indicate the likelihood of claims based on your credit profile. The weightings are different from a traditional score used to extend credit.
The cost of repairing your car is also a factor in premiums. Some cars are more expensive to repair than others. Insurers take this into consideration in pricing.
Age is a big factor, too. Young drivers, especially young males, are more likely to get into accidents and face significantly higher premiums. There is also increased risk at the upper ages, but to a far lesser extent.
Coverage limits are obviously a factor. Higher limits for coverages will cost more; lower deductibles will cost more.
The Bottom Line
It’s important to understand how auto insurance works and what is covered in order to pick appropriate levels of coverage for your personal financial situation.
Most people need more than the mandated minimums of liability coverage, and state-mandated levels are generally insufficient to protect you in a significant accident.
As you build your emergency fund, you may choose to increase your deductibles to lower your premium, retaining some increased risk in exchange for lower premiums. Your own comfort level with risk will most likely be your guiding beacon there.
It behooves you to shop your auto insurance coverage periodically. Service is definitely important, as anyone who has had to file claims can attest. But prices seem to creep up across time and periodic shopping can assure you that you’re still getting a good value for the coverage you need.