Auto Insurance Basics - Getting Started

1. Do I need auto insurance?

Quite simply, driving without liability auto insurance is illegal in almost all states. Penalties for not purchasing insurance vary by state, but often include a substantial fine, license and/or registration suspension or revocation, and possible jail time.

Insurance protects you, and others, from major financial burdens in the event of a major auto accident or other damages to your car (e.g., vandalism or natural disaster). Even if you’re willing to take the risk of paying for damage to your own car, you need to have the financial coverage to pay for any damage you may cause to other people’s property, as well as any for any bodily injury that may result from any auto accident for which you are at fault. This is why auto insurance is a social responsibility. Driving without insurance puts you and others at financial risk.

2. What are the different types of auto insurance coverage?

Bodily Injury and Property Damage Liability coverage is perhaps the most important type of protection that auto insurance policies offer, and the one that almost all states require. Bodily injury liability applies to damages you cause to others. It covers their medical bills and lost wages. Property damage liability pays to repair or replace property that you damage or destroy. This includes other cars or property, such as fences. It can also pay for "pain and suffering" damages if someone sues you after a car accident. Almost all states and the District of Columbia require minimum liability coverage amounts by law.

Personal Injury Protection (PIP) and Medical (MedPay) coverage pays for both medical expenses and lost wages to the policyholder and any passengers injured in the vehicle in the event of an accident. Some experts advise people with good medical and disability policies to only take on the lowest limit of PIP coverage required by their state. Some states, such as New Jersey, allow drivers to reject PIP entirely. Even so, PIP usually provides “dollar-one” coverage over injuries (i.e., there is no deductible); people with significant deductibles and co-pays may very well want to consider PIP.

Collision and Comprehensive is another major area of coverage, but one that is not required by law. Collision coverage insures you in the event of any kind of accident, whether it's with another car or an object, such as a utility pole or fire hydrant. Comprehensive coverage protects you in the event of theft or natural disaster (i.e., for everything other than a collision). If you have an older car, and the cost of repairing or replacing your car is likely more than its value, you may want to waive both collision and comprehensive coverage. Unlike liability coverage, this type of coverage is not required by law, but according to 2008 NAIC data, 77 percent of insured drivers purchase comprehensive coverage in addition to liability insurance and 72 percent buy collision coverage. Furthermore, your bank (if you are financing your car) or your leasing company (if you are leasing your car) will likely require that you carry this coverage until you have paid for your car in full or for the life of the lease.

Uninsured Motorist coverage provides you protection from crashes with motorists not carrying car insurance, as well as covering you in the event of a hit-and-run accident. Also, uninsured motorist insurance coverage comes into play when an at-fault driver doesn't have enough liability coverage to pay for the damages from an accident. Most states require drivers to carry some level of uninsured motorist coverage.

3. What coverage level do I need to have?

The mandatory auto insurance coverage you are required to have in almost all states is liability coverage, in other words, insurance to protect third parties against the financial consequences of loss, damage or injury caused by your vehicle. Each state has different minimum liability coverage levels you will need. Some states also require PIP and/or uninsured/underinsured motorist coverage. For the state-by-state liability limits and a list of states that require other, non-liability coverage like PIP, click here. Keep in mind that most drivers will want more than the state liability limit. Cost for cars, car repair, and hospital prices have gone up over the years, while state minimum limits have not. Most experts recommend that drivers have liability coverage that is no less than 100/300/50. This means that you'll be able to provide $100,000 worth of bodily injury protection to one individual, $300,000 worth of bodily injury coverage to all passengers, and $50,000 for damage to others’ personal property. Basically, the more assets you have that you want to protect, the higher the coverage level you will want. Furthermore, if you plan to lease an automobile, you should check your lease agreement to confirm insurance coverage required. Generally, these agreements require that you carry liability coverage in the amount of $100,000 per person and $300,000 per accident and may require you to carry property damage coverage in excess of your state's minimum requirement.

4. How are insurance rates determined?

One major factor is the level of coverage you are looking to get. The more protection you want (i.e., higher coverage limits), the higher your monthly premiums will be. The deductible amount is also an important factor. If you are willing to have a high deductible (i.e., the amount you are out of pocket for each incident), you can lower your monthly premiums.

In addition to the level of coverage, your past driving history and the type of car you own are also important factors in determining your insurance rate; the safer driver you are and the cheaper your car will be to fix, the lower your premiums.

Some factors are out of your control – like your age, gender and where you live. Insurance companies base their rates levels on years of statistical research. According to statistical data, single males under 25 years of age belong to the highest risk group. The lowest risk group comprises married, middle-aged, non-smoking females.

Lastly, keep in mind that people in certain professions, drivers with clean driving records, students with good grades, someone having good credit are all factors that can contribute to discounted insurance premiums. Be sure to ask your agent about these types of discounts and whether they may apply to your situation.

5. What do I need to consider when buying a new policy?

Most people consider cost as the single most important factor in choosing the right carrier and policy. Increasing your deductible will have a significant impact on your rates. For most safe drivers, instead of paying extra for low deductibles and skimping on liability coverage, raising your deductible and increasing your liability coverage makes more sense. However, a higher deductible comes with a tradeoff: the higher the deductible, the higher the financial risk for you in case of an accident.

There are also many little things you can do to make sure you receive the most affordable auto insurance possible: years of accident-free, ticket-free driving; driving less than a certain number of miles each year; car safety features like antilock brakes or an antitheft device, etc. Also, if you insure more than one vehicle under the same policy or with the same company, you may be eligible for a discount. The same is true if you buy more than one type of insurance through that same company (e.g., auto and homeowners).

In addition to price, you also want to know that your auto insurance carrier will have great customer service and make the claim process easy and fair in the event of an accident. For that, the recommendations of friends and family, especially those who have made claims, and user reviews, like those featured on QuoteLab.com, can be invaluable. 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.

6. How do I start looking for a new policy?

There are various ways to find and save money on your auto insurance policy. The best way to comparison shop is to talk to local insurance agents and get auto insurance quotes online – you can do both by starting your search on a site like QuoteLab.com. Experts agree that seeking quotes from several companies will save you money - on average $455 per year.