Car Insurance 101: What a Beginner Needs to Know About Car Insurance

Auto insurance can protect you against financial loss after a covered peril, such as an accident on the road or an off-road disaster. Depending on the state you live in, it may be required by law.

In short, car insurance is crucial to have. However, it can be challenging to understand how it covers you, what it means to make a claim, how much coverage you should buy and how much a policy costs. This car insurance guide can help you understand more about your insurance so you can make informed decisions when selecting and utilizing your policy.

• Car Insurance 101: What Is Car Insurance?
• What Car Insurance Covers
• What Is a Claim & How It Works?
• What Car Insurance Coverage Do You Need?
• How Much Does Car Insurance Cost?
• Where Do You Buy Car Insurance?
• Frequently Asked Questions

Car insurance is a contract between the policyholder and the insurance provider. Under this contract, you agree to pay a certain monthly or yearly premium for your policy. In turn, your insurance carrier agrees to pay for losses and expenses related to covered accidents when you file a claim. An insurance claim is a formal request that a policyholder files to their insurance carrier for compensation for all covered losses.

Your needs and situation as a driver determine the right coverage for you. Depending on the type of policy you purchase, your insurance could cover vehicle damage, medical expenses and property damage for yourself or others.

Accidents can happen anytime. Whether it’s your fault or not, it's essential to have the proper protection against possible expenses. Auto insurance covers these expenses. The type of insurance you purchase determines which costs are covered under your policy. The core coverages for auto insurance are:

• Liability insurance
• Comprehensive and collision insurance
• Personal injury protection (PIP) or medical payments insurance
• Uninsured or underinsured motorist insurance

States have different auto insurance laws. In most states, having liability insurance is a requirement for drivers. This coverage offers essential protection against possible financial loss due to a car accident where the policyholder is at fault. It includes bodily injury liability and property damage liability to the other party but does not cover damage to you or your vehicle.

For many drivers, having liability-only insurance is not enough. Comprehensive and collision insurance provide financial protection for your vehicle.

Collision covers damage to your vehicle in an at-fault accident with another vehicle or an object, such as a fence, tree or light pole, and single-car accidents that involve a rollover.

Comprehensive takes care of damages to your car caused by an incident you have not caused, such as theft, fire, vandalism and hail.

Twelve states require motorists to purchase personal injury protection (PIP). Also known as no-fault insurance, PIP covers medical payments related to injuries you and your passengers sustain in the event of an accident, regardless of who is at fault. It also covers other related expenses, such as health insurance deductibles, lost wages, childcare and funeral expenses.

If you live in Delaware, Florida, Hawaii, Kansas, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon or Utah, you must have PIP on your auto insurance policy.

Some states require drivers to carry uninsured/underinsured motorist (UM/UIM) coverage, while many states require insurers to offer it but allow drivers to opt out. But even if it is not a requirement, having this type of insurance will give you and your family additional financial protection. About 12.6% of drivers are uninsured in the United States, and six states have uninsured motorist rates above 20%. If you ever get in an accident where the at-fault driver is uninsured or has limited coverage, this insurance will cover the medical fees, lost wages and car damage you incur. It also covers hit-and-runs.

Many factors affect the cost of your car insurance. One of these is your deductible or the cost of damages you’re responsible for when you file certain types of claims.

Not all coverage types have deductibles. Liability insurance, for example, does not have a deductible. Deductibles only apply to:

• Comprehensive and collision coverage
• PIP coverage
• Uninsured/underinsured motorist property damage coverage

Having a higher deductible usually results in a lower insurance premium because you will be paying more out-of-pocket when you file a claim. A lower deductible means a higher premium because the insurance company pays more in a claim.

You can have different deductibles for different types of coverage. For example, you may choose a $500 collision deductible and a $1,000 comprehensive deductible.

Each state has its own laws that determine the minimum auto insurance coverage requirements that every driver must have. Most states require some form of liability insurance. However, some states also require PIP or uninsured/underinsured motorist coverage. Failure to carry and maintain the necessary coverage limits can lead to penalties and fines, as well as driver's license and vehicle registration suspensions.

Note that state minimum coverage will only provide baseline protection. While this will ensure compliance with state regulations, it does not determine how much coverage you should buy. A liability-only policy will not cover you and your vehicle in the event of an accident. We highly recommend purchasing liability coverage at 100/300/100, as well as comprehensive and collision coverage, for a greater level of financial protection.

The average cost of car insurance across the country is $1,424 per year or $119 per month. However, the actual cost of car insurance will vary per person. Insurance providers may use more than a dozen individual rating factors, like location, ZIP code, age, gender, credit history, driving record and claims history and coverage level, to determine a premium for each policyholder.

Auto insurance can seem expensive, but the coverage you receive from it far exceeds what you pay. For instance, the average cost of insurance across the country is $4,272 over three years. For this much, you could potentially receive up to $100,000 in bodily injury liability coverage per person, $300,000 per accident and $100,000 in property damage liability per accident from your insurance provider.

Before choosing an insurance company, you have to determine what you want in an insurer. For the most part, insurance providers offer similar core coverages. Your decision will depend on how much you value cost versus quality of service.

For some drivers, the best car insurance for beginners is a policy that fulfills their state obligations and allows them to save on their monthly bills. MoneyGeek collected average rates from various companies to determine the cheapest car insurance companies.

Others may opt for a company offering a balance in value and quality service. MoneyGeek also created a car insurance guide that ranked the best car insurance.