The Ultimate Guide to Auto Insurance
Consult this comprehensive guide to learn more about auto insurance.
Are you confused about what to look for in an auto insurance policy? What about extra coverages that are offered? Do you need them?
Are car insurance companies different from one another? If so, how should you compare car insurance providers? Does it make any difference which one you go with?
And if you need to file a claim, what do you need to know?
In this article, we will go over the ins and outs of car insurance in detail and discuss what you want to look for when shopping around for auto insurance.
What’s in a Basic Car Insurance Policy?
A basic, or standard, auto insurance policy typically has two or three coverages (depending on how you count them).
Bodily injury liability covers personal injuries that you cause someone else to suffer. These are usually physical but can also include emotional injuries.
This coverage has two levels. One level applies when, as a result of a single occurrence, a single person makes a claim against you. By "occurrence," we mean a single event, such as two cars crashing into each other. If several cars are involved in a single event, it still counts as one occurrence. The second level of coverage applies if more than one person makes a claim against you as a result of a single occurrence.
For example, if you have vehicle insurance with a 50/100 liability, you would have a maximum coverage of $50,000 if a single person makes a claim against you. If more than one person files a claim—whether it's two people or ten—the maximum amount the insurer will pay in total to these people would be $100,000, divided among the claimants. These amounts ($50,000 and $100,000 in this case) are known as policy limits, meaning the maximum amount the insurer will pay for a single occurrence.
Property damage liability covers damage to other people’s property, not yours. Most often, this will be damage to another person’s vehicle after a collision, but it covers any personal property, including bicycles and property within another person’s vehicle such as cameras or computers.
In most states, the coverage we just described is all that is required by law but the minimums vary from state to state.
At the time of writing, Florida has the lowest minimums: 10/20/10, meaning $10,000 coverage for bodily injury to one person, $20,000 total coverage for bodily injury to more than one person, and $10,000 coverage for property damage. The states with the highest minimums are Alaska and Maine, with 50/100/25. As I will explain later in this article, these minimums provide grossly inadequate coverage; you should buy more.
What Additional Auto Insurance Coverages are Available?
There are several additional coverages that you should consider when you compare car insurance options.
Uninsured and Underinsured Motorist Coverage
As explained above, if you crash into someone else’s vehicle and cause them to suffer bodily injury, your insurer will pay up to the policy limits for the bodily injuries and property damage they have suffered. But what if the other driver has crashed into you and is deemed responsible for your injuries but has no insurance to cover the expense? It's true that all 50 states require every driver to have a personal auto policy but, despite the law, it is estimated that one in eight drivers in America is uninsured. To protect yourself from this situation, you can purchase uninsured motorist coverage for your car insurance policy.
Most insurance companies provide an amount of uninsured motorist coverage that is identical to the bodily injury and property damage coverage you have purchased. So, if your bodily injury and property damage coverage is 50/100/25, your uninsured coverage will be the same. The "100" portion of this coverage would come into effect if passengers in your car were injured in the collision with the uninsured motorist. This means that if you had two passengers and all three of you were injured, the total maximum amount your insurer would pay for bodily injury to the three of you would be $100,000.
As for underinsured coverage, this comes into play when you suffer injury or property damage from a collision with a driver who is insured but opted to purchase cheap auto insurance that doesn't provide you with adequate compensation for your losses.
Let’s say you have a 50/100/50 auto insurance policy but the driver who crashes into your vehicle only has a car insurance policy with 25/50/25 coverage. Compared to you, that driver is underinsured, meaning they have less coverage than you do. If you suffer bodily injury serious enough to warrant a payment of more than $25,000, the other driver’s insurance will pay the first $25,000 of your claim, and then you can file an underinsured motorist claim against your own insurer to recover the balance of your claim (in this case, an additional $25,000)
Uninsured and underinsured coverage are sold as a package deal; you cannot buy them separately.
As the name implies, medical payments coverage provides payments for medical bills. It covers you and the passengers in your car (people in other cars must claim against your bodily injury coverage for their medical bills).
Under some policies, medical payments coverage also compensates for lost wages, funeral costs, and perhaps more; under others it is limited to medical (and usually dental) bills.
This coverage operates on a "no fault" basis. So, even if you are responsible for the collision, you and your passengers can still recover your medical expenses.
Your basic auto insurance policy covers property damage to other people’s property, not yours. If your car is damaged and another driver is at fault, you can make a claim against the other driver’s car insurance. But what if you are at fault?
If you want to protect your vehicle in the case that you are responsible for a collision, you need collision coverage. A deductible will always apply, and the lower the deductible the higher the premium. With a deductible of, for example, $500, you pay the first $500 of the cost of repairing or replacing your vehicle and the insurer pays the remaining balance, up to the policy limit.
Comprehensive insurance covers damage to your vehicle due to causes other than a collision, such as fire, earthquake, flood, or vandalism. As with collision coverage, comprehensive is sold with a deductible, and a low cost auto insurance policy will have a higher deductible.
How Much Car Insurance Coverage Do You Need?
The amount of coverage you need varies somewhat according to the age of your vehicle and according to your own personal feelings about risk assessment, though there are some rock-bottom minimum recommendations. This section will walk you through the recommended minimums for the coverages discussed above.
Bodily Injury and Uninsured/Underinsured Motorist
Have you or someone you know spent a day in emergency care at a hospital, followed by some days of intensive care and then months of treatment, as the result of a serious injury? If you do, then you know that the cost can be exorbitant—hundreds of thousands of dollars at least, and it could conceivably top $1 million.
How about if you are married and have two children and the four of you are all seriously injured when struck by an uninsured or underinsured driver (someone, for example, with the minimum policy required under the law)? If you have a good health insurance policy, it will pay for some of your medical bills. Add to that all the lost income while you're recovering. And what if you or your spouse can never work again? Not to mention the costs associated with special needs such as a wheelchair and a vehicle that can be accessed by someone in a wheelchair (see Why You Need Disability Insurance for more on disability coverage).
Given those risks, it's important to know that, while the maximum amount available in coverage varies from state to state and from insurer to insurer, it can be as high as $2 million/$2 million—far more protection than the typical legal minimum of $25,000/$50,000 you get with cheap auto insurance. And the best part is that while the maximum is as much as 80/40 times the minimum, it doesn’t cost anywhere near 80/40 times as much.
I recommend buying the maximum amount of coverage available for bodily injury and uninsured/underinsured motorist. If you can only find auto insurance quotes that exceed your budget, buy as much as you comfortably can. The legal minimums are completely inadequate.
If you have significant assets and your budget allows for it, you might consider an umbrella, or excess, policy. For individuals, these policies are usually "excess" to both the homeowners and auto policy and come into effect if a claim exceeds the policy limits of the underlying (homeowners or auto) policy (for more, see Auto Liability Insurance - How Much Is Enough?)
The minimum property damage coverage required in the 50 states varies from $5,000 to $25,000. Remember that this coverage only applies to other people’s property, not yours. Many, if not most, new cars today cost more than $25,000, so if you total someone else’s vehicle, the legal minimum will most likely be inadequate. And even if you don’t total it but do cause significant damage, a $5,000 policy could easily provide too little coverage.
I recommend a minimum of $25,000 coverage and more if your budget allows. $100,000 or more is not too much if you can afford it.
Again, this is for you and occupants of your vehicle and is essentially "no fault" coverage that is available regardless of who is responsible for the collision.
As the name implies, it mostly covers items that are also covered under health insurance policies, though, as noted above, its coverage may be broader. So, if you have health insurance, does it make sense to pay for medical payments coverage? It might. It's generally cheap, sometimes as little a $20 a year for $10,000 in coverage.
Importantly, there are no deductibles, co-payments, and other limitations that are part of almost all health insurance policies (learn about All The Ways You Pay: The Basics of Premiums, Deductibles, Co-pays,. So, if you got hit with a $50,000 bill following a serious accident and your health insurance covered only $30,000 of this, with $20,000 of medical payments coverage your out-of-pocket costs would amount to exactly zero.
Moreover, even if you have health insurance, what about your passengers? Roughly 15% of Americans do not have any. While you are obviously not obligated to provide such insurance for passengers, medical payments coverage is a very affordable protection that you will wish you had if a passenger is injured.
Last but not least, being compensated by health insurers for your bills is sometimes a slow, complicated process. Medical payments coverage generally pays more rapidly and with less hassle, letting you to buy time with healthcare providers while you and they deal with the health insurer.
If you can afford it, $50,000 or more in medical payments coverage is well worth the money.
Collision coverage applies to your car and any property within your car that is damaged in a collision (as opposed to property damage coverage, which applies to other people’s property).
This coverage is on the expensive side and is not recommended for all car owners. Given the higher auto insurance quote that comes with collision coverage, why would you want it? One reason might be that you have a fairly expensive vehicle that would cost you a pretty penny to replace or repair if it suffered heavy damage. Also, if you buy a new car with a loan from a bank, the bank will, in most cases, require you to have collision coverage until the loan is fully paid off.
In what cases would you not want it? Let's say you buy a five-year-old car with 60,000 miles on it for a few thousand dollars out of your pocket (no bank loan). With a vehicle like that, this insurance is probably not worth buying. Monthly premiums for collision coverage on a low-value private passenger car can run from perhaps $20 a month, with a $1,000 deductible, to perhaps $50 a month, with a $100 deductible. If your car is only worth a few thousand dollars, you might well pay for it with a few years of collision premiums! Plus, if you opt for a $1,000 deductible, the deductible is a significant percentage of the value of the vehicle.
Of course, if you have no savings at all and lose your car to a collision that you caused, not having collision coverage could cause you some difficulties. But ,in general, if you have a low-value vehicle this is one type of vehicle insurance you might want to skip.
As discussed above, comprehensive covers damage to your car that is not caused by collisions, rather by things such as fire, earthquake, flood, or vandalism.
The same reasoning applies here as did with collision coverage. Comprehensive coverage tends to be expensive, is usually required by banks if you have an outstanding loan for the car, and is probably not worth it for low-value vehicles.
Note that many insurers sell collision and comprehensive coverage as a package deal, but some will allow you to buy just one and not the other.
How Can You Keep Your Car Insurance Costs Down?
But what should you do if you want, or need, to cut corners to save costs? How can you strike a good balance between adequate coverage and low cost auto insurance?
The single biggest way to save on car insurance rates, especially if you have a low-value vehicle, is to do without collision or comprehensive coverage. Both of these are relatively expensive and often not worth it at all for vehicles worth less than $7,000 or $8,000. This is of course a judgment call and depends on what kind of car insurance rates you can afford and how you feel about taking risks.
If your budget is tight and you need a lower auto insurance quote, you might consider going with only the minimum property damage coverage required by law. The damage caused by many collisions is within these limits. Again, this is a judgment call and depends on what car insurance rates fall within your budget and how you feel about taking risks.
Bodily injury and uninsured/underinsured motorist coverage are too important to cut corners on. I recommend going with the maximum you can afford. Relying only on the minimums that come with low cost auto insurance is simply not worth the risk.
Medical payments coverage is not essential if you have health insurance, so you could consider cutting it if you really want to pinch pennies. But it is cheap for what it offers, so it's generally worth having.
Car Insurance Comparison (or: How to Get Cheap Auto Insurance without Settling for Slim Auto Insurance Coverage)
Yes, if you want to find low cost auto insurance, you'll need to shop around for your personal auto policy.
Car insurance rates for private passenger cars vary from insurer to insurer. Some insurers specialize in particular types of insureds (the people who, like you, buy insurance). For example, USAA specializes in providing auto insurance for military families and The Hartford specializes in car insurance for seniors. If you have a bad driving record, you might need to shop around just to find an insurer who will even sell you a personal auto policy. Good places to check for particular advice include Consumer Report's Car Insurance Buying Guide and Consumer Affair's ranking of the Best Auto Insurance Companies for 2016.
Also, as is the case with all types of insurance, brokers and insurance agents, especially independent agents (all brokers are independent), can be invaluable when you are looking for good auto insurance quotes. The insurers pay their fees, so it costs you nothing to get their help to compare car insurance policies and get the best auto insurance quotes. And the car insurance rates you will pay are the same whether you go directly to the insurer or go through an agent (see our 5 Questions to Ask Before Choosing an Insurance Agent).
Auto Insurance Claims and Payouts
When it comes to claims, document, document, document. If you have a camera or a smart phone with a camera, take photos at the scene of any collision. Contact your insurer, insurance agent, or broker as soon as possible. Ask them what they need in the way of documentation to present your claim, and ask to have this information in writing (an email will do).
If your vehicle needs any repairs, always get itemized receipts. The insurer might have deals set up with some repair shops to get discounted rates, so be sure to ask your insurer, agent, or broker about this before you initiate any repair work. The insurer might also require that an estimate be submitted to them before repair work is done. In general, keep in touch with the insurer and be sure to follow its guidelines.
For more information on how to deal with insurance companies, see How to Write a Demand Letter and Insurance and Lawsuits: What Happens When You are Sued?
Written by David Hughes | Writer/Researcher
David Hughes worked as a researcher and writer for two California litigation law firms between 1988 and 2005, and has worked on a freelance basis since then. His areas of expertise include personal injury litigation plaintiff and defense, medical malpractice plaintiff, contract law especially contracts of insurance, insurance bad faith litigation defense, insurance coverage opinion letters, administrative law defense . He also taught English in China and Azerbaijan for eight years and worked as a welder in shipyards in the San Francisco Bay Area for seven years. He is an outdoorsman and loves being in the mountains.