Auto insurance
What is auto insurance?
Auto insurance is a contract between you and an insurance company that provides financial protection if your car is damaged, stolen or involved in an accident. In exchange for a premium, the insurance company agrees to cover certain costs outlined in the policy, such as damage repair, medical expenses and liability claims. Most auto insurance policies allow you to customize coverage amounts to suit your needs and budget.
Auto insurance is designed to protect you, your passengers and others on the road from financial losses. It also helps you comply with legal requirements, as most states mandate a minimum level of auto coverage. Car owners are required to have auto insurance to comply with state laws. The minimum coverage requirements for auto insurance vary by state.
How does auto insurance work?
When you purchase auto insurance, you choose a coverage level and agree to pay a monthly or annual premium. In return, auto insurance carriers provide coverage for specified risks, up to the policy limits. Most policies last six months to a year and can be renewed.
Knowing what's in your policy helps you understand what is and isn't covered. If you’re involved in an incident, you can file a claim, and the insurance carrier will assess the damage and determine a payout based on your coverage.
Claim process overview:
- Accident or loss occurs – Your car is involved in a crash, vandalized, stolen , or damaged by natural causes.
- Claim is filed – You notify your insurance company, providing details and any supporting documentation.
- Insurance company investigates – Adjusters review the claim, assess damage and determine fault.
- Payout or repair – Based on your policy, the insurance company either pays for repairs, reimburses you , or pays a third party.
Do I need auto insurance?
Yes, auto insurance is legally required in almost every U.S. state, besides New Hampshire. If you cause an accident, you are legally responsible for any resulting injuries or damages. Nearly every state requires car owners to maintain a minimum level of coverage. Driving without it can lead to fines, license suspension and even legal penalties. Beyond the legal aspect, it also protects you from costly expenses due to medical bills, property damage and lawsuits that may result from an accident. Personal auto insurance only covers personal driving activities.
If you lease or finance your vehicle, your lender will usually require extra coverage like comprehensive and collision. Uninsured driver coverage is important for protection against drivers who do not have insurance. Your policy can also protect you and family members listed on the policy, even if you’re driving someone else’s car with permission.
What does auto insurance cover?
Your coverage depends on the type of policy you choose. Here are common types:
- Liability coverage – Covers injury or damage you cause to others. Liability insurance can be divided into bodily injury liability and property damage liability. Bodily injury liability coverage is mandatory in some states and protects against financial losses from injuries caused to others.
- Collision coverage – Pays for damage to your vehicle in an accident.
- Comprehensive coverage – Protects against theft, vandalism, fire, severe weather and other non-collision events.
- Personal injury protection (PIP) – Covers medical bills for you and your passengers. Personal injury protection can also cover lost wages.
- Uninsured/underinsured motorist coverage – Protects you if the at-fault driver has insufficient or no insurance.
What does auto insurance not cover?
While auto insurance offers broad protection, there are exclusions. Typical things it does not cover include:
- Mechanical breakdowns or wear and tear
- Using your car for commercial purposes without proper coverage: Personal auto insurance does not provide coverage for commercial use or ride-sharing services unless specifically extended with supplemental insurance products.
- Intentional damage or illegal activity
- Driving another person’s car without permission
- Racing or off-roading damage (unless covered in a specialty policy)
Always read your policy carefully to understand specific exclusions.
Buying auto insurance
When buying auto insurance, it’s essential to understand the different types of coverage available and how they work. Liability insurance coverage, for example, pays for damages to other vehicles or property, as well as bodily injuries to others. Comprehensive coverage, on the other hand, pays for damage to the insured vehicle resulting from events other than traffic collisions, such as vandalism, weather or natural disasters. Collision coverage pays for physical damage to the insured vehicle resulting from a collision with another vehicle or object.
It’s also important to consider factors such as deductibles, coverage limits and insurance premiums when purchasing an auto insurance policy. Most insurance companies offer a range of coverage options, including optional coverages such as gap insurance, uninsured motorist coverage and personal injury protection.
How to understand your auto insurance policy
An auto insurance policy consists of multiple sections that define your coverage, responsibilities, and limitations. Here’s what to look for: The specific terms of vehicle insurance vary with legal regulations in each region.
- Declarations page – Lists your coverages, limits, deductibles and premium.
- Insuring agreement – Outlines what the insurance company promises to cover.
- Conditions – Describes your obligations (e.g. timely claim filing and cooperating in investigations).
- Exclusions – Details what isn’t covered under the policy.
- Endorsements – Optional add-ons that modify or expand coverage. For example, gap coverage can be added to cover the difference between the car's value and the loan balance.
Review your policy annually to make sure it reflects your current needs and complies with state requirements. Your insurance company will send a notice when it’s time to renew your policy and pay your premium.
Factors affecting costs
The cost of auto insurance can vary significantly depending on several factors, including the driver’s age, driving record, credit score and the type of vehicle being insured. Insurance companies also consider factors such as the location where the vehicle is primarily driven, the number of miles driven per year and the presence of anti-theft devices. Additionally, the level of coverage chosen, including liability limits and coverage limits, can impact the cost of the policy.
Some insurance companies offer discounts for good driving records, low mileage or the installation of safety devices. It’s essential to shop around and compare rates from different insurance companies to find the best coverage at an affordable price. The insurance information institute provides valuable resources and information to help consumers make informed decisions when purchasing auto insurance.
FAQs:
Who does auto insurance coverage protect?
Auto insurance coverage protects a variety of individuals and entities. Primarily, it protects the policyholder, providing financial security against costs associated with accidents or damages. It also extends protection to family members listed on the policy, ensuring they are covered when driving the insured vehicle or another car with permission.
Additionally, auto insurance offers protection to third parties, covering bodily injuries and property damage they may incur in an accident involving the insured vehicle. This comprehensive safety net makes sure that all parties involved in a vehicular incident are financially protected, providing peace of mind for vehicle owners and drivers alike.
What to do if you change or cancel an auto policy?
If you're planning to change or cancel your auto insurance policy, it's important to manage the transition carefully to avoid coverage gaps. Begin by reviewing your current policy to understand any cancellation fees. Contact your insurance provider to discuss your plans and explore new coverage options if you're switching policies. Make sure that your new auto insurance policy is active before canceling the old one to maintain continuous coverage.
After switching, obtain written confirmation of the cancellation from your current insurance carrier and keep it for your records. If you're selling your vehicle, notify your state Department of Motor Vehicles (DMV) to update your registration and prevent fines. Continuous auto insurance coverage is crucial for complying with state laws and protecting yourself financially against accidents and damages.