Everything you need to know about choosing the right auto insurance

One of the most important and least understood aspects of car ownership is insurance.

Car payments, maintenance costs, and the rising price of gasoline are easy to grasp. Auto insurance, not so much—even though total motor vehicle injury costs were estimated at $498.3 billion in 2021, according to the National Safety Council (NSC).

Auto insurance exists to ensure that the tragedy of a motor vehicle accident isn’t made worse by catastrophic financial loss.  

What is auto insurance? 

Auto insurance is a contract between you and an insurance company in which you agree to pay money in the form of premiums, and the insurance company agrees to cover your losses in the event of an accident. 

“Auto policies are liability policies in their purest form,” says insurance and financial adviser Brian Carden at Madison Avenue Securities. “They cover damage for which you are liable, meaning the accident was your fault or there’s no other party who can or will take responsibility.” 

The most important reason to have auto insurance is the peace of mind it provides by allowing you to leverage small regular premium payments into coverage you may not otherwise be able to afford. The average cost of an auto accident ranges from $5,700 when the accident results in property damage to $1,778,000 when a death occurs, according to NSC. 

In recent years, insurers have begun employing telematics, which is the use of an onboard device to monitor and help change driving habits to lower insurance costs and reduce accidents.  

“Ideally, telematics help customers feel cared for and appreciative of an insurer meeting their personalization expectations,” says Dror Pockard, chief strategy officer at telematics provider Earnix. Effective telematics, he says, should engage and communicate with consumers, offer processes like high-accuracy crash detection, and deliver personalized offerings in real time. 

Financial coverage, real-time safety features, and insulation from catastrophic loss are all part of what auto insurance is and does. Knowing how it works and what types of coverage are available can lead to protection and peace of mind behind the wheel. 

The basics of how auto insurance works 

Auto insurance coverage falls into three broad categories:  

  • Property damage, which refers to damage to, or theft of, your vehicle.  
  • Liability is when you cause bodily injury to others or damage their property. 
  • Medical expenses include the cost to treat your injuries or those of passengers in your vehicle. 

Within these three broad coverage areas lie the various types of coverage available. The amount you pay for coverage is called the premium and is typically paid annually, semiannually, or monthly. Not all coverage is available in all states, and even when it is, that doesn’t necessarily mean you should get that type or amount of coverage. 

So, how much coverage should you have? Aside from the required state minimum coverage—where many states require you to have auto insurance—Carden says it’s a matter of how much risk you are willing to assume. “You can carry the state minimums and hope you never find yourself in an accident caused by you or someone with minimum limits, or you can be more prudent and look to carry what I consider to be a reasonable bare minimum: $100,000 per person, $300,000 per occurrence, and $100,000 property damage (100/300/100) for both what you are liable for when the accident is your fault and if you’re hit by an uninsured motorist.” 

How much this coverage will cost depends on several factors according to Kelley Blue Book, including:

  • The level and types of coverage you choose 
  • The deductible amount per claim 
  • Your previous car insurance claims 
  • Demographics such as your marital status 
  • Your credit history 
  • Your driving history 
  • Your annual mileage 
  • The make and model of your car 
  • Your ZIP code 

Depending on the factors above, you may pay more or less. There are a number of factors that can also impact whether the cost of your auto insurance premium will increase, including your accident history and if you live in an area where more claims occur. When that happens, it may be time to shop around for new car insurance.

What are the different types of auto insurance?  

There are different types of insurance coverage that fall under the property, liability, and medical umbrellas noted in the section above. But it’s good to first check what type of coverage you need before comparing the options available. 

“When thinking about how to get auto insurance and read policies, I suggest consumers start by familiarizing themselves with their state’s auto insurance climate and required coverages,” says Mark Snyder, principal consultant and claims subject matter expert at Hi Marley, an insurance communications platform. “Once the consumer has a better sense of their potential-risk and coverage-needs profile, they should go on to the web and pull down a standard ISO [insurance services office] personal auto policy form and review it to familiarize themselves with policy sections, coverage types, and policy language.” 

Here are the various types of auto insurance coverage available:  

1. Comprehensive coverage  

Comprehensive coverage falls under the property umbrella and provides coverage against theft and damage to your vehicle caused by an incident other than a collision. This includes damage caused by…

  • Fire 
  • Flooding 
  • Vandalism 
  • Hail 
  • Falling rocks or trees 
  • Broken windshield 
  • Other hazards 

Comprehensive coverage doesn’t pay for damage to another person’s vehicle or property. 

2. Collision coverage  

Another form of property damage insurance, collision coverage pays for damage to your vehicle resulting from a collision with another object including (but not limited to)… 

  • Vehicles 
  • Trees 
  • Telephone poles 
  • Guardrails 

Collision coverage also pays for the cost to repair your car if it flips over. As with comprehensive coverage, it does not cover damage to another person’s vehicle or property. 

3. Bodily injury and property damage (BI/PD) 

Bodily injury and property damage coverage are both forms of liability insurance. Bodily injury coverage pays for injuries you cause to others including their…

  • Medical expenses 
  • Lost wages and income 
  • Pain and suffering 
  • Funeral costs 

It also helps pay for your legal defense in case you are sued by the injured party. 

Property damage coverage pays for damage you cause to the property of others including their…

  • Vehicles 
  • Fences 
  • Buildings 
  • Trees 

BI/PD coverage does not pay for your medical expenses or property damage. It is strictly liability coverage designed to compensate those you injure. 

4. Medical payments (MedPay) or personal injury protection (PIP) 

Medical payments (MedPay) and personal injury protection (PIP) coverage pay for medical expenses for you and any passengers involved in an accident regardless of who is at fault. They also cover lost wages and other related expenses. They are not forms of liability insurance since they don’t cover injuries to others (except passengers in your vehicle). They both fall under the medical umbrella and include reimbursement for… 

  • Health insurance deductibles and co-pays 
  • Doctor or hospital visits 
  • Surgery, X-rays, or prostheses 
  • Ambulance and emergency medical technician fees 
  • Professional nursing services 

PIP is distinguished from MedPay in three important ways: 

  • PIP is available in “no-fault” states or states where both parties’ insurance companies pay in the event of an accident, regardless of who caused the accident. Medical payments coverage is offered in states that aren’t “no-fault.” 
  • PIP is sometimes required and sometimes optional, depending on state law. Medical payments insurance is always an optional coverage. 
  • PIP helps cover expenses such as lost wages or childcare if you’re unable to perform essential services owing to injuries after a car accident. Medical payments insurance does not cover these expenses. 

5. Uninsured/underinsured motorist coverage 

This type of insurance falls under both medical and property umbrellas and is insurance you take out in case you’re injured, or if your vehicle is damaged by someone who has little or no insurance. 

If you’re in an accident caused by a driver who doesn’t have insurance (or not enough to cover your injuries or damage), your uninsured/underinsured coverage pays medical bills, and otherwise does what the at-fault driver’s insurance would’ve done. 

Some states require uninsured/underinsured coverage, and some do not. Even if it’s not required in your state, experts recommend getting it for the financial protection it provides. 

6. GAP insurance 

Collision and comprehensive coverage pay only what your car is worth—also known as market value. This is because typically new cars depreciate quickly. So if your car is totaled or stolen, there may be a “gap” between what you owe on the vehicle and what your insurance will pay. Guaranteed asset protection (GAP) insurance pays that difference. When you lease a car, GAP insurance is usually part of your lease payments. 

An alternative to GAP insurance worth considering is something called new car replacement insurance. This type of coverage is an upgrade to your original auto policy that will pay to replace your stolen or totaled car with a brand new one equal to the value of the one you lost. It’s important to note that new car replacement coverage has a time limit, typically one to two years after purchase. On the other hand, instead of filling the gap between your car’s depreciated value and the balance owed, new car replacement provides you with a new car and you simply continue making payments. 

Is auto insurance coverage mandatory?  

Every state except New Hampshire requires at least some form of auto insurance. However, New Hampshire requires drivers to show they have sufficient funds to meet the state’s “financial responsibility requirement” in the event of an at-fault accident.  

Coverage requirements vary by state but typically consist of some combination of the following:

Liability insurance: Almost all states require a minimum amount of liability insurance, typically in the form of BI/PD coverage. The most common minimum amounts are $25,000 bodily injury liability per person, $50,000 bodily injury liability per accident, and $25,000 property damage liability. 

Uninsured/underinsured motorist: This coverage is required in about half of all states, although some of them only require the bodily injury form of this insurance (not property damage). Typical required coverage amounts are $25,000 bodily injury per person and $50,000 bodily injury per accident. 

Personal injury protection (PIP): PIP coverage is required in 12 states, 11 of which are no-fault states that require both drivers involved in an accident to file with their own insurance company. An additional 11 states require insurers to offer PIP but do not require drivers to buy it. The PIP minimum coverage requirements vary from $3,000 in Utah to $250,000 in Michigan. Michigan also requires $1 million in property protection insurance (PPI) in the event you damage another person’s property. 

The takeaway 

Auto insurance is required in nearly all states—for good reason. Few individuals could afford to pay the cost of even a minor fender-bender, especially if it resulted in injury. But the fact that auto insurance offers so many different types of coverage makes it somewhat confusing. 

“The price difference per month between a policy with mediocre and high liability limits isn’t negligible, but it also isn’t massive,” notes Jeffrey J. Zenna, a personal injury lawyer and partner at New Jersey law firm, Blume Forte Fried Zerres & Molinari. “What could be massive is the dollar amount you could be on the hook for if you don’t have a policy with high liability limits.” 

As you weigh the types of coverage available to you, make sure you can afford the coverage you do not select as well as that which you do.

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