Auto insurance is a policy purchased by vehicle owners to mitigate costs associated with getting into an auto accident. Instead of paying out-of-pocket for auto accidents, people pay annual premiums to an auto insurance company; the company then pays all or most of the costs associated with an auto accident or other vehicle damage.
Understanding Auto Insurance
Auto insurance premiums vary depending on age, gender, years of driving experience, accident and moving violation history, and other factors. While not all states require car insurance, most do mandate a minimum amount of auto insurance. That minimum varies by state, but many people purchase additional insurance to protect themselves further. Additionally, if you're financing a car, the lender may stipulate that you carry certain types of car insurance.
A poor driving record or the desire for complete coverage will lead to higher premiums. However, you can reduce your premiums by agreeing to take on more risk, which means increasing your deductible.
How Auto Insurance Works
In exchange for paying a premium, the insurance company agrees to pay your losses as outlined in your policy. Coverages include:
- Property – damage to or theft of your car
- Liability – legal responsibility to others for bodily injury or property damage
- Medical – costs of treating injuries, rehabilitation, and sometimes, lost wages and funeral expenses
Policies are priced individually to let you customize coverage amounts to suit your exact needs and budget. Policy terms are usually six- or 12-month timeframes and are renewable. An insurer will notify a customer when it’s time to renew the policy and pay another premium.
Regardless of whether they mandate having a minimum amount of auto insurance, nearly every state requires car owners to carry bodily injury liability, which covers costs associated with injuries or death that you or another driver causes while driving your car. They may also require property damage liability, which reimburses others for damage that you or another driver operating your car causes to another vehicle or other property.
A number of states go a step further, mandating car owners carry medical payments or personal injury protection (PIP), which reimburses medical expenses for injuries sustained by you or your passengers. It will also cover lost wages and other related expenses.
Uninsured motorist coverage reimburses you when an accident is caused by a driver who does not have auto insurance.
Who Does Auto Insurance Coverage Protect?
An auto insurance policy will cover you and other family members on the policy, whether driving your car or someone else’s car (with their permission). Your policy also provides coverage to someone who is not on your policy and is driving your car with your consent.
Personal auto insurance only covers personal driving. It will not provide coverage if you use your car for commercial purposes—such as making deliveries. Neither will it provide coverage if you use your car to work for ride-sharing services such as Uber or Lyft. Some auto insurers now offer supplemental insurance products (at additional cost) that extend coverage for vehicle owners that provide ride-sharing services.
The Bottom Line
While other types of insurance such as health and homeowner's may seem more important, if you own an automobile, regardless of whether your state requires auto insurance, having an insurance policy can save you a lot of money and aggravation in the long run.