What is Auto Insurance?

Auto insurance is a form of coverage that helps protect you financially. It covers expenses related to auto accidents or other forms of vehicle-related incidents up to the policy limit. This comprehensive guide takes a deep dive into how auto insurance policies work, coverage options, premium calculations and what to look for when shopping around with providers.

What is Auto Insurance, and How Does It Work?

Car insurance is a formal contract between you and an insurance company. It protects you from incurring substantial costs if you’re involved in an automobile accident or if theft, vandalism or damage from a natural disaster occurs to your vehicle.

You pay a premium – monthly, quarterly, semi-annually or annually, in exchange for coverage. In turn, the insurance company agrees to cover specific costs if you file a claim. But you must meet the deductible first or the amount you have to pay out of pocket before your policy kicks in.

The premiums you pay depend on several factors, like your driving record, vehicle type and location. More on this shortly,

Is Auto Insurance Really Necessary?

Auto insurance is mandatory in every state except New Hampshire and Virginia. Failure to carry a policy could result in fines, a suspended license, and, in some cases, jail time.

But even if it wasn’t legally required, it’s still in your best interest to carry a policy. Otherwise, you put yourself at risk of serious financial loss, even if you’re a superb driver, since there’s no way to control how others behave on the road.

The Importance of Understanding Auto Insurance Coverage

You want to understand how car insurance works to ensure you purchase a policy that best suits your needs. Opting for adequate coverage levels is equally important – being overinsured or underinsured isn’t in your best interest.

What Is Not Usually Covered by Auto Insurance

Below are some common exclusions to be aware of:

• Commercial use: Personal auto insurance does not cover business-related activities like deliveries or rideshare driving. Specialized policies are needed for this form of coverage.
• Natural disasters: Auto insurance often excludes natural disasters such as hurricanes and floods. However, comprehensive coverage might cover specific events like hail damage.
• Wear and tear: Normal wear and tear, including brake pad replacements and oil changes, are not covered by auto insurance. These costs are your personal responsibility.
• Intentional damage: Damage you intentionally cause to your car is not covered.
• Aftermarket modifications: Custom equipment or modifications, like new sound systems or custom rims, may not be covered unless additional coverage is included in your policy.
• Personal belongings: Items inside your car, such as laptops or phones, are not covered by auto insurance if stolen or damaged. Homeowners or renters insurance might provide coverage for these items, though.
• Acts of war: Damage from acts of war or terrorism is generally excluded from auto insurance coverage.

Types of Auto Insurance Coverage

Here’s a closer look at coverage options:

Liability Coverage

It covers costs associated with property damage and bodily injury resulting from an accident where you’re at fault.

Collision Coverage

It covers repair costs for your vehicle if it is involved in a collision with another vehicle or object.

Comprehensive Coverage

It covers your vehicle if it’s stolen, vandalized or damaged as a result of a natural disaster or fire. This coverage also extends to collisions with animals.

Personal Injury Protection (PIP)

It covers medical expenses for both you and your passengers if you’re involved in an accident, even if you’re not at fault.

Medical Payments Coverage

It works alongside PIP and health insurance to cover medical expenses for both you and your passengers, regardless of who caused the accident.

Uninsured/Underinsured Motorist Coverage

It covers you if you’re hit by a driver with little or no insurance coverage.

How Auto Insurance Premiums are Calculated

Several factors are used to determine the cost you’ll pay for car insurance.

Risk Factors

• Age: Younger drivers, especially teenagers, often pay higher rates due to less driving experience. However, older, more experienced drivers often receive lower premiums.
• Driving record: A history of accidents, traffic violations or DUI offenses can increase your premium. But a clean driving record generally means more affordable coverage.
• Credit score: Some insurers use your credit score to predict the likelihood of filing a claim in states where this practice is allowed. Poor credit can lead to higher rates, while good credit may lower your premium.

Vehicle Factors

• Vehicle type: The type of vehicle you drive significantly impacts your premium. Luxury cars and sports cars tend to have higher premiums due to their higher repair costs and increased risk of theft.
• Vehicle age: The vehicle’s age is also important. Newer cars might cost more to insure because parts are more expensive. However, older vehicles might not have the latest safety features, which can drive up coverage costs.
• Safety features: Insurance companies also look at safety ratings. Cars equipped with advanced safety features like airbags, anti-lock brakes and anti-theft systems often qualify for additional policy discounts.

Location Factors

• Population: Your location plays a vital role in calculating your premium. Densely populated urban areas with high traffic congestion typically have higher premiums compared to rural areas.
• Crime rates: Crime rates in your area are another factor. Regions with higher rates of car theft or vandalism can see increased premiums.
• Weather conditions: The climate where you live matters. Areas prone to natural disasters like floods, hurricanes, or heavy snowfall might face higher insurance costs due to the increased risk of damage to your vehicle.

Average Cost of Auto Insurance in the U.S.

On average, drivers pay $2,329 annually for full coverage. This figure dips to $633 per year with minimum coverage.

How to Choose the Right Auto Insurance

Before purchasing coverage, it’s essential to assess your needs, finances and driving habits. You also want to understand policy-related jargon to ensure you select the right coverages.

Assessing Your Needs and Financial Situation

Assess how much coverage you need based on your car’s value, your savings, and your potential medical or legal expenses in case of an accident. Minimum coverage might be sufficient for older cars, while new or expensive cars might need comprehensive coverage.

Evaluating Your Driving Habits

If you drive frequently or cover long distances, comprehensive coverage might be your best option. Those who drive occasionally might find basic liability coverage adequate. Daily commuters and long-distance drivers face higher risks due to more time on the road. However, short trips, inner-city driving or infrequent use can lower your premiums.

Comparing Quotes

Use an auto insurance comparison tool to find the best deals in your area. Experian offers a free service to help consumers compare car auto insurance quotes with ease. And if you’re able to snag a better deal than you currently have, Experian will take care of the rest. Visit the Insurance Marketplace online to learn more.

Understanding Policy Terms

Familiarize yourself with key concepts like deductibles, coverage limits and exclusions. Knowing what your policy covers and what it doesn’t will help you avoid surprises later.

How to File an Auto Insurance Claim

If the need arises to file a claim, here’s how to move forward.

Steps to Take After an Accident

Relocate to a safe location if possible and call the police right away. You also want to exchange contact and insurance information with the other driver.

How to Gather Documentation and Evidence

Collect as much evidence as possible to support your claim. Take photos of the accident scene, including vehicle damage, skid marks, and surrounding areas and get a copy of the police report. Gather contact information for any witnesses and document any conversations with the other driver(s) or witnesses.

Contacting Your Insurer

Reach out to your insurance provider right away at the emergency number or on the claim hotline (if applicable). Be sure to provide accurate details surrounding the accident.

Claim Process

You may be able to start the process online. Otherwise, you’ll need to call the provider directly. They will advise you on the next steps and assign a claims adjuster to your case.

Investigation and Assessment

The claims adjuster will investigate the accident, and they may inspect your vehicle following the accident to assess the damage, determine fault and estimate repair costs.

Approval and Payout

If your claim is approved, the insurance company will remit payment to you or the vendors owed (i.e., repair, medical facilities) on your behalf. For totaled vehicles, they will cut a check to you for the cash value minus any deductibles.

Final Tips on How to Lower Auto Insurance Premiums

Here are some strategies to help curb car insurance costs:

• Shop around periodically
• Increase your deductible
• Drop unnecessary coverage
• Capitalize on provider discounts
• Drive less
• Improve your credit score
• Opt for safe, more reliable vehicles
• Drive safely

FAQs on Auto Insurance