Auto insurance is like a safety net for climbers. It’s there in case of an emergency, but it’s not something you will use. Car insurance does not cover you for a fall from a mountain. It only covers your expenses following an accident.
Let’s face it, nobody wants to spend extra money on features they don’t use. To find the best coverage, you will need to know what auto insurance is, what it covers, and why you need it.
Let’s start at the top.
What’s auto insurance?
Auto insurance covers injuries and property damage that result from an accident. This financial protection is the reason insurance is required by law to be able to drive or own a car.
Multiple drivers and vehicles can lead to high medical bills and expensive car repairs. This can quickly become overwhelming. It can be confusing to figure out how much and how much coverage you will need and how much car insurance you’ll have to pay.
Finding the right insurance for you can be hard. NerdWallet has created a guide for car insurance buyers to help you choose the right insurance policy for you.
Why should you have car insurance?
Understanding why you need auto insurance is more important than understanding how it works. After an accident, you will likely be more interested in the details of how it works.
Car insurance is mandatory in all 50 states. This means that you will need it to comply with your state’s minimum requirements. Car insurance also provides financial protection. You won’t have to pay out of pocket for any expenses that arise after a collision, as long as your policy limits allow.
Accidents can quickly increase in cost. According to 2020 data from National Safety Council, the average cost for property damage following an accident is $4,000.
However, if there are injuries or deaths, the expenses can rise to more than $100,000 per individual. A car accident can lead to serious financial ruin if you don’t have $100,000 in your savings.
This is an example of what an accident could cost:
Scenario: Imagine you’re driving in an unfamiliar area of town when you hit another car at an intersection. Your car will cost $3,000 to repair and the repairs of the other driver will cost $2,000. Due to the accident, the other driver will also need back surgery. The medical bills total $30,000.
Total cost out-of-pocket without car insurance: $35,000
If you don’t have insurance, because you were at fault for the accident, you are responsible for all bills. This is not the end of the story.
Let’s assume that your car insurance policy covers $25,000 per person in medical bills, $50,000 in total medical bills, and $15,000 in property damage. Your vehicle repairs are your responsibility. However, your insurance will cover the car repairs of the other driver and $25,000 of their medical expenses. After your insurance has paid out, you are responsible for $5,000 for the remaining medical expenses of the other driver and $3,000 for your car repairs.
Car insurance total out-of-pocket costs: $8,000
Based on a liability-only policy for car insurance with limits of $25,000 per person in bodily injuries, $50,000 per accident in bodily injury and $15,000 per property damage liability.
What is the best auto insurance for?
These are the most popular types of car insurance and what they cover:
Liability coverage is what insurance calls the “meat-and-potatoes” part of the policy. This covers medical bills and property damage costs that are a result of an accident you cause.
Uninsured motorist coverage covers your medical costs and repairs if you are injured by someone who doesn’t have car insurance.
Uninsured motorist coverage is similar to underinsured motorist. If your medical bills or property damage exceed the limits of liability for the other driver, it pays.
Collision insurance covers your traffic-related vehicle repair costs (after you have paid your deductible).
Comprehensive coverage is like Mother Nature insurance on your car. Comprehensive coverage covers damage from severe weather such as tornadoes and hurricanes, as well as vandalism and hitting wild animals.
No matter who is at fault, medical payments coverage covers your medical expenses and those of your passengers following an accident.
No matter who was at fault for an accident, personal injury protection (or PIP) pays for medical expenses. It can also cover funeral and child-care costs.
If you total your vehicle, gap insurance will pay the difference between the amount you owe on your loan or lease car and the current market value of the car.
What kind of auto insurance doesn’t cover?
Auto insurance is not a magic bullet that covers your car against all possible dangers. Auto insurance is not like health insurance that covers every medical expense.
These are just a few examples of the things that car insurance does not cover.
Wear and tear. Car insurance will not pay for flat tires or oil changes. You shouldn’t expect coverage if damage isn’t due to an accident.
Stolen belongings. Stolen belongings. Your auto insurance won’t usually replace your laptop if someone breaks your window to steal it. However, a homeowners insurance policy or renters insurance policy will cover any items stolen from your vehicle up to the policy limits.
You won’t be covered if you ride a rideshare like Uber or Lyft. These companies offer insurance that covers you after you accept a fare and transport a passenger. However, it does not cover between rides. You can purchase optional rideshare insurance from some insurers to supplement your personal insurance if you’re not covered by rideshare companies.
Without new car replacement coverage, the cost of a new vehicle will be higher than what you pay for. Comprehensive and collision insurance will not always cover enough to replace your car after an accident. Your provider will determine the vehicle’s value at the time of an accident and calculate your payout if your car has been totaled.
This is a problem with auto insurance. Most coverage options that protect you and/or your vehicle are optional and availability depends on the insurer you have. If you want additional coverage, make sure to prioritize them when looking for car insurance.