Need car insurance? 4 most important auto insurance basics to know

Auto insurance protects your vehicle against many risks, such as car accidents, theft, and vandalism. And most U.S. states require car insurance — only New Hampshire and Virginia do not.

Understanding some auto insurance basics can help ensure you don’t overpay for coverage. Here’s what you need to know about auto insurance, as well as some tips for how to lower your premium.

• How does auto insurance work?
• What types of auto insurance do you need?
• How much auto insurance should you buy?
• How to lower your auto insurance premium

How does auto insurance work?

Car insurance is a contract between you and an insurance provider that helps pay for damages to your vehicle and other vehicles, any other property damage, and bodily injury that an accident causes. The specific claims process depends on the state you live in and who’s responsible for the accident, but in general, you’ll file a claim after a car accident and wait for your insurer to approve it.

Insurers determine your auto insurance premium by assessing several factors, such as your vehicle, how much coverage you get, and your driving record. Once you’re approved for a policy, you can pay it in full up front or in regular installments — you can typically choose to pay monthly, every six months, or yearly.

What is a deductible?

Your car insurance deductible is what you pay before your insurer pays the rest for a covered claim. For example, say your deductible is $1,000 and you get into an accident that causes $5,000 worth of damage to your vehicle. In that case, your insurance payout would be $4,000.

Typically, the higher your deductible, the lower your car insurance premium, and vice versa. If you choose a higher deductible to save money during the year, just be sure you can afford to pay that amount in the event of an accident.

What types of auto insurance do you need?

You can choose from several types of auto insurance coverage — each one protects you in different ways. Keep in mind that you must purchase at least the minimum required insurance in your state. Here are the types of car insurance you should consider:

• Liability — If you’re involved in a car accident and you’re at fault, liability coverage pays for property damage and any bodily injury you cause, up to your policy limits. Liability insurance is required in almost every state, and each state sets its own minimum liability coverage limits.
• Personal injury protection — Personal injury protection (PIP) covers medical expenses for you or your passengers if you’re involved in an accident, regardless of who's at fault. You may need to purchase this type of insurance if you live in a no-fault state — a state where you have to file a claim with your own insurance carrier, no matter who’s at fault.
• Medical payments — Similar to PIP, medical payments insurance covers your medical expenses and your passengers’ medical expenses, regardless of who’s at fault. But PIP and medical payments coverage aren’t the same. Medical payments coverage is only offered in at-fault states — these states require the person who’s deemed at fault to pay for covered damages. And unlike PIP, medical payments coverage is always optional. This coverage may be beneficial if you don’t have health insurance.
• Comprehensive — Comprehensive coverage protects your car against damages not caused by a collision with another vehicle or object. Some examples include damages to your vehicle from a wildfire, windstorm, or vandalism. If you’re financing a vehicle, your lender will likely require you to purchase this type of insurance to protect its interest in your vehicle.
• Collision — Collision insurance helps you pay to repair or replace your car if it’s involved in an accident with another vehicle or a non-moving object, like a pole. Similar to comprehensive insurance, a lender may require you to purchase collision coverage.
• Uninsured and underinsured motorist — Uninsured motorist coverage helps pay for damages to your vehicle caused by a motorist who doesn’t have insurance. It may also cover repairs if you’re the victim of a hit-and-run accident. Underinsured motorist coverage helps pay for damages to your car if the driver responsible for them doesn’t have enough coverage. Depending on your state, you may be required to purchase one or both of these coverages.

How much auto insurance should you buy?

The amount of coverage you need depends on the state you live in and your individual situation. You should buy enough liability insurance to protect your assets in the event someone sues you after an accident.

How much collision coverage you need depends on your car’s value and whether you make payments on your vehicle or own it outright. It’s important to note that you may not need collision insurance if your deductible is greater than the value of your car — if you have an old vehicle, for instance. But if you lease your car or have an auto loan, the lender or leasing company will require you to carry collision and comprehensive coverage.

A good rule of thumb is to buy as much coverage over the minimum as you can comfortably afford. For example, if you own your car outright, collision and comprehensive coverage aren’t required. But adding those coverages can help you protect yourself in case of an accident or an unexpected event, like vandalism.

How to lower your auto insurance premium

If you’re looking to save money on car insurance, consider taking these steps:

• Comparison shop for the best deal. One of the best ways to lower your car insurance is to shop around. To find the best deal, get quotes from at least three to five insurance providers. You can get auto insurance quotes online or by reaching out to an insurance agent. When getting quotes, make sure to compare policies that offer similar coverages.
• Bundle with homeowners insurance or another policy. Some insurance carriers will give you a discount for buying multiple policies from them, such as your home insurance and auto insurance. You can also get a discount if you purchase renters insurance and auto insurance from the same insurer.
• Choose a higher deductible. If you choose a higher deductible, you can lower your insurance rate. But before you do so, review your finances to make sure you can comfortably afford to pay the higher out-of-pocket costs to repair or replace your vehicle if it’s damaged.
• Ask about additional discounts. Contact your insurance carrier to see if it offers any discounts. Some common car insurance discounts include those for members of the military, low mileage, being a good student, and using autopay.
• Boost your credit score. When you apply for auto insurance, many insurers will review your credit history to determine how risky you are to insure. If you have good credit, you’ll likely receive a lower rate. You can improve your credit score by adopting good credit-building habits, like paying all your bills on time and paying down any outstanding debt.