Auto insurance guide: what you need and how it works
Car insurance pays for the damage and injuries you cause to others, and, depending on what you buy, for your own car and medical bills too. Here's how the pieces fit together before you start comparing quotes.
Published by Marcus L. Barber, former licensed Maryland property and casualty producer (2010–2012)Reviewed by Marcus L. Barber on Updated This guide is general education, not advice for your situation. We're an independent publisher, not an insurer or agent, and we may earn a commission from partner links. How we make money.
Key points
- Every state except New Hampshire requires drivers to carry auto insurance or meet a financial responsibility rule.
- Liability coverage protects other people. Collision and comprehensive protect your own car.
- State minimums are a floor, not a recommendation. A serious crash can cost far more.
- Prices for the same driver vary between insurers, so compare quotes with identical limits and deductibles.
How car insurance works
An auto policy is a contract: you pay a premium, and the insurer agrees to pay for specific losses up to the limits you choose. Each coverage in the policy has its own limit, and the ones that pay for your own car usually have a deductible, the amount you pay out of pocket on a claim before the insurer pays the rest.
Most policies run for six or twelve months. At renewal the insurer can change your price, so it's worth checking the market every year or two even if nothing about your driving has changed.
What the law requires
Nearly every state makes drivers carry liability insurance, which pays for injuries and property damage you cause to other people. New Hampshire is the exception: it doesn't have a compulsory insurance law, but drivers must be able to show they can pay for an accident they cause. Virginia used to let drivers pay a fee instead of buying insurance; since July 1, 2024, every vehicle registered there must be insured.
Twelve states and Puerto Rico have no-fault systems. In those states you also have to buy personal injury protection (PIP), which pays your own medical bills after a crash no matter who caused it. The no-fault states are Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah.
Some states also require uninsured motorist coverage. Your state's insurance department publishes the exact minimums, and if you have a car loan or lease, your lender will usually require collision and comprehensive too.
The six main coverages
| Coverage | What it pays for | Usually required? |
|---|---|---|
| Bodily injury liability | Injuries you or a permitted driver cause to other people | Yes, in nearly every state |
| Property damage liability | Damage you cause to someone else's car or property | Yes, in nearly every state |
| Medical payments or PIP | Medical bills for you and your passengers; PIP can also cover lost wages | PIP in no-fault states |
| Uninsured/underinsured motorist | Your injuries (and sometimes car damage) when the at-fault driver has no or too little insurance, including hit-and-runs | In some states |
| Collision | Damage to your car from hitting another vehicle or object, or rolling over | Optional by law; lenders usually require it |
| Comprehensive | Damage to your car from theft, fire, weather, vandalism or hitting an animal | Optional by law; lenders usually require it |
Read car insurance coverage types, explained for how each one pays out, plus optional extras like gap insurance and rental reimbursement.
What sets your price
Insurers price each driver differently, but they look at many of the same things:
- Your driving record: accidents and violations raise rates for several years.
- Where you live and park: local crash, theft and repair costs matter.
- Your age and experience: newer drivers usually pay more.
- The car: repair cost, theft rate and safety record all count.
- How much you drive: fewer miles generally means less risk.
- Your coverage choices: higher limits cost more; higher deductibles cost less.
- Credit-based insurance score, where allowed: several states restrict or ban it. Hawaii, Massachusetts and Michigan don't allow credit to be used to set auto rates.
Because every company weighs these factors its own way, two insurers can quote the same driver very different prices. That's the main reason to compare.
How much coverage to buy
State minimum liability limits are low compared with the cost of a serious crash, and you're personally responsible for anything above your limit. A common approach is to buy liability limits that at least match what you could lose in a lawsuit, meaning your savings, home equity and future income. If you have significant assets, an umbrella policy adds liability protection on top of your auto and home policies.
For your own car, ask whether you could afford to repair or replace it from savings. If the car is worth little, dropping collision and comprehensive can save money. If you owe more on a loan than the car is worth, look at gap insurance.
Deductible tip: raising your deductible lowers your premium, but only choose an amount you could pay tomorrow without borrowing.
How to shop
- Decide on your limits and deductibles first, then ask every insurer to quote exactly those.
- Get several quotes, in writing.
- Ask about discounts: bundling with home or renters, safe driving, low mileage, good student, anti-theft devices.
- Check complaint records and financial strength. The NAIC's Consumer Insurance Search shows complaint data by company and state.
- Don't cancel your current policy until the new one is active, so you never have a gap in coverage.
Our step-by-step guide covers this in more detail: how to compare car insurance quotes.
How this guide was made
We drafted this guide with help from AI writing tools, working from the sources listed below. Every fact was checked against those sources, and Marcus L. Barber read and reviewed the full page, including its title, description and FAQs, before it was published. AI tools don't decide what we publish; a person does. Our editorial standards.
Sources
- What is covered by a basic auto insurance policy?, Insurance Information Institute
- Background on: Compulsory auto/uninsured motorists, Insurance Information Institute
- New laws take effect today, July 1, 2024, Virginia Department of Motor Vehicles
- Background on: No-fault auto insurance, Insurance Information Institute
- What determines the price of an auto insurance policy?, Insurance Information Institute
- A Consumer's Guide to Auto Insurance, National Association of Insurance Commissioners
- Use of credit reports/scoring in underwriting (state chart MC-20), National Association of Insurance Commissioners
- Does your vehicle have the right protection? Best practices for buying auto insurance, National Association of Insurance Commissioners