Auto Insurance

An auto insurance policy covers damage to your vehicle from accidents, weather, or theft, and provides liability coverage if you injure someone or damage their property while driving. Auto insurance is legally required in all states and typically costs $1,000–$2,000+ per year.

Coverage types

Liability (required by law). Covers damage you cause to others’ property or injuries to others. Includes bodily injury (per-person and per-accident limits) and property damage. Example: $100,000/$300,000/$100,000 means $100k per person, $300k total per accident, $100k property damage.

Most states require minimum coverage (e.g., $25,000/$50,000/$25,000), but you should carry more. If you cause a serious accident, damages can exceed $500,000. Higher limits are cheap ($20–$40 more per year for $100k/$300k/$100k).

Collision (optional, required if financed). Covers damage to your vehicle from accidents with another vehicle or object. Has a deductible (e.g., $500, $1,000). If you cause the accident, this covers your car (minus deductible).

Comprehensive (optional, required if financed). Covers damage to your vehicle from non-accident causes (theft, weather, falling objects, animal strikes). Has a deductible.

Uninsured/underinsured motorist. Covers you if hit by a driver with no insurance or insufficient insurance. Recommended, especially in areas with high uninsured driver rates.

Medical payments. Covers medical bills for you and passengers after an accident, regardless of fault. Overlaps with health insurance but useful.

Collision and comprehensive are optional if you own the vehicle outright. But if you finance a car, the lender requires them.

Choosing deductibles

Higher deductible ($1,000) = lower premium. Lower deductible ($250) = higher premium.

If you have an emergency fund and can cover a $1,000 deductible, choose that. If finances are tight, lower deductible costs more but is safer.

Example: $500 deductible costs $150/year more than $1,000 deductible. Over 10 years, that is $1,500. If you never have a claim, you lost money. If you have one claim, you save $500 in deductible.

Cost factors

• Age and driving record. Young drivers and those with accidents/tickets pay much more.
• Location. Urban areas = higher cost (more accidents, theft).
• Vehicle type. High-value cars and sports cars cost more to insure.
• Annual mileage. More miles = more accident risk.
• Credit score. Many insurers use credit as a proxy for risk.

Discounts

• Bundling. Auto + home insurance = 10–25% discount.
• Safe driving. No accidents/tickets in 3–5 years.
• Good credit. Excellent credit score.
• Safety features. ABS, airbags, theft prevention = small discounts.
• Low mileage. <10,000 miles/year qualifies for discounts.
• Paid-in-full. Annual payment cheaper than monthly.

Shopping around

Insurance rates vary significantly by insurer (up to 40% difference for the same coverage). Get quotes from 3–5 companies annually. Most people do not shop enough and overpay.

Comparison sites (NerdWallet, TheZebra, etc.) make this easy.

Required by law, required by lenders

Auto insurance is legally required in all states (minimum varies). Driving without it is illegal.

If you finance a car, the lender requires you to carry collision and comprehensive (to protect the lender’s interest in the vehicle).

Umbrella for serious accidents

If you cause a major accident (multiple injuries, significant property damage), damages can exceed your auto insurance limits. Umbrella insurance covers this excess. For $150–$300/year, it is worth it.

See also