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Automobile Insurance

Auto insurance covers costs that result from auto accidents. The types and amounts of required coverage differ significantly from state to state, so be sure to confirm your state’s specific requirements before buying a policy.

Auto Insurance Coverage Options

Auto insurance policies typically include the following five coverage options:

Vehicle damage
Liability
Personal injury
Road service
Car rental

The state you live in will require you to purchase some or all of these options and stipulate a minimum amount of coverage you have to purchase for each. But depending on your situation, it may be smart to purchase options or coverage levels beyond what your state requires.

Vehicle Damage

Vehicle damage coverage has two components: collision and comprehensive. Collision coverage covers damage resulting from hitting another object—a car, tree, curb, etc.—regardless of who’s at fault. Comprehensive coverage covers nearly every other type of accidental damage to your car, such as fire, theft, or hail.

Liability

Liability coverage covers injury or damage claims made by other people as a result of an accident that you caused. For example, suppose you hit another vehicle and seriously injure the other driver. The driver can and may sue you for medical bills, lost wages, and pain and suffering. Liability coverage is intended to cover some or all of these costs to help protect your assets, such as your home or personal investments, which a court could force you to sell in order to pay a judgment against you.

Liability coverage comes in lump-sum dollar amounts. You should purchase an amount of liability coverage equal to the total value of all of your assets, including all savings, investments, and property you own.

Personal Injury

Personal injury coverage applies to medical bills, lost wages, and pain and suffering that you suffer as a result of an auto accident. Personal injury costs can be covered by:

Your auto insurance
Your health insurance
Your disability insurance
The personal liability coverage in the other driver’s auto insurance policy, if any

Even if you have health or disability insurance, you need personal injury coverage in case your other insurance doesn’t cover you completely or the other driver lacks liability coverage. Be sure your personal injury coverage covers compensatory damages, medical bills, and lost wages.

Compensatory Damages

Compensatory damages include the cost of your injuries and the amount of money you receive in compensation for pain and suffering if you’re hit by a driver who has no liability insurance or whose insurance doesn’t cover the full extent of your cost. Insurance that covers compensatory damages is called uninsured motorist or underinsured motorist coverage. Most drivers buy an amount of this coverage equal to that of their liability insurance.

Medical Payments and Personal Injury

Medical payments coverage and personal injury protection cover medical bills and lost wages that result from an auto accident, regardless of who was at fault. Personal injury protection will also reimburse you for lost wages and, depending on your policy, for replacement services—any additional help that you may need to hire in your home.

Buy only as much coverage as your state requires. Buying more will often duplicate your health and disability insurance coverage (assuming you have those types of insurance). To learn more about your state’s specific requirements, visit info.insure.com/auto/minimum.html.

Road Service

Road service coverage includes roadside services, such as towing or help with a flat tire. Though it may seem easiest to add this coverage to your existing auto insurance policy, it’s cheaper over the long run to buy this service through an automobile club, such as AAA (www.aaa.com). AAA membership rates vary based on your location, ranging from about $40–100 per year.

Car Rental

There are two insurance options related to car rentals: loss of use coverage and rental car liability coverage.

Loss of use: Covers rental car costs you incur when your regular car is in the shop. If you don’t have a second car to use when your main car is being repaired, it’s wise to buy loss of use coverage. Loss of use coverage ranges from $10–50 per day for a maximum of 30 days. Buy coverage of at least $30 per day (the average minimum daily car rental cost).
Rental car liability: Covers insurance costs when renting a vehicle for business or pleasure, including vehicle damage, bodily injuries you cause, and revenue loss that the rental car company suffers. It’s crucial to understand exactly how your policy applies to each rental situation: certain limits may apply based on various factors, such as the state in which you rent the car. Rental car liability amounts typically range from $10–50 per day for a maximum of 30 days. Most auto insurance policyholders buy $30 per day of coverage.

Motorcycle Insurance

Motorcycle insurance works just like auto insurance, with a few additional considerations:

Lay-up periods: Some insurers offer the option of lay-up periods—extended periods during which you don’t expect to use your motorcycle and therefore don’t need insurance. Unless you’re 100% sure you won’t be riding for a specific period, it’s usually best to avoid lay-up periods—you never know when you may want, or need, to use your motorcycle.
Passenger liability coverage: Make sure to buy passenger liability coverage that’s equal to the amount you buy to cover your own injuries. If your insurer doesn’t provide passenger liability coverage, don’t carry passengers on your bike.

Auto Insurance Costs

The amount you pay in auto insurance premiums depends on a few factors:

Types of coverage you choose
Make and model of your vehicle
Your city and state
Your driving record, sex, and age

The average annual premium for collision, comprehensive, and liability coverage is roughly $800, but this varies considerably by state. Payments may be annual, semiannual, or monthly, depending on your insurance company.

How to Lower Your Auto Insurance Premiums

Insurance companies calculate auto insurance premiums based on several risk factors, considerations that determine your likelihood to file a claim. Some examples of risk factors include the mileage on the car, how often you use the car, where it’s stored, your driving record and previous accidents, and so on. There are a few ways to reduce your risk factor and, in turn, the amount of your premium:

Buy a vehicle with safety features, such as airbags and anti-lock brakes.
Maintain a clean driving record.
Drop collision and/or comprehensive coverage on older cars that are worth less than ten times the premium— such cars aren’t worth the cost of that coverage.
Keep your mileage low by using public transportation.
Take a defensive driver education course.
Choose a policy with a high deductible ($1,000 and up).

How to Buy Auto Insurance

Though you can purchase auto insurance through captive and independent agents, buying direct has become increasingly popular because it’s often cheaper. Two of the leading direct writers include: