Car Insurance Basics Everyone Should Know

These car insurance basics will help you navigate the sometimes confusing world of auto insurance. The 1st step to follow to start on the right path is to evaluate your insurance needs.

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Zaneta Wood, Ed.S. has over 15 years of experience in research and technical writing bringing a keen understanding of data analysis and information synthesis to reach a wide variety of audiences. She studied adult education and instructional technology at Appalachian State University as well as technical and professional communication at East Carolina University. Zaneta has prepared technical p...

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jan 24, 2021

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Here's what you need to know...

  • The first step in finding the right coverage for you is deciding on your own insurance needs
  • You must meet any minimum requirements set by your state, and it is recommended to purchase additional coverage if you can afford it
  • Choosing a company based on their customer service and financial ratings is always a good idea

Car insurance can be perplexing due to the number of factors associated with it. You will get the most out of your insurance policy if you understand many of its aspects.

You don’t have to understand every little detail about it, but there are certain basics that you should be aware of.

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Many people will choose a car insurance policy because it is the cheapest. This is not always the best decision.

The more you understand about insurance policies and prices, the more specific you can be when it comes to choosing the best coverage.

Sometimes it is better to pay a little more to get more value out of your coverage.

Evaluate your Needs

Before you even start to search for car insurance, you should evaluate how much coverage you want and need.

You should do this every year or whenever you have a life change that may affect your insurance coverage.

Things you should consider include the type of car you drive, the year of the vehicle, and how many miles you drive on a daily basis.

An older car will require different—and usually less—coverage than a newer more expensive one.

Also, the more you are on the road, the more chances there will be to get in an accident, which may affect how much coverage you get.

Whether you own your car outright or lease or finance your vehicle will also make a difference in what type of coverage you will need. Check with your lender as to what they require for insurance on your financed car.

The number of people you are covering will also have an affect on how much insurance you should get.

Having a teenage driver will necessitate more coverage as teenagers are the highest-risk drivers according to the National Highway Traffic Safety Administration.

You should also look at your finances and figure out what type of budget you have for insurance.

You may choose to pay up front for yearly coverage or you may choose to pay quarterly or monthly.

Also, determine how much you would be able to pay for a deductible in the event you are in an accident.

Once you have evaluated what you need and want for insurance, you are capable of looking for the type of car insurance that’s best for you.

The first thing to decide is what type of coverage you want on your policy in order to protect your vehicle as well as your passengers.

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Types of Insurance Coverage


What are the types of car insurance? According to the Insurance Information Institute, there are six possible types of auto insurance coverage. Liability insurance is the kind that covers you when you are the one who caused an accident.

There are two types of liability, bodily injury and property.

Liability for bodily injury covers injuries for the driver and passengers in the other car. Liability for property damage covers damage done to the other driver’s vehicle or other structures you might damage.

Collision coverage is what covers damage that is done to your own car from some type of collision. This coverage is good even if you were at fault for the accident.

Comprehensive coverage is for damage caused to your vehicle by anything other than collision. It also covers you if your car is stolen.

To help cover medical expenses that result from an accident, you may choose to carry Personal Injury Protection (PIP) or medical payment coverage.

Uninsured/underinsured coverage is good to have in the event you are in an accident with another driver who was not insured or didn’t have enough to cover all of the damages.

If that person was at fault and didn’t have insurance, your uninsured coverage will pay for the damages. It also covers hit and runs to you or your vehicle.


Once you determine what types of coverage you want on your vehicle, you need to choose your deductibles.

A deductible refers to the amount of money that you pay before the insurance coverage starts to kick in.

A higher deductible will mean that you have to pay more out of your own pocket, but it also means that your insurance premiums will be lower.

If you can’t afford to have a high deductible, you can choose a lower one, but be aware that your insurance rate will be higher because of it.

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Another thing you will need to decide is your limit amount. The limit amount is the maximum amount that your insurance company will pay.

Once the limit has been reached, you are responsible for the remaining amount.

 In order to have sufficient coverage, you should choose the highest limits that you can afford.

Limits refer to your liability coverage, and you choose amounts for each passenger’s bodily injury, the maximum for total bodily injury payment, and the maximum for property damage payment.

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Basic Insurance Needs

What are the levels of car insurance? Although you have choices when it comes to car insurance, you are required to purchase a certain amount of insurance coverage, depending on which state you live in.

Most states have minimum insurance requirements for each driver, including the types of coverage you need to carry and the minimum limits you need to have.

To find out what your state mandates are, you can ask your insurance agent or visit the National Association of Insurance Commissioners.

Liability coverage is a requirement in most states and some require additional coverage as well.

How Insurance Rates are Determined

Several factors help determine how much you will pay for your car insurance and it can vary greatly from one driver to the next.

The type of car you drive will have an effect on your insurance rates.

Your driving history is also a big factor.

If you are a safe driver and your driving record is clean, your rates will be much lower than a driver who has had multiple accidents. Accidents usually stay on your record for a specified period of time, often three years, and then you have a clean slate.

Your credit history also affects how much you will pay for car insurance.

If your credit score is low or you don’t have much of a credit history, you will have a higher rate than a driver who has strong credit.

Your age and gender also affect how much your insurance premium will be. Males tend to pay more for car insurance, as do drivers under the age of 25.

How to Find Car Insurance


If you are currently not working with an insurance agent, there are multiple avenues you can take to find a car insurance policy.

An insurance broker is a person who doesn’t work for one particular insurance company but can choose your policy from a number of different carriers.

A broker may be able to offer you more options and prices than you would find by going through one particular company.

A quick way to find car insurance is online.

Many companies want your business, and it is easy to get quotes from them quickly.

You will need to fill out personal information and information about your vehicle and driving habits, but then you will receive multiple quotes which will help you make an informed decision.

Once you have quotes for a policy, do not automatically choose the cheapest one.

Do your research so that you end up with a good and trustworthy company. You should choose a company that pays claims efficiently and has good customer service.

Find out if any of the companies have complaints made against them. This can be found through the insurance department of your state or through the Better Business Bureau.

To find out how the companies stand financially, go to a website such as A.M. Best.

There you can see how many assets the insurance company has, what its financial rating is, and if its future outlook is positive or negative.

Try to select a company that has a rating of A or higher, as this indicates that it will be able to pay current claims as well as those that come in the future.

Because there are so many choices for car insurance, you have many options.

This means that you will be able to find the right one for your specific needs and budget.

It also means that if you are unhappy with your current insurance carrier, there are many opportunities for you to find a better one.

It may take a little bit of time and effort on your part, but it is worth it in the long run.

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