Important Reasons to Have Car Insurance

The three main reasons to have car insurance are to comply with state laws, satisfy a lender, and to protect your personal assets. All states require you to take financial responsibility for any damage you cause in an accident.

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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...

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UPDATED: Jun 8, 2020

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Here's what you need to know...

  • Why is it important to have insurance? The three main reasons to have car insurance are to comply with state laws, to satisfy a lender, and to protect personal assets
  • All states require for you to take financial responsibility for any damage you cause in a traffic accident
  • Lenders will require that you have comprehensive and collision insurance in addition to the state-required liability

Insurance can be expensive. Unless you are in a wreck, it might even seem useless. So why do you need car insurance?

Why is it important to have car insurance? There are three main reasons to have car insurance, according to the National Association of Insurance Commissioners’ Consumer Guide to comply with state laws, to satisfy a lender, and to protect personal assets.

In this country, driving is a privilege. With that privilege comes the duty to pay for any damages incurred while driving. Insurance is the cheapest way to live up to that responsibility.

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Why does my state mandate insurance?

All states require for you to take financial responsibility for any damage you cause in a traffic accident. Forty-nine of the states require that you do this by purchasing a minimum amount of liability insurance.

One state – New Hampshire – allows you to show proof of financial responsibility in another way.

Liability insurance pays for the repair or replacement of the other driver’s car if you cause an accident.

It will also pay for medical bills for all the occupants of the other vehicle. In most states, the person who caused the accident is required to pay for the damage.

Thus states require that if you drive, you have insurance to pay for any damage you might cause.

Some states also require a secondary coverage for uninsured and underinsured drivers. This will pay for all or part of the damage to your car if the person who hits you doesn’t have any insurance or doesn’t have enough.

For a full list of each state’s minimum liability and whether they require uninsured motorist coverage, see Edmunds’ full list in its article on “How Much Car Insurance Do You Need?“.

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Why does my lender require me to carry insurance?

If you take out a loan to purchase an automobile, the lending institution, whether it is a bank, credit union, or dealership, will require that you have comprehensive and collision insurance in addition to the state-required liability.

Collision insurance pays for repair or replacement of your vehicle if you are the at-fault driver in an accident. Comprehensive insurance would cover repair or replacement if the car was damaged by another, non-accident related event.

This would include theft, fire, storms, or floods. When you take out an auto loan, the vehicle is the collateral.

If you can’t make the payments, the bank can repossess the vehicle, sell it, and retrieve their money that way.

Thus, the bank wants to protect its collateral. All lenders require that you carry enough comprehensive and collision to replace the vehicle if it is totaled.

If the lender catches you without the required coverage, you will be in violation of the terms of the loan and your car can be repossessed.

How can insurance protect my assets?

Perhaps the most important reason to have car insurance is to protect everything for which you have worked so hard. Since you are liable by law to pay for the damage you cause to another driver or vehicle, you will be required to pay.

If you don’t have insurance, or don’t have enough insurance, you could end up depleting your savings or 401(k), and maybe even lose your home to pay for it.

For example, if you cause a severe accident with a $40,000 car, totaling the car and sending the driver and passenger to the hospital, you are responsible for paying the hospital bill and replacing the car. If the two people are in ICU for two days, racking up $60,000 in bills, that’s $100,000 you will need to come up with.

If your state only requires 25/50/10 liability, this will pay $25,000 for each occupant towards their medical bills, and no more than $50,000 per accident. It will also pay $10,000 to repair or replace the car. In this situation, you’re left to pay the extra $40,000.

How would you come up with this extra money? Depleted your savings? Cash in your retirement account? Sell your house?

This is why experts like the ones at the Insurance Information Institute in its “Crash Course in Auto Insurance” recommends that you carry at least 100/300/50 insurance. The policy pays $100,000 per person and $50,000 for the automobile.

In that same scenario, 100/300/50 liability insurance would have fully covered the medical bills and replacement value of the totaled car.

You would not be responsible for paying any of it. No matter what your state’s minimum, it is wise not to purchase only that minimum amount.

Start your search for online car insurance to protect your assets right now by entering your ZIP code into the box below!

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