A comprehensive guide to car insurance

Car insurance provides financial protection if you’re involved in a traffic accident. Most states require drivers to carry a minimum level of liability coverage to cover bodily injuries and property damage others might experience if you cause an accident. Purchasing additional coverage types like collision and comprehensive — commonly referred to as full coverage — can broaden your protection, helping to pay for damage to your vehicle, regardless of fault.

In this guide, we’ll go over what coverage is required by law (and what coverage your lender likely requires), how much you can expect to pay (plus tips for saving on policy costs), and how to get car insurance quotes.

How does car insurance work?

Car insurance is a contract between the driver and the insurance company. The driver pays a premium to keep the policy active. In return, the insurer agrees to cover specific financial losses if you’re involved in an accident.

Car insurance deductibles

Some coverage types — like collision and comprehensive insurance — come with deductibles. A deductible is the amount of damage you agree to cover out of pocket in the event of an approved claim. Your insurer will cover the rest, up to your policy limits. Deductibles commonly range from $250 to $2,500, but other amounts may be available.

Choosing a higher deductible will make your policy cheaper, and vice versa — a lower deductible will make your policy more expensive. In selecting an appropriate deductible for your situation, it’s important to balance your ongoing insurance costs (monthly or annual premiums) versus your ability to pay an unexpected bill to repair or replace your car after an accident. 

Car insurance policy limits

Car insurance policies also have limits, which are the maximum amount your insurance company will pay toward a covered loss. If damage exceeds the policy limits, you’re responsible for the remaining costs out of pocket.

Common types of car insurance coverage

Car insurance policies are made up of several types of coverage. Some are required; others are optional. 

Understanding car insurance requirements

Each state determines the types of car insurance and minimum policy limits drivers must carry to hit the road legally. In 49 states and the District of Columbia, the law requires drivers to have liability coverage, which provides financial protection for other drivers if you cause an accident that damages their property or leaves them injured. Driving without liability insurance can result in fines, license suspension, or jail time.

While it’s not a legal requirement, full coverage offers broader financial protection. Full coverage typically refers to a combination of liability, collision, and comprehensive coverage, though it isn’t a formal insurance term. Adding collision and comprehensive insurance helps protect you and your vehicle against theft, weather-related damage, accidents, and other claims — even if you are at fault. 

Note that if you financed your vehicle purchase, your car loan agreement may require you to carry collision and comprehensive coverage (in addition to other coverage types like gap insurance). The same goes for drivers leasing vehicles. These added insurance requirements protect the lender or lessor’s interest in the vehicle until it’s paid off or the lease term expires.

How much does car insurance cost? 

The average cost of car insurance in the U.S. is $737 per year, or almost $61 per month, for minimum liability coverage, according to 2023 data from the National Association of Insurance Commissioners. Full coverage costs an average of $1,438 per year, or around $120 per month. 

According to the Bureau of Transportation Statistics, auto insurance prices go up about 7.5% year over year, so the average car insurance premium is likely even higher today.  

Keep in mind: while these averages can give you an idea of what car insurance costs, your actual rate will vary depending on the company you choose and the coverage you need, as well as details specific to the vehicles and drivers listed on the policy. 

Factors that influence your car insurance rate

Depending on the laws in your state, insurers consider factors like ZIP code, age, gender, credit, driving record, claims history, and more when pricing policies.

• Location (ZIP code): Drivers in areas with higher rates of accidents, theft, and traffic density generally face higher premiums.
• Age and gender (prohibited in some states): Newer and younger drivers typically pay more for car insurance than more experienced drivers because they’re more likely to be involved in an accident.
• Credit-based insurance scores (prohibited in some states): Insurers in many states use credit data like payment history, credit mix, and outstanding debt to estimate your risk of filing a claim. Better credit can lead to lower premiums.
• Driving record: If you have accidents, speeding tickets, or DUIs on your driving record, you’re considered riskier to insure, which increases how much you’ll pay for car insurance.
• Vehicle make and model: Insurers consider things like vehicle value, theft risk, repair costs, safety features, and claim trends when setting rates. Expensive or frequently stolen cars cost more to insure than safer, more affordable vehicles.

Other factors insurers might consider include annual mileage, occupation, marital status, and claims history.

How to shop for car insurance

Buying car insurance doesn’t have to be complicated. Here’s how to get the right coverage at a price that fits your budget:

1. Gather information. You’ll need some information to get car insurance quotes, including driver’s license numbers for every driver in your household, a summary of their driving history, and the year, make, model, and VIN for each vehicle you’re insuring.
2. Determine your coverage needs. Assess your car’s value, your personal assets, and potential risks. The more likely you are to get into an accident or file a claim, the more coverage you might need. Decide whether liability-only coverage is enough or if you need full coverage. You can have liability-only on one car and full coverage on another if structuring coverage that way better suits your situation.
3. Compare quotes. Get quotes from at least three car insurance companies. Ask for quotes for the same coverage types, limits, and deductibles. Then, compare rates and customer reviews from each insurer to see which company offers the price, coverage, service, and benefits that appeal most to you.
4. Check for discounts. Ask about discounts to lower your premiums. Commonly available discounts include savings for purchasing home and auto coverage from the same company (called bundling), not filing claims, having a clean driving record, or getting good grades (if there’s a student on your policy).

Frequently asked questions

What is the cheapest car insurance?

The cheapest car insurance usually refers to state-minimum liability coverage, which only pays for injuries or property damage you cause to others. While the cost of coverage is attractive, liability-only policies may leave you underinsured if you’re in a serious accident or total a brand-new, expensive car. For most people, paying a little extra to better protect your finances is worth it.

How much car insurance do I actually need?

While your state’s insurance laws likely require much less, the National Association of Insurance Commissioners recommends carrying a 100/300/100 policy, meaning $100,000 in bodily injury per person, $300,000 in bodily injury per accident, and $100,000 in property damage per accident. 

In terms of liability, your car insurance policy limits should ideally be enough to protect your total assets in case of a lawsuit. If your net worth is more than $500,000, it could be worth purchasing an umbrella policy, which typically provides an extra $1 million in liability coverage. 

If you finance or lease your car, you should have liability plus comprehensive and collision coverage, which will pay up to your vehicle’s value (minus any applicable deductibles) in the event of a total loss. 

Does car insurance cover the car or the driver?

Car insurance generally follows the car, meaning the vehicle is covered even if someone else is driving with your permission. But policy terms vary, so you should review your policy’s permissive use clause to confirm who is covered and when.

How do I file a car insurance claim?

1. Document the scene. Take photos or videos and gather details about the accident, like the time, date, location, vehicles, and drivers involved.
2. Exchange information. Get the other driver’s insurance and contact info, and give them yours.
3. Contact your insurer. Report the claim as soon as you’re able.
4. Work with the adjuster. The insurer will assign a claims adjuster to assess the damage and determine your payout.