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Car insurance is a financial product that lessens your financial losses in the face of damaging events involving your car or you as a driver. Auto insurance is technically a product you buy, but it’s one that, ideally, you’ll never use.
You’ll often hear car insurance talked about in terms of the protections it offers you. However, unlike protections that keep an event from happening – like brakes, an alarm system, or a levy – car insurance protects you from loss that results from those events. It’s after-the-fact protection that helps minimize the impact of a damaging event.
Auto insurance policies, like collision insurance and comprehensive insurance, are typically tied to your car, while other types of car insurance coverage, like liability and non-owner car insurance, are tied to you as a driver. No matter the type of coverage, everyone needs some type of car insurance. For one, most states require that you have some car insurance coverage. Even if it isn't required, though, car insurance is worth having.
In addition to providing you money for car repairs as the result of an accident, auto insurance can provide you with protection from liability. Liability is money you owe to someone because your actions caused them harm, and you're at-fault. For example, if you hit a cyclist with your car, your liability would include their resulting medical bills, which could be in the hundreds of thousands of dollars. Without the right liability car insurance, you could have your wages garnished, or you could be forced to liquidate your retirement accounts or sell your house to pay their medical bills. With liability car insurance, your insurance company would pay. So while paying for auto insurance can be annoying, it’s much better than losing your house or going bankrupt because of a mistake on the road.
This guide contains the following sections:
- How Does Car Insurance Work?
- How Much Car Insurance Do I Need?
- Car Insurance Companies
- Car Insurance by State
- Car Insurance Discounts
- Types of Car Insurance
- Frequently Asked Questions
In short, car insurance is an agreement between you and your insurance company. You agree to pay them a fixed and recurring fee, called a premium. You can pay your premium monthly, yearly, or every six months. In exchange for the premium, the car insurance company gives you an auto policy. A car insurance policy is a contract where the insurance company agrees to give you financial coverage for certain types of events. When you have the right car insurance coverage, you won’t have to come up with cash for repairs if you wreck your car. You simply alert your insurance company through a process known as making a claim, and your insurance company pays for repairs or vehicle replacement, up to your coverage limits. Your auto insurance policy will also spell out your deductible, which is the amount of money you are responsible for contributing when you make a claim. So, for example, if your car has $3,000 worth of damage and your deductible is $1,000, you pay $1,000 and your insurance company pays $2,000.
Because insurance companies have many policyholders, and not all of them will make a claim, the insurance company will have enough money on hand to pay for the policyholders who do need to make a claim. Note, however, that exactly how much the company will pay for a claim (the coverage limits) and what types of claims they will pay for, depend on the types and amount of insurance you buy.
Read more about how car insurance works.
As long as you’re meeting the minimum amount of car insurance required in your state, you can pick and choose the amount of car insurance you buy, based on your budget and how much financial risk you want to take on. Keep in mind that if you’re financing or leasing your car, your lender or lease company may have minimum car insurance requirements you need to hit as well.
Getting the right amount of car insurance is all about balancing what you pay in premiums with the amount of coverage you need. If you have a large cash savings, you can buy less car insurance and use those savings to repair any damages or replace a car that’s a total loss. Similarly, if you don’t have many assets to lose in a liability case, you can carry less liability insurance and lower your premiums. You can also lower your premiums by opting for a higher deductible, but that means you’ll have to pay more out-of-pocket when you make a claim.
Bear in mind that if you carry limited insurance, you'll have limited protection in the event of a collision or theft, and what you save in premiums, you may end up spending on repairs or a new car. Cheap car insurance is not always a great deal. The average cost of a car insurance claim is about $3,000, but with medical and liability costs, a car accident can end up costing in the hundreds of thousands of dollars. Without proper insurance coverage, you may be on the hook for that money.
Read more about how much car insurance you need.
With some auto insurance claims costing in the hundreds of thousands of dollars, how do car insurance companies make money? As we mentioned above, not all policyholders make an insurance claim – at least not all at the same time. And while car insurance claims can cost hundreds of thousands of dollars, most don’t. Car insurance companies make money by collecting more in premiums than they pay out in claims.
That doesn’t mean car insurance companies are always raking in the dough. After a natural disaster, like a hurricane with severe flooding, insurance companies can pay out so many claims that they end up with smaller profits. For publicly traded, or stock, insurance companies, that’s bad news for their shareholders. For mutual insurance companies, which are owned by their policyholders, it’s the policyholders who take the hit in the form of higher rates and smaller dividends (a dividend is a share of the profit paid to stockholders in a stock insurance company or policyholders in a mutual insurance company).
Insurance companies weren’t always for-profit businesses. They grew out of mutual aid societies where people pooled their resources to respond to costly events like a disaster or death. Now, the 10 largest car insurance companies in the United States insure more than 70 percent of car insurance customers and write billions of dollars' worth of car insurance policies. Some also offer full banking services, as well as other products, like homeowners and renters insurance. Some will even insure your wedding, so you're covered if the caterer skips out or the dance floor collapses. Most offer discounts on car insurance and allow you to buy online or to work with an agent in your community.
Read more about car insurance companies.
We built our car insurance ranking by surveying 2,799 consumers who filed a car insurance claim in the past five years. They answered questions about the ease of filing a claim, customer service, claim status communication, claim resolution, overall value they feel their insurance company gives, if they’d recommend the company, and if they planned to renew their policy.
We've listed the top 9 insurance companies below. Follow the links in the companies' names to read our full reviews.
- State Farm
- Liberty Mutual
- American Family
Read more about the U.S. News Best Car Insurance rankings.
As part of the U.S. News Best Car Insurance ranking we mention above, we worked with Quadrant Information Services to get the average insurance rates in all 50 states from the 9 largest insurance companies. That allowed us to build a list of the cheapest car insurance companies on the market. Our results show information for a variety of ages, annual mileage, and driving records and are based on some of the most popular vehicles on the market, such as the Ford F-150 and Toyota RAV4. We found that USAA leads the pack, with average annual rates of $2,537, followed by Geico at $3,215, and State Farm at $3,260.
You can read more about the Cheapest Car Insurance Companies here, and see a snapshot of the results below.
Cheapest Car Insurance Companies
|Company||Avg Annual Rate|
Unfortunately, you can't purchase insurance across state lines. While you probably won't notice that if you have lived in the same area for a while, that fact can complicate your car insurance coverage when you move. If you live in an urban area that covers multiple states, like New York or Kansas City, you might change states multiple times over just a few years.
Luckily, U.S. News has you covered. We're developing car insurance guides for most states, so you know which companies offer the cheapest insurance in your state. Below, we've included a snapshot of our state insurance buying guides for some of the most populous states in the U.S.
A Snapshot of Our State Insurance Buying Guides
- New York
- New Jersey
How much you pay for car insurance depends on how expensive your car is to fix and how high-risk you are as a driver. That said, there are some common car insurance discounts that you may be able to get.
Most car insurance companies offer multi-policy discounts for people who have insurance policies beyond car insurance with the same company. So, you can save by purchasing your homeowners, renters, or life insurance policies from the same company than insures your car. If you have more than one car, you can also get a multi-car policy discount from most insurers.
Good driver discounts are one of the most common auto insurance discounts available. If you have a clean driving record, you might be able to get a discount on your auto insurance premium. You may also get a discount for taking more driver education and driver training courses or for agreeing to have a tracking device in your car. Good student car insurance discounts are also common. Anti-theft auto insurance discounts are common as well because they reduce the risk of having your car stolen.
Read more about car insurance discounts.
How much your car insurance company pays out when you make a car insurance claim – or if it pays out at all – depends on the type of car insurance you have. While it’s true that you can pick and choose your insurance coverage (as long as your meeting the minimum standards set by your state or lender), when it comes time to make a claim, you might discover that you didn’t buy the coverage you needed. To make sure you have the protection you think you do, it's important to know what each different type of car insurance actually covers.
Having full coverage car insurance is like having a security blanket – no matter the situation, you and your car are covered. That said, it’s better to think about full coverage car insurance as a quilt to stitch together, rather than a blanket that comes all in one piece.
Full coverage auto insurance isn’t sold as a single policy. Full coverage refers to a group of individual types of car insurance that, taken together, provide coverage for damage to your car in many types of situations, provide you with liability coverage, and provide coverage for medical expenses that result from a car accident. Full coverage car insurance can also include things like gap insurance or underinsured and uninsured motorist coverage, which isn't required for all drivers but protects drivers who choose to have it. Remember, though, that full coverage car insurance is something you generally have to put together yourself, so select the options that are right for you.
Read more about full coverage car insurance.
Like full coverage car insurance, comprehensive car insurance is another auto insurance term than can trip up consumers. While the name comprehensive car insurance implies that this policy covers you in most situations, the reality is that comprehensive car insurance coverage is actually pretty narrow.
Comprehensive car insurance coverage is a type of car insurance policy that covers damage to your car from events outside of your control. For the most part, that means it covers things that damage your car while you’re not driving it (though there’s a key exception, which we’ll get to in a minute). Comprehensive insurance coverage provides you with compensation for damages to your car due to weather (such as hail damage or a tree falling on it) or theft. It also covers you for damage due to animals, whether from a moose getting amorous with your parked car or you hitting a deer while driving. Collisions with an animal are the main exception to the rule that comprehensive car insurance coverage is for things that happen to your car while you’re not driving it.
Note that comprehensive insurance only covers damage to your car, NOT wear and tear. If you need your serpentine belt replaced, you leave your car parked for weeks on end and find that the battery is dead, or you go years between oil changes and your engine seizes up, comprehensive car insurance will not help. Comprehensive auto insurance does not cover mechanical breakdowns. Roadside assistance is not covered either, though you can get it through a separate auto insurance policy.
Not every driver needs comprehensive car insurance – just those who want coverage for damages from those types of situations. Most states don't require comprehensive insurance, though if you lease or finance your car, you may be required to get it. However, if you own your car outright and keep enough cash on hand for car repairs or replacement, you might be able to save some money on your insurance premium by skipping comprehensive coverage.
Read more about comprehensive car insurance coverage.
Compared to other types of car insurance policies, collision car insurance actually lives up to its name. Collision car insurance covers you for damages related to your car colliding with another car or object. So if you drive into another car or a fence, your collision car insurance policy will cover the damage to your car.
That’s the key part to remember: Collision car insurance only covers damage to your car as the result of a collision with another car or an object like a fence. It does not cover the cost of damages to the other car or the fence, nor does it cover medical expenses related to the collision. It covers car repairs or replacement costs for your car only. Collision car insurance also comes into play if a hit-and-run collision damages your car.
Most states don't require collision car insurance, though if you finance or lease your car, you’ll need to get it. Most states do require liability insurance, which covers damages you cause to other people’s property with your car. Once again, if you own your car outright and keep plenty of cash on hand for car repairs or replacement, you can save a little money on your premiums by opting out of collision insurance.
Read more about collision car insurance coverage.
It’s a sad fact of life that your car isn’t worth what you paid for it. That’s because a car (with the exception of a very few collector cars) is a depreciating asset. It loses value. You might be OK with that since most people buy cars for transportation, not as an investment. However, most people also finance their cars, and that’s where depreciation and gap insurance coverage come into play.
Let’s say you finance a car that costs $30,000 and put no money down. Using the conventional wisdom that a car loses 20 percent of its value as soon as it leaves the dealer lot, you now have a $30,000 car loan on a car that’s worth $24,000. Now let’s say you get in an accident with that car, and it’s damaged beyond repair. Using your collision insurance policy, you'll receive a check for the car’s value, not what you paid for it or how much you owe on it. You’re on the hook for the difference, and your finance company can demand that you pay them immediately.
This is where gap car insurance comes in. Gap insurance is car insurance you buy to cover the difference between your car’s value and the amount of your car loan. If you have gap insurance coverage and the car is a total loss, you’ll have all the money you need to pay off your car loan or lease. Gap insurance is an extra type of auto insurance that most people are not required to get, but if you lease or finance a car, it can be a lifesaver. Plus, you don’t have to keep gap insurance forever. As you pay down your car loan and it becomes more in-line with what your car is worth, you can drop gap insurance.
Read more about gap insurance.
Now, you might be thinking that if you don’t own a car, you don’t need car insurance (and we’re thinking, “what the heck are you doing reading this?"). For the most part, that’s true. However, if you borrow cars from friends or family, frequently rent cars, or will be buying a car in the near future, you should consider getting non-owner car insurance.
Non-owner car insurance is an insurance policy that provides liability coverage for drivers who don’t own their own cars and are in at-fault accidents. While collision and comprehensive car insurance policies are tied to a specific car, non-owner car insurance is tied to the driver. So if you borrow your Aunt Mary’s Oldsmobile and drive it into your neighbor’s fence, Aunt Mary’s collision policy will cover the damage to her car, but you’d need a non-owner car insurance policy to cover the damage to your neighbor’s fence. If you’ve ever rented a car, the rental company has offered you this type of insurance. If you frequently rent or borrow cars, however, having your own policy can save you money in the long run. Plus you can be sure you have the coverage that works best for you.
Having a non-owner car insurance policy when you don’t own a car can also keep your car insurance rates down when you do own a car. Car insurance companies see drivers with gaps in their insurance coverage as higher risks, and higher-risk drivers pay higher premiums. Keeping a non-owner policy active is one way to avoid this gap. Also, if you’ve had your driver’s license suspended, many states will require you to get a non-owner car insurance policy to get your license reinstated.
Read more about non-owner car insurance.
Here are a few more questions people tend to ask when they’re researching car insurance.
In most cases, your personal insurance will cover your rental car. That’s important, because you’ll usually be asked about your insurance coverage at the rental counter. You may even be pressured into purchasing coverage from the rental car company, which can add $20 to $50 per day to your rental fee.
You’ll want to make sure you have the proper insurance for every situation. You’ll need liability, collision, and comprehensive coverage. You may end up getting those three categories of coverage from different sources. For example, your personal policy may not include collision, but you can often supplement your coverage with the collision policy offered by your credit card company.
Read more about rental car insurance here.
If your insurance policy includes comprehensive coverage – that is, coverage for damage unrelated to a collision – you should be covered. Comprehensive insurance covers everything from a stolen car stereo to a stolen car. If you just have basic liability coverage, you’ll be out of luck if your car gets broken into or stolen.
There are some limits. If you upgrade to fancy $5,000 wheels, those probably won’t be covered. The insurance company will just comp you the cost of stock wheels. Stereo theft will be covered, but items like smartphones, clothes – basically anything that isn’t part of your car – would be covered by your homeowners or renters insurance.
Read more about insurance against theft here.
You’ve probably heard of these devices at some point. Progressive calls theirs Snapshot. Allstate’s is called Drivewise. Insurance companies use these telematics devices to track your driving behavior and adjust your rates accordingly. If you demonstrate good driving habits, your rates could go down.
The discounts can be noticeable, but you should be wary. Telematics devices plug directly into your OBD-II port – the plug mechanics use to diagnose problems with your car. That means any info coming out of that port can be sent to your insurance company. The devices use a wireless connection.
The companies say they are only paying attention to hard braking, distance driven, and other factors they see as indicators of driver safety. However, they have access to more data than that, so make sure you trust your insurance company, and that the discount is worth it.
Read more about car insurance tracking devices here.