The secret to success in choosing the right car insurance for you

Think of car insurance like a safety rope for mountaineers — something that's there if you need it, but you wish you never needed it. However, instead of saving you when you fall off a mountain, car insurance protects you from costs after an accident.

However, let's be honest: no one wants to pay for extra features that are not needed. So, to find the right coverage, you'll want to understand what car insurance is, why you need it, and what it protects (and doesn't protect).

Let's start at the beginning.

What is car insurance?

Car insurance pays for injuries or property damage after an accident, at least up to the policy limit. Financial Protection that is why insurance is usually required by state law to own or drive a car.

Medical bills and car repair costs can add up when multiple vehicles and drivers are involved, which can quickly become very confusing. And because the cost of car insurance depends on many different factors (such as where you live and the type of car you own), it's hard to understand how much you'll pay and how much protection you'll need.

All of this means that shopping for the right insurance can be difficult for anyone. That's why NerdWallet created the car insurance buying guide to help you find the right car insurance for your unique situation.

Why Do You Need Car Insurance?

Reading the definition of car insurance is not the same as understanding why you need it, because if you have already been in an accident, you may be more interested in how it works and what exactly it does.

Auto insurance is mandatory in most states, so the first reason you need it is to meet your state's minimum insurance requirements. However, perhaps more importantly, car insurance provides financial protection. This prevents you from having to pay the costs that arise after the accident yourself, as long as they fall within the maximum limits of your policy.

The costs of an accident can quickly add up. For example, the average cost of property repairs after an accident is $5,700 per vehicle, according to 2021 data from the National Safety Council.

However, in the event of injury or death, the cost can reach more than $120,000 per person. So unless you have $120,000 stashed away in your drawer, a car accident could result in serious financial ruin.

Here is an example of how much an accident can cost you:

Scenario: you are driving through an unfamiliar part of the city and hit another vehicle at an intersection. The cost of repairing your car is $3,000, and the cost of repairing another driver is $2,000. Another driver also needed to undergo surgery due to an accident, and medical expenses reached $30,000.

Total costs you have to pay without car insurance: $35,000

Since you are at fault in an accident, you are responsible for paying all those bills out of your own pocket if you do not have car insurance. But that's not the only version of this story.

Let's say in this scenario, your auto insurance policy covers $25,000 for medical bills per person, $50,000 for total medical bills, and $15,000 for total property damage. You are responsible for repairing your own vehicle, but your insurance covers the cost of repairing the other driver's car and $25,000 of their medical bills. Once your insurance pays, you are responsible for paying $5,000 for medical expenses left over from the other driver, plus $3,000 for repairs to your own car.

Total cost you have to pay with car insurance: $8,000*

Under auto insurance policies are only liability with limits of $25,000 in bodily injury liability per person, $50,000 in bodily injury liability per accident, and $15,000 in property damage liability.

What is covered by car insurance

Here are some of the most common types of car insurance coverage and what they cover:

Liability Coverage is the essence of insurance. It pays for medical bills or property repair costs incurred as a result of an accident you caused.

Uninsured Motorist coverage pays for your own medical bills and property repair costs if you are hit by someone who does not have car insurance.

Underinsured Motorist coverage works just like driver coverage without insurance. It pays if the cost of your own medical bills and property damage exceed the other driver's limit of liability.

Collision Coverage (Collision Coverage) pays for your own car repair costs associated with a traffic accident (after you pay the deductible amount yourself) regardless of who was at fault in the accident.

Comprehensive coverage (Comprehensive Coverage) is similar to natural insurance for your car. It pays for repair costs from bad weather such as tornadoes or hurricanes as well as acts of vandalism or when you hit wild animals.

Medical Payments Coverage pays for your and your passengers ' medical expenses after an accident, regardless of who is at fault.

Personal Injury Protection coverage, or PIP (Personal Injury Protection Coverage), pays for medical expenses regardless of who is at fault in an accident. It can also pay for things like funeral or childcare costs.

Gap Insurance pays the difference between the amount you owe on your car loan or lease and the current market value if your car is totaled.

What is not covered by car insurance

Car insurance is not a magic bubble that protects your car from everything. Just as health insurance usually won't cover every medical expense, car insurance won't cover every car-related bill that comes your way.

Here are some examples of things that are not covered by car insurance:

Damage due to wear and time. In general, car insurance won't pay for things like oil changes or flat tires. If the damage was not caused by an accident, you should not expect coverage.

Stolen goods. Your car insurance usually won't replace your laptop if someone breaks your car window to steal it, but a homeowner's or renter's insurance policy will replace anything stolen from your car, up to the limit of your policy.

Ride with rideshare services. Car insurance won't cover you when you drive for rideshare services like Uber or Lyft. In fact, these companies have insurance that covers you only after you have accepted a travel offer and are carrying passengers, but not between trips. Some insurance companies offer optional rideshare insurance that you can add to your personal policy for when you are not covered by the rideshare company's insurance.

The cost of a new car, unless you have new car replacement coverage. Even comprehensive and collision insurance does not always pay enough to replace your vehicle after an accident. If your car is totaled and you have that type of coverage on your policy, the insurance provider will estimate the value of your vehicle at the time of the accident to determine your payment.

This can be a trouble point about auto insurance: most types of coverage that protect you and your vehicle are optional, and their availability depends on the insurance company you have. So, if you want to add additional types of coverage in your policy, prioritize those things when shopping for car insurance.

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