For so many people, a car is a necessity. It’s what we use to get to work, meet up with friends and family, and go on vacation. But even though they’re needed by so many people, cars are quite expensive, so much so that most of us would struggle to replace the one we have should we get into an accident and find ourselves without a vehicle.
Enter car insurance. Like any other type of insurance, car insurance is there “just in case.” It’s something we pay for, either on a monthly, semi-annual, or annual basis, but that we’re thankful to have when something does happen. Of course, we all hope to never need it, but it’s not smart to act on this hope and drive around uninsured or underinsured.
Car insurance is so important that it’s required in some form or another in almost every state, making car insurance a necessary expense for most of us. However, the average cost of car insurance is usually going to be higher than the minimum cost, largely because most people choose to purchase coverage that extends beyond the minimum. But many others end up paying above the average simply because they aren’t aware of the many different factors that determine their premium and the many more ways they can save.
We’ve put together this guide to help you better understand what makes up your rate and also how you can save on your monthly insurance bill without sacrificing coverage.
Car Insurance at a Glance
Before we go into detail about the different factors affecting the cost of car insurance, here is more or less what you can expect on the open market:
Different Types of Car Insurance (and how much they cost)
The averages above should give you a good idea of what you should expect to pay for car insurance. But in reality, what you’re going to pay may be quite different as compared to the average, and the primary reason for this is that there are many, many different types of car insurance you can buy.
To help you make sense of the car insurance world, we’ve outlined all the different options you have when it comes time to purchase a car insurance policy.
Here’s a quick summary followed by a more detailed description of each:
One of the most basic forms of car insurance is liability insurance. It is usually referred to as auto liability insurance to distinguish it from other types of liability insurance.
In sum, this type of insurance covers you for damages for which you are liable in the event of an accident. In most states, it is a law that you have at least some form of liability insurance.
Under the umbrella of auto liability insurance are two more specific types of insurance:
- Bodily injury liability insurance. This covers you for the bodily injuries you cause someone else in an accident in which you were deemed at fault. In other words, if you crash into someone and they break their arm, you’re liable for their medical bills, but you would be covered from having to pay these out-of-pocket by your liability insurance.
- Property damage liability insurance. With this type of liability insurance, you are covered for the damages you cause to the property of others as a result of an accident for which you were at fault. For example, if you crash into someone’s house or a tree, you would be responsible for replacing that property, and if you don’t have liability insurance, then you will need to pay for it with your own money.
As mentioned, bodily injury and property damage liability insurance are required by law in most states. In fact, it’s necessary to buy a car in all but three: New Hampshire (the Live Free or Die State that still doesn’t have seatbelt laws or sales tax), Iowa, and Ohio.
But even in these states, to be able to purchase and register a car, you must be able to prove your ability to handle losses from an accident.
The cost of auto liability insurance varies greatly from state to state and also depends on the mound of coverage you choose, but the national average is $471.
This is considerably lower than the average overall cost of insurance, but this is because most people choose to add on additional coverage makes it more expensive.
While liability insurance covers you for damage or harm you cause to property and people, it doesn’t guarantee you will be covered from all damages. This depends on the amount of coverage you purchase.
Most liability insurance policies have three limits: per person, per accident, and property.
So, if you see an insurance policy expressed as 15/25/5, this means you are covered for up to $15,000 per person in an accident, $25,000 per accident, and up to $5,000 in property damage.
It’s important to pay attention to these numbers so that you are not caught by surprise should you need to make a claim.
For example, consider you’re in an accident involving three people. The first is badly wounded and requires surgery, which costs $14,000 in total. Based on the terms in the above policy, you’re covered because you have insurance that pays for up to $15,000 per person.
However, if the other two each need medical attention and their bills are $6,000 and $6,500 each, you will have to pay some money out of pocket. This is because although each person has bills less than your per-person limit, these expenses, plus those from the first person, bring your total liability from the accident up to $26,500 (14k + 6k + 6.5k).
In this scenario, the above policy has a per accident limit of $25,000, meaning the remaining $1,500 would need to come out of your pocket.
Figuring out which liability limits you need is tough, and you definitely don’t want to end up with less than you need. The best thing to do is to speak to your agent to see what they recommend based on your experience
Minimum vs. Full Coverage
Because liability insurance is required by law, states also set a mandatory minimum for coverage. These minimums vary considerably by state. For example, in Alaska, you must have at least 50/100/25, whereas in Delaware you only need 15/30/10. In Florida, the minimum is 10/20/10. However, the most common minimum is 25/50, with property damage minimums ranging from 10-25.
As you can see, depending on the state in which you live, the state minimums may or may not be enough. To give you an idea, the Insurance Information Institute estimates the average bodily injury claim to be just over $15,000, meaning if you live in the state of Florida and had minimum coverage (see above), then you would likely not have enough coverage to handle an average claim. This is why it might be smart for you to speak to your insurance agent about raising your coverage limits.
If you’ve ever been in a car accident, you know that one of the most frustrating things when it comes to insurance is determining fault. This is because the person who is deemed “at fault” in the accident is the one who will need to pay for the damages they caused. It’s for this reason it’s so important to engage the authorities when you have an accident, as proving fault otherwise can be difficult and could cause you to forfeit your coverage.
In theory, since nearly all states require insurance or some sort of proof of financial responsibility, if you get into an accident that’s not your fault, the other person will cover your losses. However, it does happen where you get into an accident with someone who does not have insurance, either because they let their payments lapse or they live in a state where it’s not required.
In this case, you’re basically out of luck. To avoid this situation, some states, such as Connecticut, require you to purchase uninsured motorist protection, although this requirement is the exception and not the rule.
Although liability insurance is the only insurance most states require you to purchase (some force you to buy uninsured motorist protection, as well), many people opt for additional coverage, which raises the overall cost of their insurance bill. The most common type of optional insurance people choose is collision insurance.
The main difference between collision and liability insurance is that collision covers you when there is an accident or a collision and you are not deemed at fault. This is particularly useful when you get into an accident all by yourself.
For example, if you slide on the ice and hit a telephone pole, your collision insurance would cover you for the damage to that car. Collision insurance can also fill gaps in coverage from other drivers. This could be helpful when the other driver’s insurance company doesn’t pay for all the damages to your car (something that can happen).
Many factors determine the cost of your collision insurance, but the national average is $596 per year.
Deductibles and Coverage Limits
To prevent people from constantly making claims, insurance companies typically include a deductible with collision policies. This can be as low as $500 or as high as $5,000 or more.
As with any other deductible policies, your coverage only kicks in when damages are above the limit. So, if you have a policy with a $1,000 deductible and you hit a deer which results in $800 in damage to your car, you would be expected to pay for that out of pocket since it’s lower than your deductible limit.
Another thing to consider is your collision policy’s coverage limits. Unlike liability insurance where there is a set limit, collision limits are determined by the actual cash value of your car. This means that if you’re driving around in a 15-year-old clunker worth $2,000 and you get into an accident that results in $3,000 worth of damage, the insurance company will deem the car “totaled,” meaning the repairs are going to cost more than the value of the car.
In this instance, you would receive a maximum payment of $2,000, which is theoretically to be used to replace your car with something similar, although we all know this is usually much easier said than done.
Comprehensive insurance is typically referred to as “everything other than collision” insurance. Again, it’s not required by law in any state, but it’s a popular option because it covers you from many very real threats against your car. However, if you finance a car, lenders will require you to have comprehensive insurance, which will force you to have to pay higher premiums.
To give you an idea, comprehensive insurance covers you from things such as:
- damage caused by falling objects
- natural disasters
- animal collisions
- broken windshields
To know if you should be making a claim against your collision or comprehensive policy, all you need to do is ask if there was an accident. If the answer is yes, then it’s going to be covered by your collision or someone else’s liability insurance. When there is no accident, then you must make a claim on your comprehensive policy.
Like collision insurance, your monthly premium will depend largely on the size of your deductible, but the national average for comprehensive insurance is around $172.
Uninsured and Underinsured Motorist Insurance
Liability, collision, and comprehensive car insurance are the most common, but there are many other types of insurance you can purchase if you choose to spend the money. One of the most common of these additional policies (and one that is required by law in a select few states) is uninsured motorist protection.
This type of policy covers you in the event you get into an accident with someone who does not have insurance. It’s important to consider such a policy because if this happens and you are injured or your car is damaged, you would be fully responsible for all damages since the one at fault is not covered.
Like liability insurance, there are two categories of uninsured motorist protection: bodily injury and property damage. Typically, liability limits are similar to those sold in standard liability insurance policies, with the end goal being to ensure you are fully covered in the event of an accident.
Underinsured motorist insurance does the same thing, except it kicks in in cases in which the driver at fault does not have enough coverage to pay for your bodily injuries or property damage. This could happen if you get into an accident with someone who has only bought the state minimum.
In general, uninsured and underinsured motorist protection is quite affordable. The average for a 50/100/50 policy is around $54 and $26 per month, respectively. And considering around 13 percent of the population drives around without insurance, this might be a very small price to pay for peace of mind
Medical Payments Coverage
Another type of car insurance you can add to your policy that will cover you and cost you more is medical payments coverage. As the name suggests, this type of coverage helps you pay for any medical expenses you may incur as a result of an accident. Since the other driver’s insurance should cover you when you’re not at fault, this type of policy is typically used when that coverage is not enough, which is similar to uninsured or underinsured motorist protection.
However, medical payments coverage also covers you when you’re deemed to be at fault but still need medical help. It can help you pay for health insurance deductibles, ambulance bills, x-rays, doctor’s appointments, and any other health bills you incur as a result of the accident.
Costs vary based on the amount of coverage you have and also on your deductible. But it is typically quite affordable when you add it to your existing policy, with rates ranging from as low as an additional $7 a month to $40.
For those who are leasing a car or still making payments on one, gap insurance could be a good thing to add to your policy. This coverage helps you pay for the “gap” between damages to your car and what you still owe.
As mentioned earlier, collision insurance is limited to the value of your car. However, as we know, cars depreciate quickly. So, while you may still owe $17,000 on your car, it may only be worth $12,000.
In this scenario, if you were to get into an accident and total your car, the insurance company would give you $12,000, but you would still owe the bank $5,000. Without gap insurance, you would need to pay this out-of-pocket, something most of us would not be able to afford.
Speak with your agent to find out if this is a good option for you, and know that gap insurance typically costs around 5 percent of your collision and comprehensive insurance premiums.
Towing & Labor; Rental Reimbursement
One last form of insurance we are going to cover (although there are more out there) is towing & labor. All this coverage provides is some assistance in the event your car breaks down and needs to be towed to the nearest garage. It also includes any roadside assistance you might need, such as tire replacement or a jump.
One of the most common towing & labor insurance companies is AAA, and they offer this coverage as a part of their membership plans, which cost between $76-$148. You can also add it to your existing policy for as little as $10 per year.
Rental reimbursement coverage helps you pay for rental cars when something happens to your vehicle and you are without it for an extended period of time. Most of us don’t consider this risk, but if we get into an accident and don’t have our cars for a week or more, the cost of renting can get exorbitant rather quickly. Speak to your agent because rental reimbursement can cost as little as $10 per month and be extremely handy should something happen to your vehicle.
Factors Affecting Your Rate
The most significant factors affecting the cost of your insurance policy are the amount and types of coverage you purchase. However, several factors will raise or lower the price, such as:
The biggest thing insurance companies look at when providing you with a quote is your driving record. Of course, past results are not always an indicator of future outcomes, but the insurance world interprets things as if they were, i.e. a bad driving record suggests a high likelihood of making a claim, which means higher rates.
Most states use a points system. Points are attached to your driving records for moving violations, such as speeding tickets, and accidents for which you are at found fault. Not every violation comes with points, either because it’s a first offense or because the police department didn’t report it to the insurance company, and not every state uses the points system. But insurance companies will certainly look at your driving record before offering you a quote.
As a result, it’s smart to take a look at your driving record before applying for insurance to ensure there aren’t any surprises. In some cases, you can do courses or other driver training programs to remove points from your record and make it easier for you to get an affordable rate.
Next to your driving record, your age is one of the biggest factors in determining if you pay at or near the average rate for car insurance. This is because insurance companies see younger people as a larger risk, which makes sense considering teenagers tend to be less experienced drivers and less mature behind the wheel.
Obviously, there is nothing you can do about your age, so if you are young, expect to pay more pretty much no matter what. To give you an idea of how much age affects your rate, consider the average premiums for the following age groups according to 4 Auto Insurance:
As you can see, anyone under the age of 30 typically pays a higher premium than the national average, so if you’re unhappy about your rate at the moment, it’s possible the best, and only, thing to do is wait until you’re a bit older and have a few more years of driving experience.
Gender and Marital States
While there has been an (unfair) stereotype that men are better drivers than women since the automobile was invented, the reality is that men cause more accidents, and they pay higher insurance premiums as a result.
At first, it might seem unfair for insurance companies to decide rates based on gender, but they use large samples of data when calculating rates, and the reality is that men are more accident-prone than women.
Interestingly, marital status also has a significant impact on the rate you might pay. For example, a study by the Insurance Information Institute found that a married 20-year-old pays 21 percent less than a single 20-year-old, in car insurance. It seems insurance companies take marriage as a sign of maturity, or that you have more to lose, and they expect this to translate into safer driving.
Of course, this doesn’t mean you should go out and get married just to save on your car insurance, but if you’re paying more than you think you should be and your single, this could be a reason why.
Also, if you’ve recently married and haven’t updated your information with the insurance company, consider doing so as this might cause your rate to go down.
Car Make and Model
When dealing with liability insurance, the type of car you drive doesn’t matter too much since the insurance you’re paying for is covering you for the damage you cause to other people and their property.
However, when you add collision and/or comprehensive insurance to your policy, the type of car you drive will matter. Expensive sports cars attract more tickets and are more prone to theft. Plus, they’re worth more, so they are naturally more expensive to insure. So, if you drive a Ferrari or a BMW, you shouldn’t be surprised when you’re given a quote way above the national average.
Where you live also factors into the price of your insurance. Areas where there are more natural disasters could cause you to pay more, and insuring cars in urban areas is typically more expensive than in rural ones because there are more people and cars you could bump into, and because crime tends to be higher, putting your car at higher risk of theft.
Lastly, your credit rating will play a role in the rate you get. Insurance companies don’t want to get involved with people who don’t pay their bills, so if you have bad credit, expect to have trouble getting a competitive quote. In some cases, you may actually have difficulty getting insurance at all, which means it’s a good idea to do a credit check before applying for insurance.
How to Save on Your Car Insurance
Now that you know what the average cost of car insurance is and what goes into determining the price of your premium, you may feel you are still paying too much. If this is the case, then here are some tips on how to save money on your car insurance:
Practice Good Driving Habits
As mentioned, one of if not the biggest factor in determining the price of your premium is your driving record. Because of this, to start driving your premiums down, it’s important you begin making good driving habits true habits.
Of course, the impact on your premiums won’t be immediate, but points do come off your record over time, and many insurance companies will offer you discounts if you can show that you have been able to go a long period of time without being in an accident or committing a violation.
Bundle with Other Policies
Most auto insurance companies also sell homeowners, life, and other types of insurance, and if you stay loyal to them and buy more than one policy with them, they will usually reward you with a discount. This is not a guarantee, and you shouldn’t stick with a company that’s not giving you a competitive rate, but if you own a home or other property and need auto insurance, speak with your agent to see if you can bundle and save.
Raise Your Deductible
Insurance policies with low deductibles tend to have higher premiums because the insurance company will need to pay more when a claim is made. This means that you can always lower the cost of your monthly premiums by raising your deductible. However, this isn’t always the smartest decision because if something does happen and you can’t afford to pay your deductible, you will be in serious trouble. But if you have an older car you probably wouldn’t replace anyway, you could raise the deductible and save every month. Should something happen, you can just resign yourself to ditching the car for something newer.
Reduce Insurance on Multiple Vehicles
In the event you own multiple vehicles, a good way to save is to try and lower the coverage you have on the ones you use less. For example, if you have a sports car you only use in the summer, consider taking the insurance off in the winter when it’s stored in the garage. Nothing is going to happen, and you can really save.
This is also a great option if you have kids on your policy who go away to school. In most cases, you can suspend coverage while they are gone and then resume it when they are back, and this can translate into some serious savings.
Seek Out Discounts
The last thing you can do is to simply speak to your agent about any available discounts for which you may apply. Often insurance companies don’t go out of their way to offer you a lower premium (it is a business, after all), but they will give them to you if you ask.
Things to ask for included discounts for good performance in school; this is one great way to slightly bring down the immense premiums you’re likely paying to insure your teenagers. Another one is a driver’s education discount, which is offered to those who have gone through some sort of formal driver training. There could be others, such as a loyalty discount for those who have stuck with the same company for a considerable period of time. You never know until you ask.
The world of car insurance is a complex and confusing one, and knowing the average cost doesn’t always tell the whole story. But we hope that you now know everything that goes into determining the cost of your car insurance policy so that you can go out and get the best coverage for the best possible price.