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Auto Insurance 101: Basics of Auto Insurance Explained

Updated: October 24, 2018

Whenever someone buys a car, it is inevitable that they have to think about getting auto insurance for their vehicle.

In most states, it is a legal requirement to have some form of auto insurance in order to keep driving the vehicle you own.

It is important for potential car owners to understand the basics of car insurance. Learning insurance basics 101 helps people make informed decisions.

Choosing a car insurance policy is a tricky process, because there are so many elements a person must consider when making a choice.

By learning about car insurance 101, you can make the right decision when it comes time to buy auto insurance.

How Does Auto Insurance Work?

It may seem obvious that people know how auto insurance works, but the truth is that a lot of people are badly misinformed about the purpose of auto insurance. Most individuals think that auto insurance is there to give you protection if you get into an accident.

The truth is that auto insurance exists so the other people on the road are protected if you make a mistake and get into an accident with another vehicle.

The truth is that auto insurance exists so the other people on the road are protected if you make a mistake and get into an accident with another vehicle.

Parts of the auto insurance policies that everyone buys include coverage for the other person’s vehicle damage and medical expenses if you are the one who caused the accident. If everyone on the road has some form of auto insurance, everyone is protected in the event of a crash that is not their fault.

There are other parts of auto insurance that are designed to protect your vehicle in the event that it gets damaged, through an accident or while it is stationary.

These parts of an auto insurance policy will cover damage that occurs even if the accident was the result of your mistake.

Car Insurance 101: How are Premiums Determined?

When getting car insurance, a lot of people need to save as much money as possible. This is why it can help to know insurance basics 101 when it comes to car insurance premiums. How do companies determine premiums when they provide car insurance quotes?

An individual who ticks a number of high risk factors, and also belongs in high risk groups, will have a higher premium.

These premiums are determined through a combination of a person’s credit score, their age, car make and model, driving history, location and the average miles they drive per year.

The reason companies use a variety of factors is because they want to make an accurate assessment of the risk associated with an insured individual. The level of risk determines the premium rates, because companies exist to make money.

An individual who ticks a number of high risk factors, and also belongs in high risk groups, will have a higher premium. In contrast, someone who is older and has a history of good driving and no accidents will get offered lower premiums.

It is also possible for customers to get lower premiums if they are willing to accept higher deductibles – which are the out of pocket expenses paid by you after an accident.

Insurance Basics 101: What is Liability Insurance?

In most states in America, liability insurance is the part of auto insurance policies that is deemed a legal requirement by the government. The purpose of liability insurance is to protect the other individuals who are involved in a car accident with the policyholder – if the policyholder caused the accident.

Every state makes their own determination about the minimum level of liability coverage that the cheapest auto insurance policies must offer.

This is why people exchange insurance information after a crash. When the insurance companies make a determination about who is at fault, it is clear that a particular insurance company has to pay for the damages and medical expense of the innocent party in the accident.

Every state makes their own determination about the minimum level of liability coverage that the cheapest auto insurance policies must offer. It is possible for individuals to get liability coverage that is higher than those minimums.

The reason for getting more coverage is to protect against the possibility of high out of pocket expenses resulting from a crash that was your fault.

No self-respecting insurance company will offer cheap policies that do not include liability insurance.

Car Insurance 101: Comprehensive Coverage

Another part of auto insurance policies is comprehensive coverage. This is a type of coverage that a lot of people do not add to their policy, because they are trying to save money. However, comprehensive coverage is very useful under certain circumstances.

If you get a car through a loan agreement, the loan company may require you to get comprehensive coverage.

Comprehensive insurance protects against the damage that is done to a vehicle while it is parked. This means damage from natural events, such as fires or wind, theft, vandals and other miscellaneous events is covered by the insurance company.

Not everyone needs comprehensive coverage. If someone has an older car that is not very highly valued, it may make financial sense to avoid this type of coverage. However, people with expensive cars or sports vehicles absolutely need comprehensive coverage, because it also protects against cars getting stolen.

A lot of people mistakenly believe that damage suffered while a car is parked is already covered in other types of auto insurance, but they must know that comprehensive coverage is the only way to get this protection.

If you get a car through a loan agreement, the loan company may require you to get comprehensive coverage.

Should I Get Collision Insurance?

There are many reasons why a person may consider adding collision insurance to their policy. In fact, the only people who should not get collision insurance are the ones who cannot afford it.

The last thing you want is to need to spend thousands of dollars out of pocket to get major repairs done on a new car.

Collision insurance is the type of auto insurance coverage that pays for damage to the vehicle when it is the policyholder’s mistake that leads to an accident. It is important for customers to not confuse liability and collision coverage.

Liability pays for the other person’s car when you are at fault. Collision pays for damage to your car when you made a mistake.

For people who have vehicles that are valued highly, it is of paramount importance to get collision insurance coverage. The last thing you want is to need to spend thousands of dollars out of pocket to get major repairs done on a new car.

Similar to comprehensive coverage, a lot of loan companies make it a requirement for car buyers to get collision coverage on the vehicle for the duration of the loan. It is not possible to remove this element until the loan is paid.