How Much Car Insurance Do You Need?

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Last updated on: December 13, 2019
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There’s much more to buying car insurance than just finding the cheapest rates.

How much coverage does your state law require? Will that bare minimum protect your assets, your passengers and yourself? There are also industry rules and regulations to consider.

Don’t pounce on a bargain basement policy before doing your homework. That could cost you a fortune if there’s an accident with injuries. On the other hand, trusting just one agent’s opinion might result in paying sky-high rates for much more coverage than you need.

Comparison shopping pays off. Here’s what you need to know to get sufficient coverage at affordable rates.

1: What is a “car insurance premium”?

Simply put, a car insurance premium is the amount of money you pay each year for coverage. Most companies allow drivers to pay the premium in monthly, quarterly, or semi-annual installments for a small fee or surcharge. It’s important to read the insurance contract to see exactly how the insurer allows you to pay the premium. It’s common for monthly premiums to be paid at least one month in advance in order to keep the policy in force. Sometimes there’s a short grace period on monthly premium payments, so it’s essential that policy holders know the exact terms of the contract. Every company has its own ways of doing things.

The premium is the amount of money you, the insured, remit to the insurance carrier in exchange for coverage. The insurance policy contract will specifically detail the type of coverage you have. If you decide your premium is too high or low, you can contact the company and see if they will let you reduce the amount of coverage on the vehicle. In some cases, such as a bank-owned vehicle that you have financed, you must carry comprehensive coverage. If you own the vehicle outright, it’s usually possible to opt for less than comprehensive coverage or the bare-bones amount of liability insurance.

2: How much will it cost to insure your car?


To figure out exactly how much it will cost to insure your car, you need to know a number of key pieces of information that insurance companies use to determine rates. In most cases, you can get a good estimate based on some quick research, but to determine an exact premium amount, you will have to contact several insurance companies and get quotes. Still, if you know about the basic rate-setting factors, and take your location into account, it’s possible to come to a ballpark estimate for the dollar amount it will cost to insure your car.

3: How is a car insurance premium calculated?

There are many factors that companies use to determine your premium amount. Among the top factors are your age, your driving history, credit score, years you have been driving, where you live, your gender (females pay less for car insurance because they are safer drivers), your insurance coverage history, how many miles you drive each year, marital status (married people have lower rates), any past insurance claims you have made, the level of coverage you want, the car itself, whether you own the car or not, special discounts available to you (student, good driver, veteran, etc.), and the insurance company that sells you the policy.

Keep in mind that insurance carriers all have their own formulas for determining rates. Some give much more weight to your claims history while others care more about your driving history. It’s also important to note that teen drivers are the hardest hit when it comes to rates. After age 20, rates tend to stabilize based on age. Companies do deep statistical analysis to set rates, so even when an age-based rate seems unfair, you can bet that it’s based on facts. For example, teen drivers have the most accidents and get more tickets than any other age demographic. The opposite is true for 50-year-olds.

4: What are the best ways to reduce your car insurance?

Car insurance premiums can be a tricky thing for many people. It’s a challenge to figure out exactly what the cost of car insurance will be without contacting a company directly. Even after you get your first quote, it’s wise to contact several other carriers and see who has the best deal for your situation.

Some companies, for example, offer very low rates for drivers who have never had an accident. Other insurance companies put more emphasis on your age and whether you’ve had any tickets. Like everything else in the business world, each company has its quirks and special ways of dealing with customers. Before buying car insurance, it’s best to obtain several quotes and check for online reviews of the companies you are considering.

If you are a total newcomer to buying car insurance, do your homework. Read the following questions and answers in order to educate yourself. Visit car insurance websites and read through a few of their tutorials about how car insurance works and how prices are set.

Once you feel like you have a grasp of the basics of car insurance, it will be time to shop for policies. If possible, have someone help you with your first policy purchase. Help doesn’t need to come froman expert or even an insurance agent but should at least be from someone you trust who understands car insurance.

It’s always a good idea to “test” the customer service of any companies on your short list. For example, you should call the 800 numbers of several companies and ask some routine questions and see how quickly (and politely) they respond. Some sample questions include things like, “Do you offer any discounts right now for new customers?” or “Can I speak to someone who can give me a quote over the phone?”

Of course, the agents will be a bit nicer to you if they know you are “shopping,” but the exercise is still a good way to get a feel for how quickly agents answer their phones and deal with potential customers.

5: How can you lower your car insurance rate?

Fortunately, there are various ways to lower the amount you pay for car insurance. One of the best-known methods is switching to a company with lower rates. There’s a lot of variance in what different companies charge. In fact, of the many factors that play a part in car insurance rates, the insurance company you choose has the biggest effect on your rate.

So, how can you lower your rates besides shopping for a company with lower premiums? There are several ways. If it’s possible to drive fewer miles per year, you can get a lower rate. By taking mass transit to and from work a couple days per week, for example, your carrier might lower your premium.

Note: If you plan to get a lower rate by driving less or improving your credit score, contact your insurance carrier first and find out if your method is a wise one. You can learn a lot by speaking with an agent for a few minutes. Explain your situation and tell them you want to lower your premium. They will ask you a few questions and give you some helpful advice.

One sure-fire way to get a lower rate is to pay your annual premium all at once. That way, you avoid the monthly surcharges and fees that go with monthly billing options. Driving less, as noted above, is another way to pay less for car insurance. The fastest way is to call the company and ask what discounts you qualify for.

6: How much will you pay per month for car insurance?


There is no set rate for drivers. Insurance carriers will take into account all the factors discussed above, plug them into their formula, and spit out a rate. That’s your annual premium. Divide that by 12 and add in a small fee for paying monthly rather than annually and you’ll know your monthly rate. There are some general guidelines for knowing whether you’ll pay more or less than average. Here’s a quick list of facts about rates that might help:

  • As you approach age 50, your rates will go down
  • If you are a male, your rates will be higher
  • If you are a teen, your rates will be the highest
  • People with very good credit get a break on rates
  • Your zip code will play a factor in setting the premium
  • People with lots of tickets and accidents pay much more
  • If you have filed insurance claims against your carrier, you’ll pay more
  • The lower the replacement value of your vehicle, the lower your premium will be
  • Rates will be lower if you own your car rather than finance it
  • If you want more coverage, your premium will be higher
  • Married people pay less for car insurance
  • Your annual mileage will play a part in setting your rate
  • If you have gaps in your insurance coverage in the past, your rates will be higher

7: What is first-, second-, and third-party insurance?

These terms first party, second party, and third party are insurance industry jargon that have special legal meanings but are not used in everyday conversation. When it comes to car insurance, the first party is the owner of the policy, the insured person. The second party is the insurance company. The third party is someone else. For example, if you are in an accident, having been hit by a drunk driver in another car, you will likely end up filing a claim against the other driver’s company to pay your medical and repair bills.

In the legal proceeding, the impaired driver is the first party and her insurance company is the second party (because that is the company you are suing). You would be considered the third party because you are a so-called third party to the relationship between the drunk driver and her insurance company.

However, if you fall asleep at the wheel and run into a parked car, and the car’s owner sues your insurance company for reimbursement, you are the first party, your insurance company is the second party, and the person suing your carrier is the third party.

A first-party insurance claim would exist if you file a claim with your own insurance company when your car suffers a covered incident, like hail damage under a comprehensive policy. A third-party insurance claim might arise if you injure a pedestrian and the pedestrian (the third-party) files a claim against your insurance company for reimbursement from your liability coverage. The insurance company is the second party.

8: What are limits in car insurance?

The term “limits” has a very important meaning in the world of car insurance. In fact, it typically refers to two different things in car insurance policies. One is the deductible limit, which is discussed in the section below. The other important meaning of the term is the coverage limit for a particular kind of coverage.

thief breaking a car door

For example, if your coverage limit for car theft is $10,000 that is the maximum amount you would be able to recover if your car is stolen and never recovered. Even if it costs, say, $14,000 to replace your car, you will only get $10,000 from the insurance company because that was the policy limit for theft coverage.

In reality, there are many areas of car insurance coverage, and they all have their own limits. The limit is simply a fixed dollar amount above which the insurance company is no longer liable for reimbursement.

9: What is the deductible limit in car insurance?

The deductible is the amount of money you must pay before any car insurance coverage begins. For example, if your car insurance deductible amount is $250, you will need to pay the first $250 on any claim you make. If a vandal scratches your paint and you file a covered claim with your insurance carrier, you pay the initial $250 to have the car repaired. If the paint shop charges you $1,000 to mend and paint over the scratches, the insurance company will pay $750 and you will pay $250 of the shop fee.

10: What does the term “liability limits” mean in car insurance?

The term “liability limits” is a piece of car insurance jargon that everyone should know about. If you cause an accident with your car, you are the liable party and must reimburse the injured party for medical costs to the insured and passengers, as well as costs to repair or replace the victim’s car. These costs, obviously, can be quite high. Every U.S. state has laws that require drivers to carry liability coverage in order to operate a vehicle on public roads.


neck pain

Insurance companies have a sort of code for expressing the amount of liability coverage in a particular policy. They show it in three numbers. For example, if your policy’s liability coverage says “200/400/150,” it means your insurance company will pay the victim in an accident you have caused the following totals:

  • A maximum of $200,000 per person for injuries
  • A maximum of $400,000 for the total cost of injuries per accident
  • A maximum of $150,000 for property damage for each accident

Some drivers opt for the highest liability limits offered by their insurance carrier. In the U.S., the most common policy structure includes liability limits of $250,000/$500,000/$100,000, or as the policy might state it in the language of the industry, 250/500/100.

11: Is liability coverage the same as full coverage?

Liability coverage is not the same as full coverage, no matter how high the liability limits are. Liability coverage, in most cases, will only cover collision-related damage. It also covers damage to other drivers and passengers, as well as to the other car and property—provided you are the one at fault.

Comprehensive coverage, which costs considerably more than liability coverage, insures against many other types of loss. For starters, comprehensive insurance covers damage that is not related to the collision itself. It covers various kinds of damage to your own vehicle, like vandalism, storm damage, a cracked windshield, and more. If a tree falls on your car and you have comprehensive coverage, you are covered up to the policy limit.

It is important to note that there is a built-in limit on comprehensive coverage for damage to your car, with the upper limit set at the market value of your car. It doesn’t matter if a shop charges you $6,000 to repair the car. If its market value is $5,000, your insurer will only reimburse that amount, minus any deductible.

For example, if your car, with a market value of $10,000 is damaged in a tornado and you choose to have it repaired; the shop bill might come in at $11,000 based on labor and parts. If your deductible is $500, then the insurance company will reimburse you $9,500 in total. That’s the market value of your car less the $500 deductible.

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