Auto insurance

Also called car insurance

A policy covering liability for injuries and damage a driver causes, plus optional coverage for the driver’s own vehicle and medical costs.

What it means

Almost every state requires drivers to carry at least minimum liability coverage, which pays for injuries and property damage the driver causes to others. Optional coverages include collision, for damage to the driver’s own car in a crash; comprehensive, for theft, weather, fire and animal strikes; uninsured or underinsured motorist coverage; and medical payments or personal injury protection.

Lenders and leasing companies usually require collision and comprehensive. Premiums depend on driving record, vehicle, location, coverage limits and, in many states, credit-based insurance scores. State minimums are often low compared with the cost of a serious accident, and rules differ by state, including no-fault systems.

Example

Suppose a driver with a $1,000 collision deductible causes a crash that does $6,000 of damage to their own car. Collision coverage pays $5,000. The other driver’s damages are paid under the at-fault driver’s liability coverage, up to its limits.

How it’s used

Meeting state legal requirements
Protecting a financed or leased car
Guarding against large liability claims

Strengths and weaknesses

Strengths

Required liability coverage protects against costly lawsuits
Collision and comprehensive protect the car’s value
Can cover medical costs for the driver and passengers

Weaknesses

Premiums can be high for young drivers or those with violations
Minimum limits may leave drivers exposed in serious accidents
Claims can raise future premiums

Good to know

Dropping collision coverage on an older, low-value car can make sense once premiums approach the car’s worth.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.