Whether you are a brand new driver just learning about the world of car ownership, or a seasoned veteran of the road who has never been in an accident, understanding why you have to pay out every month for some mysterious insurance can be frustrating. Much like the insurance policies that most of us decline when buying a new electronic device, it can seem like car insurance is a silly waste of money – but because it’s typically required by the law to operate a vehicle on public roads, you have to have it. So what is car insurance anyway, and why does the government insist on you having it? Freedom National has the answers.
What is a Car Insurance Policy?
A car insurance policy is a legal contract between a driver or owner of a car and an auto insurance company like Freedom National. The agreement states that the auto insurance company will pay for damages that occur as a result of an accident, subject to the terms and conditions of the policy. In exchange, the driver pays a fee (often called a "premium") according to his or her statistical risk to the insurance company. The big plus for drivers is that the fee is a manageable amount, whereas the damages that the auto insurance policy may pay for any one claim for can be very high – up to the entire value of a car in the event it is totaled, or hundreds of thousands of dollars in medical bills in the case of an accident that caused serious injury.
Of course, auto insurance policies differ based on many factors. For example, in order to have a cheaper insurance policy, some drivers choose to have a higher deductible – meaning they will have to pay more of the initial damage costs before the insurance company begins to pay to fix their vehicle after an accident. Additionally, there are other types of insurance that don’t cover damage to a car at all, but only cover the damage that is done to other people’s property or well being in the event that you are responsible for an accident. In that case, you can consider car insurance more like financial protection for you in case something goes wrong, rather than protection for your property (although some coverages also protect your property).
What Are the Basics?
The basics of coverage include property damage, legal liability, and medical bills. This means that within an auto insurance policy, you could have coverage that includes:
Covering any damage done to your car, or covering the cost of your car or personal belongings should your car be stolen.
Covering the cost of property damage or injury to another driver if you cause an accident.
Covering the cost of treating any injuries, funeral expenses, lost wages, or rehabilitation that is required by either another person if you are at fault, or to yourself should you not be covered by the at-fault driver’s insurance.
Most states within America require at least liability insurance, which covers the cost of damage and personal injury done to another driver. However, the laws do vary. In some states, you may see car insurance referred to as “proof of financial responsibility”, which means that you can show that you have an insurance policy to cover a standard amount of financial responsibilities you may incur while driving.
Why is Car Insurance Important?
The first reason that car insurance is so important is that it protects you in the event of an accident. If you would not be able to turn around tomorrow and pay thousands of dollars in medical bills or car repair bills, for either yourself or another party, then you are putting yourself at financial risk every time you drive.
The second reason that car insurance is important is that it is usually required by law to operate a vehicle. If you are caught driving without insurance, you run the risk of having your driver’s license suspended, and facing hefty fines. At that point, you may also be required to begin carrying SR-22 car insurance, which is a special document in addition to your proof of insurance that often makes your car insurance cost go up.
Where is Car Insurance Mandatory?
Nearly every state requires liability insurance (again, that covers property damage and bodily injury done to another person in the event that you cause the accident). In fact, the only two states that do not require some type of auto insurance are New Hampshire and Virginia. In both of these states, however, you are still held financially responsible for property damage and physical injury if you cause an accident. If you are in an accident in these states and don’t have insurance, and you can’t pay the damage costs, then your license will be suspended and you will probably be sued by the other party. Additionally, Virginia requires citizens who do not want to pay for car insurance to pay a $500 annual fee instead – and this money does not absolve a driver from the costs of any accident they may cause.
As you can see, in both cases, car insurance would still be a very good idea. You never know when poor weather or some other circumstance could cause you to make a mistake on the road. There are some states that do allow drivers to show “proof of financial responsibility” by setting up a bond or even depositing cash with the Department of Motor Vehicles, to hold as proof that they can pay for any accidents they cause. The amount required to set aside is the same as the amount required in auto insurance, so it is essentially setting up your own private auto insurance policy instead of paying for one through a provider. The states that allow this include:
Alabama
Arizona
California
Colorado
Delaware
Idaho
Indiana
Iowa
Louisiana
Maine
Maryland
Massachusetts
Mississippi
Missouri
Montana
Nebraska
New Mexico
New York
North Carolina
Ohio
Oklahoma
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Wyoming
What Are the Different Types of Car Insurance?
In addition to the liability insurance that most states require, there are other types of insurance that you can purchase. Many drivers purchase what is called “full coverage” insurance, for example, which will not only cover the damage done to other property and injuries done to other people but also covers any damage or injury to your property or yourself. The phrase “full coverage” is often an umbrella term for a policy that includes liability, uninsured motorist coverage, comprehensive, and collision coverage, which is what covers the costs of damage to your own car when you are at fault.
There are a few other types of insurance that you may wish to purchase, such as:
Uninsured or underinsured motorist coverage: This covers damage or injury costs that should legally be paid by the other party, when that other party either does not have insurance or doesn’t have enough insurance to cover all the costs.
Comprehensive coverage: This covers any damage that is due to something unrelated to a car accident. For example, theft, falling trees, flooding, and other natural disasters are covered by this type of insurance.
Glass coverage: This type of insurance covers damage to the windshield and windows, which can happen when there is no accident at all (such as a rock hitting your windshield as you drive).
Gap insurance: This insurance covers the difference between what you owe and what the car is worth if it is totaled. Many leased vehicles are required to be covered by gap insurance, and it's a good idea to consider purchasing this coverage if you have a car loan, too.
With so many options and legal requirements for car insurance, it is very important to choose a car insurance provider that makes things easy. Freedom National works to streamline the process so that you can choose the coverage that is right for you, and for your budget, in just a few minutes. Get a free quote in just minutes right here.
