Auto insurance is a type of policy that provides financial compensation for the fallout that occurs if your car is in an accident. In addition to the basic liability coverage mandated by most states, there are many tiers available to provide extra coverage for a wide range of potential damages.

If you have never filed a claim, are a new driver, or are new to car ownership, choosing car insurance can be frustrating. The high price, combined with the feeling of not getting anything in return, makes it seem like a sunk cost. Understanding what car insurance is for, and why it’s important to have, will alleviate some of your concerns.

Definition and Examples of Auto Insurance

Auto insurance is your financial protection for owning a car. It can cover the cost of damage to your car, the other driver’s car, and any associated medical bills, depending on the circumstances. If you never have an accident, it is possible that you will never have to file an insurance claim. But it’s statistically likely that you will be in at least one accident in your lifetime.1

Suppose you are in an accident with another driver who hit you from behind at a red light. Both cars are damaged, and you have whiplash as a result. The repair shop quotes $3,000 to fix your rear bumper and replace the rear windshield. The other driver, who is at fault, calls her insurance company to submit a claim, and you do the same. Her policy covers the full amount of your car repairs and most of your medical bills, and yours picks up the rest.

Suppose, however, she is uninsured and can pay nothing out of pocket. Luckily, your insurance policy covers damage caused by other drivers, and so you are able to recover most of the costs.

Lastly, suppose neither of you is insured. You could try your luck and sue her for damages. Or you could take the loss and pay out of pocket. Either way, the lack of insurance will cost you.

Accidents occur unexpectedly, and consequences can be deadly. The Centers for Disease Control and Prevention estimates, “More than 32,000 people are killed and 2 million are injured each year from motor vehicle crashes.”1

How Auto Insurance Works

Car insurance is a contract between you and the insurance company that shelters you from financial loss if there’s an accident or theft. In exchange for your paying a premium, the insurance company agrees to pay the losses, minus the deductible, as outlined in your policy.2

It is good to not have any claims. That will keep your insurance rates lower, and you can avoid claim hassles. By continuing to carry car insurance, you are legal to drive, and you will have protection for a possible future claim.

Types of Auto Insurance

Car insurance can pay to repair your vehicle after an accident, depending on what coverage you select. A vehicle is often a major expense, and you want to protect it. Comprehensive and collision insurance each offers coverage for physical damage, which comes with a lot of rules regarding what is covered and what is not.

Personal Liability and Property Coverage

If you only carry personal liability and property damage (PLPD) coverage on your car, the minimum required coverage by law in most states, you will at least be off the hook for a portion of the costs of the damage you cause in the event of an at-fault accident. PLPD does not cover physical damage to your own car. It does, however, offer you protection for other types of losses:

  • Injuries, pain, and suffering to others depending on your state’s laws
  • Property damage
  • Medical costs for you (if you live in a no-fault state)

Comprehensive Coverage

Comprehensive coverage is for anything other than a collision. Fire, theft, vandalism, deer, rats, and storm damage all fall under comprehensive insurance. Usually, comprehensive insurance is required to get roadside assistance. It is also required in order to purchase collision coverage.

Collision Coverage

Collision coverage protects your vehicle against accidents. Collisions with automobiles, mailboxes, light posts, trees, and any other inanimate object are covered. A deductible is often required to be paid before you can get your repaired vehicle back. Collision coverage most often comes into play when you are at fault or do not know who damaged your vehicle.

Do I Need Auto Insurance?

Years without a claim may make you wonder whether you need car insurance at all. You may think that since you’re a safe driver, and nothing ever happens, you shouldn’t need to keep paying the premiums. However, if you have a car, it’s at risk of damage from all manner circumstances that have nothing to do with your driving ability, not to mention the risk of every other driver on the road. Auto insurance can provide financial compensation for damage from things you can’t control.

If you are at fault in a car accident, the injured party will want compensation. Without car insurance, you will be held financially responsible and potentially forced to pay for all the damage out of your own pocket. Most people cannot afford to self-insure, which is why most states require at least PLPD to be purchased by all drivers. In short, PLPD car insurance can protect you against financial ruin.

If you cause an accident, and you don’t carry any insurance coverage, you will be on the hook for the total financial cost of any damage you cause—and you will also be in legal trouble for not having insurance coverage, which is required by law in most states.

Pros and Cons of Auto Insurance


  • Different tiers of coverage available
  • Can pay for medical bills
  • Prevents legal trouble and lawsuits from injured parties


  • Premiums can be costly
  • Does not cover mechanical repairs
  • Required by law in most states

Pros Explained

Since auto insurance comes with a range of coverage options, you can assemble a package based on your budget and specific needs. This may be a small price to pay in comparison to the potential medical bills or legal fees that might be incurred from a severe accident.

Cons Explained

Unfortunately, if you plan to drive, auto insurance is non-negotiable (in most states). Depending on your car and personal risk factors, premiums can add significant costs to your monthly bills. And while car insurance protects against a wide range of financial upsets that can happen when owning a car, it does not pay for mechanical repairs. Unless your mechanical damage was caused by an exterior factor such as vandalism, fire, or a collision, your car insurance will not cover it. Wear and tear or bad workmanship are not matters your car insurance handles. All mechanical repairs are your responsibility or possibly covered by your warranty, if you have one.

What It Means for Your Wallet

Car insurance is for sudden accidental occurrences, not auto maintenance. For those of you who feel that you have paid into your car insurance way more than you will ever get out of it, consider yourself lucky. Claims, especially severe claims, are always best avoided. Think of car insurance as protection against the unthinkable. Car accidents occur every single day.

Each state mandates its own set of car insurance laws and enforces strict penalties when someone is caught driving without it. Car insurance laws protect you from not yourself but also the other drivers on the road. Keep your car insurance active at all times; you might be extremely grateful one day.

Key Takeaways

  • Auto insurance is a type of policy that covers the cost of damage to your car, potential medical bills, and liability, in case of an accident.
  • Everyone who has a car should have some form of coverage as financial protection against unforeseeable events.
  • Auto insurance premiums may seem like sunken costs, but they pay off in the face of massive repair or medical bills that may result from an accident.

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