Best for: Anyone who’s ever nodded along during an insurance sales pitch without understanding a word.
You’ve been paying for auto insurance for years. You probably have “full coverage.” And you almost certainly don’t know what that means.
There’s no such thing as “full coverage” in the insurance world. It’s just shorthand for “more than the state minimum,” which tells you exactly nothing. Your policy is made up of several different types of coverage, each one protecting you from a different kind of financial disaster.
Let’s break down what you’re actually paying for.
The Coverage Types That Matter
Liability Coverage: When You Cause the Accident
Liability coverage pays for damage you cause to other people and their property. It’s the only coverage most states require, and it’s the foundation of every policy.
Your liability coverage has two numbers, like 100/300/100. Here’s what they mean:
- $100,000 per person for injuries you cause
- $300,000 total per accident for all injuries
- $100,000 for property damage (their car, fence, mailbox, whatever)
These are the amounts your insurance will pay. If someone sues you for more than these limits, you pay the difference out of pocket. That’s why umbrella policies exist, but we’ll get to that later.
Most states require embarrassingly low liability limits. Texas requires 30/60/25. If you hit someone and their medical bills are $100,000, your insurance pays $30,000 and you’re responsible for the other $70,000. Don’t rely on state minimums unless you enjoy financial risk.
Collision Coverage: When You Hit Something
Collision pays to fix your car when you hit something, regardless of who’s at fault. You back into a pole? Collision. Someone rear-ends you? Also collision, though their liability should pay for it first.
Collision comes with a deductible, usually $500 or $1,000. That’s how much you pay out of pocket before insurance kicks in. If you hit a deer and damage costs $2,000 to fix, you pay $500 and insurance pays $1,500.
Here’s the part nobody tells you: collision coverage stops making financial sense once your car gets old enough. If your car is worth $5,000 and you’re paying $600 a year for collision with a $1,000 deductible, you’re basically insuring a $4,000 downside. At some point, you’re better off dropping collision and setting that $600 aside in case something happens.
Comprehensive Coverage: When Life Happens to Your Car
Comprehensive covers damage from things that aren’t collisions. Hail, theft, vandalism, hitting a deer (yes, really), falling trees, floods, fires. Basically everything except hitting another car or a stationary object.
Comprehensive also has a deductible, often the same as your collision deductible. It’s usually cheaper than collision because the odds of your car getting stolen are lower than the odds of you hitting something.
Same rule applies as collision: once your car’s value drops low enough, it may not be worth keeping comprehensive coverage.
Uninsured/Underinsured Motorist Coverage: When the Other Guy Has Nothing
About 13% of drivers have no insurance. Another big chunk have state minimums that won’t come close to covering serious injuries. If one of these people hits you, you’re in trouble.
Uninsured motorist (UM) coverage pays your medical bills and lost wages when an uninsured driver hits you. Underinsured motorist (UIM) coverage fills the gap when their insurance isn’t enough.
Some states require this coverage. Even if yours doesn’t, buy it anyway. It’s relatively cheap and it protects you from something that happens more often than you’d think.
Medical Payments or Personal Injury Protection: Your Medical Bills
These coverages pay medical expenses for you and your passengers after an accident, regardless of fault.
- Medical Payments (MedPay): Covers medical bills up to your policy limit. Simple and straightforward.
- Personal Injury Protection (PIP): Covers medical bills, lost wages, and sometimes funeral expenses. It’s required in some states and offers broader protection than MedPay.
If you have good health insurance, you might not need much here. But if your health insurance has a high deductible, MedPay or PIP can cover the gap.
What Affects Your Rates
Insurance companies use dozens of factors to calculate your premium. Some make sense. Some don’t.
Things that matter:
– Your driving record: Speeding tickets, at-fault accidents, and DUIs all increase your rates.
– Where you live: High-crime areas and places with lots of accidents cost more to insure.
– Your car: Sports cars and luxury vehicles cost more to insure than Honda Civics.
– Your age: Drivers under 25 and over 70 pay more. Insurance companies have data to back this up.
– Your credit score: Yes, really. Statistically, people with better credit file fewer claims. It’s controversial, but most states allow it.
– How much you drive: The more miles you drive, the higher your risk of an accident.
– Your coverage limits and deductibles: Higher coverage and lower deductibles mean higher premiums.
Things that shouldn’t matter but sometimes do:
– Your job: Some insurers charge less for certain professions. Unclear why.
– Whether you own your home: Homeowners tend to file fewer claims, apparently.
– Your education level: Some companies offer discounts for college degrees. Don’t ask me why.
Deductibles: The Trade-Off Nobody Explains
Your deductible is the amount you pay out of pocket before insurance covers the rest. Higher deductibles lower your premium. Lower deductibles make claims cheaper.
Here’s the math nobody does:
If increasing your deductible from $500 to $1,000 saves you $200 a year, you’ll break even after 2.5 years if you never file a claim. If you’re a safe driver and don’t plan to file small claims, the higher deductible usually wins.
But if you don’t have $1,000 sitting around for emergencies, a lower deductible might be worth the extra premium. The best deductible is the one you can afford to pay without using a credit card.
When to File a Claim (And When to Just Pay)
Filing a claim can increase your rates for years. Small claims often aren’t worth it.
As a general rule, don’t file a claim unless the damage exceeds your deductible by at least $1,000. If you have a $500 deductible and $800 in damage, just pay the $800. Your rates won’t go up and you’ll save money in the long run.
At-fault claims usually increase your rates more than not-at-fault claims. Comprehensive claims (like hitting a deer) typically have less impact than collision claims.
Every insurance company handles claims differently. Some forgive your first accident. Others don’t. Check your policy or call your agent before filing.
Bundling and Discounts: What’s Actually Worth It
Insurance companies love to bundle. Auto and home together. Auto and renters. Sometimes they throw in life insurance.
Bundling usually saves you money, but not always. Get quotes from multiple companies for bundled and separate policies. Sometimes two different insurers beat one bundled policy.
Discounts that matter:
– Multi-car discount: Insuring multiple cars with one company usually saves 10-25%.
– Good driver discount: Clean driving record for 3-5 years.
– Paid-in-full discount: Paying your annual premium upfront instead of monthly.
– Low mileage discount: If you drive less than 7,500 miles per year, ask for this.
Discounts that barely matter:
– Paperless billing: Saves you $5 a year. Wow.
– Affinity discounts: Alumni associations, professional organizations. Usually trivial.
The Big Mistake: Staying With the Same Company for Years
Insurance companies bet on inertia. They’re counting on you to auto-renew every year without shopping around.
Your rates will creep up over time, even if you don’t file claims. New customers get better rates than loyal customers. It’s backwards, but it’s how the industry works.
Shop your auto insurance every two to three years. Get quotes from at least three companies. You’ll probably save money.
Bottom Line
Auto insurance is complicated on purpose. Companies make more money when you don’t understand what you’re buying.
Here’s what you actually need:
– Liability coverage higher than state minimums (at least 100/300/100)
– Uninsured/underinsured motorist coverage matching your liability limits
– Collision and comprehensive if your car is worth more than a few thousand dollars
– A deductible you can afford to pay without going into debt
Everything else is negotiable. Shop around, raise your deductibles if you can afford to, and stop auto-renewing without checking your rates.
Your insurance company is not your friend. They’re in business to collect premiums and avoid paying claims. Treat them accordingly.