What is auto insurance?

Car insurance is an agreement between a driver and an insurer, in which the client pays the insurance company a premium and in return receives coverage for damages sustained — or caused — by their vehicle. A number of factors go into how much coverage is required or recommended, including the driver's location, the ownership status of the vehicle (leased, financed, or paid off).

This article explains the differences between car insurance coverage types and how rates are determined.

Car insurance coverage options

State insurance regulations determine mandatory coverage minimums. The majority of US states require drivers to carry the following car insurance coverage:

  • Bodily injury liability: covers the damage suffered by other people in a car accident. Extends to the policy's liability limit on an individual and per-accident basis. Typical coverage levels are $30,000 per person and $60,000 per incident.
  • Property damage liability: the other half of liability coverage, covering the damage sustained by other people’s property. This coverage applies on a per incident basis.
  • Collision: covers damage to the insured vehicle sustained via collision with another vehicle or a fixed object. This coverage is subject to a deductible, which the client is responsible for prior to the insurance company covering any costs.
  • Comprehensive insurance: covers damage to the insured vehicle caused by circumstances other than a collision. This includes damage caused by weather, theft, vandalism, and animals. This is also subject to a deductible.
  • Personal injury protection: required for drives in no-fault states. Personal injury protection (PIP) pays for medical expenses, lost wages, and additional aftercare in an accident. This coverage applies regardless of fault.

These are the basic and often-required car insurance coverage options.

Additional auto insurance add-ons include:

*Required in some areas.

How are car insurance premiums determined?

Insurance companies use the risk presented by a driver and their vehicle as a primary pricing factor. Characteristics such as age, driving record, vehicle type, and location help to determine auto insurance costs.

Age, driving history, and credit score

Factors like age, driving record, and credit score (in most states) go into car insurance rates. In the eyes of an insurance company, these personal characteristics are indicators of risk.

Age is correlated with driving experience. Young drivers pay significantly more for car insurance than experienced drivers.

Previous driving history is used as an indicator of how a driver will perform in the future. A spotty driving record — with citations and accidents — leads to higher premiums.

Unless restricted by state law, insurance companies use credit score as a rating factor. Studies by the Federal Trade Commission show drivers with low credit file more claims — and more expensive claims — than do drivers with good credit. California, Massachusetts, and Hawaii do not allow the utilization of credit score in premium pricing.


Comprehensive and collision coverages require an insurance provider to repair or replace a vehicle after a covered loss. Valuable vehicles lead to higher premiums to compensate for the risk of more costly claims.


Insurance is priced at the ZIP code level but regulated by state. Drivers in areas with more cars on the road face higher costs (New York). Some states require higher-than-average minimum insurance coverage, leading to more expensive premiums (Michigan). 

Why is car insurance required?

Accidents happen, and a system needs to be in place to protect vehicles and their drivers. Car insurance works to first cover the damage suffered by others and their property, but also the client's investment.

Below are examples of when car insurance is worth it:

  • If you are rear-ended and the at-fault driver totals your vehicle: the at-fault driver’s liability property damage coverage would repay you.
  • If you are a pedestrian and are hit by a car, requiring medical care: the at-fault driver’s bodily injury coverage would cover your medical payments.
  • If your vehicle is flooded after a hurricane, destroying it: your comprehensive coverage would compensate you for the totaled vehicle.

The only state in which car insurance is not required is New Hampshire. But drivers in the Granite State are still required to pay for any damages they cause.


Summary: what is car insurance?

Below are additional auto insurance-related topics. If you would like personalized insights from our in-house licensed insurance agents, submit a question here.

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