How auto insurance coverage works
Auto insurance is a bundle of several distinct coverages. Understanding what each one does — and what it doesn't — is the key to buying the right amount.
The three numbers in liability coverage (100/300/100)
- $100,000 bodily injury per person: max paid to any single injured person.
- $300,000 bodily injury per accident: max paid in total for all injuries in one accident.
- $100,000 property damage per accident: max paid for damage you cause to other vehicles or property.
Collision vs comprehensive
Collision covers damage to your car from a crash (regardless of fault). Comprehensive covers everything else — theft, fire, hail, falling objects, animal strikes. On older cars worth less than ~$3,000, dropping collision and comprehensive often makes financial sense because the annual premium plus deductible can approach the car's value.
State minimum liability limits are almost always too low. A $25,000 property damage limit won't even cover totaling a new midsize sedan — and your personal assets are exposed for anything above the limit. 100/300/100 is the realistic floor for most drivers.
Frequently asked questions
What is liability coverage and how much do I need?
Liability covers damage YOU cause to others. State minimums (often 25/50/25) are almost always too low — a single accident can exceed them, exposing your personal assets. Recommend 100/300/100 minimum, with an umbrella policy for $1M+ in assets.
What does comprehensive coverage include?
Comprehensive covers damage to your car NOT caused by a collision: theft, fire, vandalism, hail, falling objects, animal strikes (deer!), flood, and windshield damage. Usually paired with collision. Consider dropping both on cars worth less than $3,000.
Should I file a claim for minor damage?
Often no. If repair costs are close to your deductible, paying out-of-pocket avoids rate increases that can cost more over 3-5 years than the repair itself. Get an estimate first, then compare to your deductible plus expected rate hike.
How does my credit score affect auto insurance rates?
In most states, insurers use credit-based insurance scores to set rates — drivers with poor credit pay 2-3× more than those with excellent credit. California, Hawaii, Massachusetts, and Michigan ban this practice. Improving your credit can save hundreds per year.
Should I drop coverage on an old car?
Drop collision and comprehensive when the annual premium plus deductible approaches the car's value. A general rule: if the car is worth less than 10× the annual premium for those coverages, drop them. Keep liability — it protects your assets, not the car.
What is gap insurance and do I need it?
Gap insurance covers the difference between what you owe on a car loan and what the car is worth (which drops quickly due to depreciation). Essential if you put less than 20% down or financed for 60+ months. Buy from your auto insurer — dealers charge 2-3× more.
Will my rates go up after an accident?
Yes, typically 30-50% for 3-5 years after an at-fault accident. Some insurers offer 'accident forgiveness' as a free perk after 5+ years of clean driving, or as a paid add-on. If you have a clean record, shop around — some insurers are more forgiving than others.
Glossary of key terms
- Liability Coverage
- Pays for damage you cause to others. Split into bodily injury (per person/per accident) and property damage.
- Collision Coverage
- Pays for damage to your car from a collision, regardless of fault. Optional on older cars.
- Comprehensive Coverage
- Pays for damage to your car from non-collision events: theft, fire, hail, animal strikes, falling objects.
- Umbrella Policy
- Additional liability coverage ($1M+) that kicks in after your auto/home limits are exhausted. Cheap — typically $150-300/year per $1M.
- Uninsured/Underinsured Motorist
- Covers you if you're hit by a driver with no insurance or not enough insurance. Essential — 1 in 8 US drivers is uninsured.
Common mistakes to avoid
- Carrying only state-minimum liability — exposes your assets to lawsuits from at-fault accidents
- Not shopping around annually — loyalty rarely pays in insurance; rates can vary 50%+ between carriers
- Skipping uninsured/underinsured motorist coverage — 1 in 8 drivers is uninsured
- Filing small claims that are barely above your deductible — rate hikes cost more than the claim over time
- Not getting an umbrella policy once you have assets to protect — $1M coverage costs only $150-300/year
Pro tips
- Shop your auto insurance every 12-24 months — rates vary 50%+ between carriers for identical coverage.
- Bundle auto and home/renters insurance with one carrier — typically saves 10-20% on both.
- Increase your deductible to $1,000 or $2,500 — saves 15-30% on premiums and discourages small claims.
- Once your net worth exceeds $500K, buy a $1M+ umbrella policy — it's the cheapest asset protection available.
- Take a defensive driving course every 3 years — many insurers offer 5-10% discounts and it removes points from your license.
Results are estimates for educational purposes only and not financial advice. Consult a licensed professional for advice specific to your situation.