Everything you need to know about car insurance

I got my own car insurance for the first time back in 2018. Up until then, I’d been on my parent’s insurance with GEICO.

I had moved to Seattle a year earlier and with my girlfriend (now wife) moving in, we decided to ship my car from Florida to have for weekend excursions.

When the car arrived, I pretended I knew what I was doing and called a few different companies, ending up with Progressive as they offered us the best rate.

I stayed with Progressive for nearly five years until the start of 2023 when I switched to Nationwide to bundle our home and car insurance. Bundling these policies saved us $106 on our home insurance and $400 on our car insurance.

Up until this point, I’d never given much thought to car insurance or put much time into shopping around with other companies.¹

I chose the minimum coverage allowed to get as low a rate as possible and called Progressive every once in a while to see if there were any additional discounts I qualified for. The policy auto-renewed every six months and I was good to go.

As I’ve gotten older², however, things like insurance have started to encroach on the few remaining virgin forests of my mental landscape.

With a wife, some savings, and maybe kids in our future, is the minimum coverage enough? How much coverage do I need? What will it cost? What do my health, car, and home insurance cover? How do they overlap? How can I go back to being a kid and never think about insurance again?

These are all anxiety-inducing questions and I’ll do my best to answer them.

I’ll start by going over the terms you should know when purchasing car insurance. Each term links out to a website where you can find further info.

Then I’ll list the questions I had when thinking about car insurance along with the answers I came up with.

It’s likely your questions (and answers) will be different. But knowing the terminology will allow you to kickstart your own research. Once you understand the basics, anything you want to know is only a Google search away.

Let’s get started.

Car insurance terms made simple

Bodily Injury Liability coverage: covers medical costs for injuries you caused to other drivers and passengers (not including yourself) if you’re at fault in an accident. It also helps cover payment for legal defense if you’re sued for damages.

• It covers:
  • Medical expenses, such as emergency care services, hospital fees, ongoing care costs, etc.
  • Legal fees and legal counsel, if sued by the other party.
  • Loss of income, if the injured parties are unable to work due to injuries or ongoing medical care.
  • Pain and suffering, if there is emotional stress or prolonged pain from an accident; this is more rare.
  • Funeral costs, if there’s a fatality.
• There are 2 different coverages included: per person and per accident.
  • The per-person limit is the maximum amount the insurance would pay per person injured in an accident.
  • The per-accident limit is the maximum amount the insurance would pay per accident. No matter the number of persons injured, the insurance won’t pay more than this limit.

Property Damage Liability coverage: covers the cost of repairing or replacing another person’s property. This could be someone else’s car in the case of a collision or their fence or mailbox, for example, if you back into it and damage it.

Bodily Injury & Property Damage Liability: Each state has a mandatory minimum for this coverage. It’s typically expressed as bodily injury liability limit per person / bodily injury liability limit per accident / property damage liability limit per accident. In Texas, for example, the mandatory minimum is 30/60/25.

Uninsured/Underinsured Motorist coverage: protects you if you’re hit by a driver who either has no auto insurance or doesn’t have enough coverage to pay for damages caused. This coverage is split between Uninsured/Underinsured Motorist Bodily Injury and Uninsured/Underinsured Motorist Property Damage.

Uninsured/Underinsured Motorist Bodily Injury: covers injuries for you and your passengers if hit by a driver who has either no auto insurance or not enough. It covers medical bills, lost wages, and pain and suffering. Also known as UMBI/UIMBI.

• There’s some overlap between UMBI/UIMBI and health insurance. Some differences are:
  • UMBI/UIMBI generally doesn’t have a deductible while health insurance does.
  • UMBI/UIMBI covers passengers in your car without health insurance.
  • UMBI/UIMBI covers lost wages while health insurance doesn’t.

Uninsured/Underinsured Motorist Property Damage: covers your car and property if hit by a driver who has either no auto insurance or not enough. Also known as UMPD/UIMPD.

• There’s some overlap between UMPD/UIMPD and collision coverage. Some differences are:
  • UMPD/UIMPD generally doesn’t have a deductible while collision coverage does.
  • UMPD/UIMPD may cover damages to both your car and other property while collision coverage only pays for damages to your car.
  • UMPD/UIMPD only covers damage to your car caused by a driver with no or not enough insurance while collision coverage covers any damage to your car caused by a collision, regardless of who is at fault.

Medical Payments: an optional coverage that’s not available in all states. It helps pay for medical expenses for you or your passengers, regardless of who’s at fault. It covers bills such as doctor visits, ambulance and EMT fees, health insurance deductibles and co-pays, funeral expenses, surgery, x-rays, and dental work. Also known as Med Pay.

• There’s some overlap between Med Pay and health insurance. If you have health insurance, Med Pay can cover out-of-pocket costs like deductibles and co-pays.

Personal Injury Protection: covers medical expenses for you and your passengers if you’re injured in an accident, regardless of who’s at fault. This coverage is only required in some states. Also known as PIP or no-fault insurance.

• In some states, PIP also covers lost wages, disability and rehab costs, funeral expenses, and household services, such as childcare or cleaning, if you’re unable to perform these due to your injuries.
• There’s some overlap between PIP and health insurance. As with Med Pay, PIP can cover out-of-pocket costs like deductibles and co-pays.
• There’s some overlap between PIP and Med Pay. Some differences are:
  • Generally a state will offer either one or the other. “No-fault” states offer PIP while at-fault states offer Med Pay.
  • PIP is sometimes required, depending on the state. Med Pay is always optional.
  • PIP helps cover lost wages and essential services, like child care. Med Pay doesn’t cover this.

OEM coverage: OEM (Original Equipment Manufacturer) is an additional coverage that ensures that parts used for repairs come from the car manufacturer rather than from a third-party, i.e., aftermarket parts. Not all insurance companies offer OEM.

Safety glass: covers damage to your windshield and windows. Coverage and limits vary depending on the insurance company.

Collision: an optional coverage which covers the cost to repair or replace your car if it’s damaged in an accident with another vehicle or stationary object, such as a fence, guardrail, telephone pole, or a tree. Though not legally required in any state, collision coverage is typically required by the lender if your vehicle isn’t paid off.

• Collision coverage doesn’t cover collisions with animals or non-collision related damage such as hail, theft, vandalism, or falling trees (see Comprehensive coverage), damage you caused to another car or driver (see liability coverage), or medical bills (see medical payments or Personal Injury Protection).
• Collision coverage has a deductible, which is the amount you’ll pay before the insurance pays. The lower the deductible, the higher the cost of collision coverage. With a $1,000 deductible, you’d pay the first $1,000 and the insurance would pay the rest, up to the limit.
• Collision coverage has a limit, which is the maximum amount the insurance will pay. This limit is generally the actual cash value of the car. For example, the new car you bought five years ago for $20,000 is likely now worth around $10,000, which is what the insurance would pay out.

Comprehensive: an optional coverage which covers the cost to repair or replace your car if it’s stolen or damaged in a non-collision incident. Like collision coverage, comprehensive coverage is not legally required in any state, but is typically required by the lender if your vehicle isn’t paid off.

• Comprehensive coverage covers damage from theft, vandalism, fire, falling objects (e.g., trees or hail), accidents with animals (e.g., hitting a deer or a rodent chewing wires under the hood), and natural disasters (e.g., storm, hurricane, tornado).
• Like collision coverage, comprehensive coverage doesn’t cover damages to another person’s car or medical expenses and has a deductible and a limit.

Rental reimbursement: an optional coverage which covers the cost of a rental car while your car is being repaired. This coverage doesn’t have a deductible, but has a daily limit and a maximum number of days it can be used. For example, there might be a $50 limit per day for a maximum of 30 days or a maximum of $1,500.

Custom equipment: an optional coverage which covers the cost to repair or replace parts you added to the car, such as a stereo, paint job, or custom wheels. Also known as custom parts and equipment or CPE.

Extended non-owned: an optional coverage that extends liability and medical payments insurance to a company car or other non-owned cars. It generally doesn’t cover damage to the car.

Gap coverage: an optional coverage that helps pay off your loan if you car is stolen or totaled. If you owe more on the loan than the vehicle is worth, gap coverage pays the difference. For example, if you owe $20,000 on your loan and your car is only worth $10,000, gap coverage covers the $10,000 gap, minus your deductible. Also known as loan/lease payoff coverage.

New car replacement: an optional coverage that replaces your car with a brand-new one of similar make and model if your car is stolen or totaled. This coverage varies depending on the insurance company and is generally only available for cars under three years old.

• For example, you buy a new car for $30,000. A few months later, the car is totaled. In those months, the car’s value has decreased to $26,000. With new car replacement coverage, you’d get the full amount to purchase a new car (minus your deductible) instead of the $26,000.

Roadside assistance: an optional coverage which covers the cost of helping you in case your car breaks down on the road. This coverage varies by insurance and might include things like towing, a gallon of gas if you run out, and a flat tire, among others.

Pay-per-mile insurance: you pay a base rate and a dollar amount per mile. The base rate and cost per mile don’t change throughout the policy term, but the monthly total varies depending on the number of miles driven.

Deductible: The amount you pay out of pocket before the insurance starts paying. Let’s say your car insurance has a $500 deductible. If you have a covered accident which will cost you $5,000 to fix, you’ll pay the first $500 out of pocket and the insurance will pay the remaining $4,500. Unlike health insurance, which has an annual deductible, the deductible for car insurance applies on each claim you make.

Questions I had about car insurance

How much car insurance do I need?

The typical recommendation is 100/300/100, that is, a $100,000 Bodily Injury Liability limit per person, a $300,000 Bodily Injury Liability limit per accident, and a $100,000 Property Damage Liability limit per accident.

If it’s not too expensive, consider going up to the maximum of 250/500/250.

I had 30/60/30 until recently when I switched to 250/500/250 as it wasn’t much more expensive.

The answer to this question depends on how much you’re willing to pay and how much risk you’re willing to take.

Your coverage should bring you peace of mind at a reasonable price—it’s up to you to decide what level of coverage will achieve this and what price is “reasonable”.

This post from Dave Ramsey covers this topic well.

Do I need both Uninsured/Underinsured Motorist Property Damage coverage and Collision and Comprehensive coverage?

Progressive covers this question well:

If you have collision coverage, then you might not need UMPD coverage since you’re already covered for accident-related damage to your vehicle. If you have comprehensive coverage, but not collision coverage, then UMPD is worth considering so you’re at least covered for vehicle damage caused by uninsured drivers.

Your UMPD limit is a different (and much easier) story. You can select a limit that closely mirrors the value of your vehicle. If your car is worth $20,000, and you don’t carry collision coverage, then you should consider that much in UMPD coverage.

So if you have collision and comprehensive coverage, UMPD is likely overkill. The only benefit of UMPD over collision/comprehensive is that it doesn’t have a deductible.

If you want UMPD anyway, you can bring the limit down to the value of your car.

Do I need Medical Payments or Personal Injury Protection coverage if I have health insurance?

Medical Payments and Personal Injury Protection coverage supplement your health insurance. These coverages don’t have deductibles and can help cover your health insurance co-pays or deductibles.

If you have $2,500 of Personal Injury Protection coverage, for example, you could use this to cover the first $2,500 of your medical costs and use your health insurance to cover the rest.

Another nice thing about these coverages is that they cover your passengers as well. And Personal Injury Protection can also cover things like lost wages and child care, if your injuries prevent you from fulfilling your work/household duties.

Medical Payments or Personal Injury Protection are an extra layer of coverage. If you have good health insurance, you can likely do without these.

Do I need Uninsured/Underinsured Motorist Bodily Injury if I have health insurance?

The answer here is the same as above.

Depending on the price, Uninsured/Underinsured Motorist Bodily Injury might be a good idea as it doesn’t have a deductible, it covers your passengers as well as yourself, and covers lost wages which health insurance doesn’t.

How can I lower my car insurance?

Car insurance rates are closely tied to your age, gender³, and zip code.

An 18-year-old male, for example, has rates that are 15% higher on average than their female counterparts. Even at 70 years old, a male has rates that are 1.5% higher.⁴

And a 23-year-old, for example, has rates that are 18-23% higher on average than a 25-year-old. And a 25-year-old, meanwhile, has rates that are 14-19% higher than a 30-year-old.⁵

The decrease in car insurance is less drastic between the ages of 30 and 70, at which age the price of insurance starts to rise again.

Being married and being a homeowner are another two factors that can lower your insurance premium.

So outside of your age, gender, zip code, and marriage and homeownership status, how can you lower your car insurance?

1. Shop around. There are lots of car insurance companies—Progressive, All State, State Farm, Nationwide, GEICO, Liberty Mutual, Lemonade are a few that come to mind—and some might offer you a better rate than others.
   • Make sure you’re getting all the discounts the insurance company offers. Check their website and talk with a few different reps on the phone to confirm.
2. Consider pay-per-mile insurance if you drive little.
3. Drop less important optional coverages like rental reimbursement, roadside assistance, Original Equipment Manufacturer, etc.
4. Increase the deductible for your comprehensive and collision coverage.
5. Drop more important optional coverages like Medical Payments, Personal Injury Protection, or Uninsured/Underinsured Motorist Property Damage.
   • If you have good health insurance, Medical Payments or Personal Injury Protection are less important. And if you have comprehensive and collision coverage, UMPD is likely overkill.
6. Lower your coverage limits for Bodily Injury Liability and Property Damage liability.
   • Here we start getting into risky territory. Make sure you’re comfortable with your coverage and understand the ramifications.
7. Drop your comprehensive and collision coverage.
   • This is risky and only worth doing if your car is worth very little and you’re able to replace it out of pocket.
8. Get a car that is cheaper to insure—sport cars, luxury cars, and cars targeted by thieves are more expensive to insure.

Summary

Car insurance isn’t complicated—it just takes some time to understand the terminology as well as the costs associated with each of the coverages.

You should now have a good feel for how car insurance works, how much car insurance you need, and what you can do to lower your car insurance.

This is a lot of information at once, though, so take your time, digest it, and then figure out your next steps.

If you’re curious about how I applied this information to lower my car insurance by $400, see this post.

Good luck! May your discounts be high and your premiums be low.