In most states, you must have auto insurance if you drive a car. The necessary coverage that you need is:

• Bodily injury liability. If you injure someone in a car accident, this coverage pays their medical and rehabilitation expenses and any damages for which they may sue you. In most states, you must buy coverage of at least $15,000/$30,000. The $15,000 pays for injuries to one person. The $30,000 is the total available per accident.
• Property damage liability. If you damage someone’s property in an accident for which you are at fault, this coverage pays to repair it. In most states, you must buy $5,000 worth of coverage. Many standard policies include a higher limit (often $25,000).
• Medical benefits. This coverage pays medical bills for you and others covered on your policy, no matter who is at fault for an accident. In most states, you must buy at least $5,000 worth of coverage. The typical driver buys $10,000 worth. This coverage usually does not have a deductible.

The coverage that is not required but you should still have:

• Collision. This coverage pays to repair damage to your car in an accident. Like medical benefits, this is no-fault coverage. If you finance a car, most lenders require you to buy collision coverage. Insurance companies will usually give you a $500 deductible unless you request a different amount. The higher your deductible, the lower your premium.
• Comprehensive. This coverage pays for theft or damage to your car from hazards including fire, flood, vandalism, or striking an animal. Again, most lenders require you to buy this coverage if you’re financing your car. And you can also set your own deductible for this coverage.
• Uninsured/underinsured motorist. This coverage pays for losses and damages, including your medical bills, lost wages, and pain and suffering, if you are hit by a person who doesn’t have any insurance or enough to cover the damage. It makes sense to purchase the same level of coverage that you have for bodily injury liability.

The optional coverage includes:

• Extraordinary medical benefits. This coverage pays when your medical and rehabilitation expenses exceed the limits in your policy. It provides $1 million coverage.
• Income loss. This coverage pays the amount of your take-home pay when injuries from an accident keep you from working. Payments are made without regard to whether you have other disability insurance coverage.
• Funeral benefit. This coverage pays up to $2,500 if you or a family member dies in an auto accident. The cost is minimal. Nationwide, for example, charges 40 cents per year for $1,500 worth of coverage.
• Rental car replacement. This coverage pays a set amount per day for a rental car if your vehicle is being repaired because of an accident.
• Towing and labor costs. This coverage pays for road service, such as jump-starting your car or changing a flat tire, and towing, which can be used any time your car breaks down, not only when it’s involved in an accident. The coverage should not cost much – usually less than $5 a year.

The way insurance is structured and sold is going through some significant changes. Before the 1980s, the question most people asked themselves was: Can I afford the car I really want? Since the 1980s, the question has become: I can barely afford a car, so how can I afford to carry insurance on it?

Insurance companies decide whom they will sell a policy to as well as the price they will charge, which is virtually different for every person, based on a two-page application form.

According to experts, the average household spends $9,000 over a 10-year period on auto insurance but files only one claim – typically for about $600. That sounds like a poor deal. If you know what you’re doing, though, you can make it a better one.

These modifications moving throughout the insurance industry affect you (as a car insurance policy holder) in three basic ways:

• The way insurance is sold is changing. Car insurance used to be sold exclusively through middle-men (the insurance agents), who either represented one company or a group of companies. Since the 1990s, a growing number of auto insurance companies have switched to selling directly to policyholders. They do this through direct mail, telephone marketing and even online services. If you use an insurance agent, that person makes a 15 percent commission when you buy your auto insurance policy and an additional 12 to 15 percent each time you renew it. This commission can be good investment if you have an unusual situation or if you expect difficulties making claims. But, for many people, that money would be better spent buying additional coverage.
• The way in which states regulate the sale and use of insurance is changing. Most states have specific requirements for auto coverage, and many insurance companies offer basic average that fulfills those requirements. State insurance regulators watch auto coverage closely. They focus on two areas: rate setting and claims disbursement. Auto insurance companies have a reputation (in some cases, well-deserved) for being excruciatingly slow to pay even legitimate claims. Claims handling represents the number 1 auto insurance complaint that most state insurance commissioners report. Widespread poor experience contributes to the consumer’s distrust of insurance companies and the way they do business.
• The role of insurance in society is transforming. As more people grow wealthy (even if it’s just relatively wealthy) they have more to protect. This makes insurance less of an optional safety measure and more of a necessity of life.

The main reason you need car insurance is that the law says you have to have it. This mandated insurance usually relates to liability exposures. You have to be able to pay for the damage to other people or their property you may cause.

Most states call these laws "financial responsibility requirements." Technically, you can use something other than insurance to meet the requirements. Many states will allow you to post a cash bond instead of buying insurance. If you cause an accident, anyone you hurt can make a claim against the bond.

For most, however, insurance is the most cost-effective way to meet the responsibility requirements.

Each state has its own specific laws regarding financial responsibility, insurance coverage, or no-fault coverage. So you should make a point of finding out what your state requires.

The variations that exist from state to state can cause some confusion. The standard car insurance policy issued by the Insurance Services Office (ISO) – a clearing house for insurance industry information – includes the following language, “When this policy is certified as future proof of financial responsibility, this policy shall comply with the law to the extent required.”

A state may require evidence of financial responsibility from a driver in order to reinstate a driver’s license that has been suspended or revoked due to a bad driving record or an unsatisfied judgment from a previous auto accident. One means of showing proof is for the insurance carrier to file a document with the state agency certifying coverage in force, policy limits, coverage dates, etc.

If you borrowed money to purchase a car, the lending institution will usually insist that you have collision coverage. If you do not (or the insurance you have lapses while you still owe money on the car), the financing company may buy insurance for you and add the cost to the total amount you owe. This replacement insurance is usually extremely expensive and particularly limited in what it covers.

Even though you must carry insurance to drive, most people also buy insurance to protect their investment in the vehicle. The standard Personal Auto Policy provides coverage for “damages to covered autos.” Although it is called “Coverage for Damage to Your Auto," the policy has traditionally been known as physical damage coverage.

This part of the policy says that the insurance company will “pay for direct and accidental loss to your covered auto, or any non-owned auto, including its equipment, minus any applicable deductible.” It therefore covers any type of damage that is not excluded. If the collision damages more than one “covered auto,” the highest deductible will apply.

Coverage for Damage to Your Auto actually consists of two kinds of coverage: (a) “Collision” and (b) “Other than Collision.” You can buy either or both of these kinds of coverage for each car you insure. Each type of coverage applies only when the Declarations indicate that the coverage is provided by showing a premium for the vehicle.

In the standard auto policy, “collision” is defined as “the upset of your covered auto or a non-owned auto or their impact with another vehicle or object.” Note that collision with an object is covered, even if it is not another vehicle.

The standard policy clearly spells out the losses that are not related to collision, such as missiles, falling objects, fire, theft, explosion, earthquake, windstorm, hail, water, flood, malicious mischief, vandalism, riot, civil commotion, contact with a bird or animal, and breakage of glass.

Auto policies are nearly always written with higher deductibles for collision than for non-collision losses. By treating contact with an animal as a non-collision loss, you have the advantage of applying a lower deductible. This difference in deductibles is an implicit recognition of the fact that drivers usually have greater opportunities to avoid contact with other cars or objects than with free-moving creatures that react unpredictably to lights, motion, and sound.

If you cause an accident that results in damage to a car you are driving but do not own, the ISO standard policy will provide the broadest coverage applicable to any covered auto.

Drivers often drive their cars into a state other than the one where they reside. Since insurance laws vary from state to state, settling a claim can become complicated if an accident occurs when you are out of your home state.

The out-of-state coverage provisions in a standard auto policy refer not only to the required minimum amounts of coverage, but to required types of coverage as well. This means that if you drive into a state where no-fault benefits or other types of coverage are required, the policy will automatically provide the minimum amounts and types of coverage.

If you travel outside your home state, the policy will adjust to these laws by automatically increasing the liability limits to conform to that state’s laws, and will provide coverage as required by the state to conform to its laws with respect to a nonresident driving within the state.

One of the most frequently asked questions about car insurance is, "Do I need to buy insurance when I rent a car?"

When you rent a car, you will usually be offered a "collision damage waiver" or CDW (some rental companies use the term "loss damage waiver" or LDW, but the coverage is the same).

This waiver releases you from responsibility for damage to the rental car, provided you comply with the rental contract terms. If you decline the coverage and have an accident, you may be held responsible for the entire value of the car.

One common problem is that many of these policies contain limitations and loopholes that renters can unknowingly violate, voiding the coverage. For example, CDW can be voided if you drive on an unpaved road or if you engage in negligent driving (and the car rental company ultimately determines what is meant by “negligent”). CDW is usually over-priced, adding around $11 a day to the rental cost.

CDW often duplicates coverage you already have. Many regular auto insurance policies cover damage to rented cars, although the fine print may restrict the types of rentals covered.

Before you turn down the rental coverage, though, it’s important to know what kind of coverage you already have. If you carry collision insurance on your own car, and your policy also covers rented (technically called “non-owned”) vehicles, it is safe to decline the collision damage waiver.

As for liability insurance, your own auto policy should protect you and your passengers in a rented car as well as in your own car.

Coverage may also depend on whether you use the car for business or pleasure, or whether your vehicle at home is still being used in your absence. Some policies limit the number of rental days covered each year. Others apply deductibles and lower liability limits to collision coverage (and therefore rental car coverage).

Another reason that some people buy car insurance is to provide coverage for lost wages that might occur after an accident. This kind of coverage is often called an “income continuation benefit.” Policies that offer this benefit cover some portion of salary and other wages you don’t receive while recuperating from injuries in a car accident. These losses, however, are sometimes difficult to establish.

Some important factors in your obtaining coverage include the following:

• Who you are. Certain age, sex and marital status classifications are what insurance companies refer to as “Primary Factors” figured into premium formulas.
• Your driving record. This is what insurance companies call “Sub-class,” and it is the most important of “Secondary Rating Factors.” Insurance company statistics state that the more accidents you have, the more likely you will be involved in another accident. If you have a poor driving record, you may be limited in what kind of insurance you can buy, and you may also need different types of coverage.
• Neighborhood. This is another factor that affects insurance. If you live in a large city, you will most likely pay more for car insurance.
• Your net worth. This defines how much liability coverage you should purchase. If you’re not worth much, the state minimums will probably cover any liability you might face. But if you have some equity worth protecting, you will want to make sure you’re covered on the liability end.
• How you use your car. The insurance company will want to know if you use your vehicle for business or personal use. This is known as “Automobile Use Classification” and includes categories such as “pleasure use,” “business use,” “farm use,” and “driving to work.” Generally, the use issue is a factor when you insure more than one car. If your household has two or three cars, you should not insure them all as work or business related. Try to insure at least one of the cars you don’t drive on a daily basis as pleasure or occasional use.
• The make, model and age of your car. This can be the most important risk factor that can determine what type of insurance you need. In most cases, the older the car, the less insurance you need, mainly because the replacement value diminishes with age. In the case of collectible or antique cars, you can choose to insure a pre-determined replacement value. Insurance companies usually offer this in the form of a premium per $100 of declared value.
• Single versus multiple car policies. Insurance policies are often divided into two categories: one for single-car risks, and one for multi-car risks. Multi-car factors are lower than single-car factors, because they include a discount for insuring two or more cars. This means insuring a second car will be much less expensive than insuring two cars separately.