What Is the Purpose of Car Insurance?

For many people, insurance is considered a commodity. For some, it's a luxury. Insurance is generally intended to protect you from financial loss from an accident that either you or someone else caused. That is why all states that require insurance require bodily injury (BI) liability and property damage (PD) liability insurance. Because there are drivers out there who refuse to buy mandatory auto insurance, many states also require uninsured motorist coverage (UM). Further, the monthly cost of the insurance premium is predicated on the market value of the car (i.e., a high-performance sports car versus a modest sedan), the average number of miles it will be driven per year, and the age, gender and health of the person or persons who will be driving it.

The primary factor in deciding the amount of insurance you should have for your automobile is learning what assets you have at your disposal to pay for damages that exceed the minimum state requirements for insurance. For example, if you're in an accident you need to ask yourself whether you'll be able to pay for the necessary repairs to get your car back on the road again or, if need be, to purchase a replacement if the damage is too extensive. If you don't have access to enough money, you should consider collision insurance. This coverage will pay for repairs to your car even if you're the one at fault. If you are in an accident and not at fault, the other driver's minimum policy benefits may not be adequate to pay your damages. Underinsured motorist coverage (UIM) steps in to fill in the insurance gap and also protects you if you're injured as a pedestrian (i.e., a car jumps a curb and hits you).

There are essentially three situations where having the right amount of automobile insurance is critical. The first is if you cause an accident. The second is when you're not at fault and the insurance--or lack of insurance--of the other driver is insufficient to cover the extent of your damages. A third benefit is when you're physically injured and at fault, or when your automobile is damaged but not through an accident with another driver, such as a cracked windshield or the branch of tree that falls on it during a windy day. For these situations, medical payments coverage (med-pay) and comprehensive coverage can protect your personal assets.

The first state to require liability insurance for drivers was Massachusetts in 1927. Since then, states have tried many different ways to limit the number of uninsured drivers on their highways. Some states, such as California, are developing electronic systems where the insurer notifies the Department of Motor Vehicles when coverage is canceled to limit the number of drivers who buy a one-month policy in order to be able to purchase and register their vehicles. Still, estimates are that the number of uninsured drivers on the highways remains between 15 and 20 percent. This also includes teenagers whose parents believe that just because their child is still living at home it's not important to add them as an authorized driver on their policy. If an accident occurs in which the uninsured teen was driving, the insurer will not only refuse to honor any claims but may also cancel the parents' policy altogether.

If you're a homeowner or a renter, always check with your insurance agent or broker to see if you can get a multi-policy discount. While insurance is a commodity, that doesn't mean all insurance companies are the same. Check with your state Department of Insurance to find out about the claims-paying history of an insurer before you purchase your coverage. Also, many insurance companies now sell direct to the consumer. While letting your agent do the work for you is why you're paying a commission, checking the market yourself is a good way to verify price and reputation. Organizations such as the Insurance Information Institute and Progressive Insurance (see "Additional Resources," below) offer invaluable advice to consumers as well as comparisons of which providers offer the most competitive rates and incentives for good drivers.