A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products, including home, life, auto, and commercial, and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, mainly in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: Oct 14, 2021

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Here's what you need to know...

  • One of the main reasons why you need auto insurance is to comply with state laws that you must abide by when you own a vehicle
  • While state laws vary from state to state, almost all states require vehicle owners to purchase auto liability insurance to pay for third-party damages
  • Even in states where auto insurance isn’t a requirement, having coverage is a necessity to protect your assets and to avoid expensive litigation
  • Not only will your auto insurance pay for third-party repairs and medical bills, if you’re taken to court for damages your policy will cover the court costs
  • If you’re leasing or financing your vehicle, you’ll need to purchase physical damage coverage to pay for damage to the vehicle

In today’s modern world, about 95% of American households own one or more cars. Out of these households, about 85% of them use their car to commute to and from work. These statistics show that there’s such an obvious reliance on vehicles and that that reliance isn’t going anywhere.

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If you’re thinking about buying a car of your own, it’s important that you don’t overlook all of the financial obligations that come along with buying a vehicle. You’ll have to pay for tax, title, licensing, and also for recurring expenses like gas, maintenance, and auto insurance. If you’re reviewing the true cost to own a vehicle and you’re wondering why exactly you need auto insurance, there’s a long list of reasons that you should be aware of.

You’re Required By Law to Carry Auto Insurance in Most States

The laws surrounding auto insurance vary by state. Since the laws are enacted by state officials and the insurance industry is regulated by the state’s Department of Insurance, you’ll need to find out exactly what’s required in the state where you live so that you can comply.

States require vehicle owners to purchase and maintain active life insurance coverage to protect pedestrians and drivers from the damage that a negligent driver could potentially cause.

Since there’s no guarantee that someone will have the financial means to pay to repair someone else’s car or to pay for their medical bills, officials in most states believe that the solution is compulsory insurance laws. This guarantees that at least some damages and medical bills will be paid for following an accident.

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What type of coverage is required by the state and what does it pay for?

Actual coverage requirements can be different from state to state and are dependent on the type of insurance system the state operates under. Most states operate under what’s called fault-based or tort law systems. In these states, the party who is negligent for the damages will be responsible for paying to restore the victim to their pre-loss condition. You’ll need the following coverage options to satisfy the law in tort states:

  • Bodily Injury Liability:

Pays for the medical expenses or the funeral expenses of people in other vehicles who are injured in a crash that you’re responsible for. The policy will have per person and accident limits.

  • Property Damage Liability:

Pays to repair the damage that’s been done to someone else’s property when you’re at fault for the loss. The policy will pay the limit per accident regardless of how much property is damaged.

What type of coverage do you need in no-fault states?

If you’re in one of the 12 states that operate under some type of no-fault system, then you’ll need a different type of coverage. No-fault states have a unique system where individuals who’re injured in car accidents will collect from their insurance no matter who’s at fault for the loss. You must carry the following in no-fault states:

  • Personal Injury Protection:

This coverage pays for the policyholder’s medical expenses, lost income, funeral expenses, rehabilitation costs, and more. The actual limits that you are required to carry will depend on the state that you live in.

  • Property Damage Liability:

There’s no pure no-fault system because all states still require the person negligent for an accident to pay to restore the vehicles damaged. This is why you’ll still need to carry Property Damage Liability in a no-fault state.

Insurance Is an Asset Protection Tool and Not Just a Requirement

If you’re a safe driver, you might feel like you don’t need liability insurance. Even so, you must understand what the risks are for being uninsured. Auto insurance protects both your assets and your wages.

If you’re in an accident and you don’t have coverage, you’ll have to pay out of pocket for the hundreds, thousands, or hundreds of thousands worth of damage that you’ve caused.

If you aren’t able to do this, you’ll be taken to court where you could be ordered to liquidate your assets or have your wages garnished until you can repay what you owe. Not to mention the fact that you’ll probably be cited for driving without insurance and required to appear in court where you could face a license suspension or hefty fines. Just one joyride behind the wheel could lead to some major headaches that could change your entire life.

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You’re Required to Buy Full Coverage If You’re Financing?

The state doesn’t care if you buy coverage to protect your car from a loss, but a lender or leasing company will. When you’re signing a purchase or leasing agreement, you are entering into a legally binding contract that says that you’re going to pay a promised amount for the car. It also says you’ll take care of the car while it’s in your possession and that you’ll keep it insured with full coverage. This is why lenders and lessors require the following insurance:

  • Comprehensive:

Will pay to repair the covered auto if it’s damaged or totaled because of a fire, theft, explosion, wind, hail, flood, vandalism, falling objects, or encounter with a live animal. You’ll have to select a deductible that your lender will accept to comply with the contractual obligations.

  • Collision:

Will pay to repair the covered auto if it’s damaged in a crash with another object. Typically collision pays when you’re at fault, but it might pay when you’re in an accident with an uninsured driver.

  • Gap Coverage

GAP coverage is mainly required when you’re leasing a vehicle. This form of Guaranteed Auto Protection will pay for the difference between what you owe on the car and what it’s worth at the time of the loss if its value has dramatically depreciated.

Pay a Little Now and Get a Huge Benefit Later

Even if you do have the money put away that could pay for damages that you cause in an accident, do you want to spend that money on an accident? For a small amount each month, you can buy a lot of asset protection. This means you’ll have peace of mind as you drive, no matter how talented you are behind the wheel. It also means that you’ll have a company by your side to represent you in court if you are ever sued for damages.

How much car insurance do you need?

Deciding how much coverage that you’ll need can be difficult. There’s no surefire way to know if you’re buying enough coverage, but state minimum limits are typically very low. If you can afford to buy higher limits, most experts recommend that you carry at least $100,000 per person and $300,000 per accident in Bodily Injury Liability.

It’s important to compare costs and look at your assets to make a decision.

If you’re ready to buy a car, take time out of your day to shop the market for auto insurance first. You’ll need to get an idea of how much you’ll need to pay for auto insurance before settling on a specific car. Use an online auto insurance comparison tool and enter your personal information. After you’ve done this, you’ll get to choose coverage limits and options that you want so that you can be directed to instant quotes through reputable carriers. Start comparing car insurance rates now by using our FREE tool below!