Why Do I Need Car Insurance?

Reviewed by David Goguen, J.D., University of San Francisco School of Law
Car insurance is expensive, but it helps protect you and your assets, and it provides piece of mind. Plus, it's the law.

You may wonder why you even need car insurance, especially if you’ve never been in a car accident. The number one reason is this: All states require you to carry car insurance or establish some other form of financial responsibility in case you get into an accident in your registered vehicle. But that's not the only reason to make sure you carry the right coverage.

It's the Law, But It Also Protects You

After a car accident, the drivers and passengers involved may suffer harm in the form of property damage, medical bills, lost wages and other losses. If you don’t have car insurance, you could be on the financial hook for some or all of these costs, especially if you caused the car accident. Few of us have that kind of cash lying around.

Car insurance protects you from personal financial loss by pooling what you pay for car insurance -- your "premium" -- with that of thousands or even millions of other drivers. This way, when you have a car accident, the insurance company covers your losses up to your policy limits, and you aren’t left holding a bag of debt.

What is a “Policy Limit”?

Your “policy limit” is the maximum amount your insurance company will have to pay if you are in an accident. Most states require that you purchase a certain minimum amount of automobile liability coverage, usually between $15,000 and $25,000.

Car insurance is most often sold with a “per person” and “per accident” maximum loss amount. These numbers are usually right on the front of your automobile insurance policy or insurance card. For example, if you're a California driver, you may wonder what 15/30/5 means:

  • The first number, “15” in this example, is the amount of automobile liability insurance for bodily injury. This means your policy would pay up to $15,000 per person injured in the accident.

  • The second number, “30” in the example, gives you the total amount your automobile insurance company will pay for all bodily injury damages arising from the accident. For instance, if three people were in the other vehicle when you got into an accident, and all three people suffered injuries, your car insurance company would pay a maximum of $10,000 per person up to a total of $30,000 for the claims of everyone involved in the accident.

  • The final number, in this case “5” refers to the maximum amount of money your car insurance company will pay for property damage. Here, a maximum of $5,000.

How Do I Decide How Much Insurance I Need?

Often, the minimum required by the law won’t be enough if you are in a serious accident. When buying automobile insurance, remember that it protects you and your assets. You should think hard about how much coverage you might need if the worst-case scenario happens to you or the other driver. What if you are in the hospital for weeks? What if the other driver can’t work for several months? What if you are facing a long painful recovery? While you also need to think about how much you can afford to pay each month for car insurance, you should also consider how much you would need if the worst happened.

I Live in a No-Fault State; Do I Need Insurance?

“No-fault” simply means that, in certain states or with certain kinds of coverage (usually "personal injury protection" or PIP) there is no need to determine who is a fault in the accident in order to receive payment for claims from the automobile insurance company. Instead of seeking payment or filing a lawsuit against the driver who caused the accident, in a no-fault state, drivers would seek recovery from their own PIP coverage.

That's often the exclusive remedy, especially after a minor accident, but in every no-fault state there are circumstances under which an injured person can step outside the no-fault system and file a liability claim or lawsuit against the at-fault driver, usually after the claim has exceeded a certain dollar threshold, or injuries resulting from the accident qualify as "serious" under a statutory definition. Learn more about no-fault car insurance.

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