.Types of Coverage

If you own a car, you must have insurance. That's the law. In many states, auto insurance is so expensive it's been a major, bitter issue in state political campaigns. Auto insurance premiums have gone up 3 percent within the past two years and are only expected to drop 0.5 percent in 2007, according to the Insurance Information Institute.

Helping to moderate overall rates is the emergence of baby boomers into late middle age. That means fewer accidents and lower rates for them. A second factor working to lower rates is that cars have become safer.

Despite those trends, the average annual car insurance costs for Americans are estimated at $847 in 2007, according to the Insurance Information Institute. Because auto coverage and rates are highly specific, your annual premium could vary greatly from that amount. Your rates depend on:

• your age
• your driving record
• your vehicle
• the vehicle's age
• where you live

Knowing this information, you can still cut your costs. By tailoring your coverage to what you really need and then shopping around carefully, you can get a better deal on your insurance.

Three Types of Coverage

Before shopping for auto insurance, it's best to understand the different components of coverage: liability, collision and comprehensive, with each accounting for a distinct part of the premium you pay.

Both the collision and comprehensive sections of your policy, which together account for 40 percent or more of your premium, involve a deductible amount that you must pay before the insurance kicks in on each claim. Policies also might include medical payments coverage for you and your passengers, regardless of who is at fault, and uninsured motorist protection in case your car is hit by an uninsured driver.

Most policies also offer lower-cost add-ons such as rental reimbursement in case your car is incapacitated for a period of time after an accident for repair, as well as towing insurance.

What You Need

To keep costs down, figure out what types of coverage you can avoid entirely and then take just what you need of the essential sections.

Nearly all states require drivers to carry liability insurance, but in some states the amount of coverage required is quite low — say $15,000 to $25,000. No matter what your state regulates, get a policy with coverage limits of at least $100,000 per person injured and $300,000 per accident. Lower limits won't protect you because the average personal-injury award in such cases in recent years has been about $323,000, according to the Insurance Information Institute. Get at least $50,000 in property-damage-liability coverage. Though state limits are much lower, repair bills can escalate swiftly on luxury cars and other expensive vehicles.

The fastest way to cut your premium is to increase the deductible on your collision and comprehensive coverage. Raising your deductible from the common $200 or $250 limit to $500 can cut 10 to 15 percent a year from your insurance bill. Weigh these potential savings against the higher out-of-pocket expenses you'll incur if you file a claim.

For older cars, you may be able to drop comprehensive and collision coverage entirely; if the car is more than five years old, consider this option. After all, keeping up costly premiums makes little sense if the car isn't worth that much. Remember that any payout will be on the market value only of that car. As a rule of thumb, don't keep up coverage if the premium for collision and comprehensive is more than 10 percent of the retail used value of the car.

Most states require uninsured/underinsured motorist coverage, which is often $20,000 to $40,000 in protection. If your vehicle is hit by a driver who has no or insufficient insurance, this section will cover injuries to your passengers and other expenses that ordinary health insurance does not pick up. It also protects you if an uninsured motorist hits you while you're walking or riding a bicycle. You can purchase $100,000 in coverage for about $50 or less each year, but it's usually worth the cost to step up your limit.

On the other hand, you may be able to save on medical-payments coverage. Regardless of fault in an accident, this coverage will pay doctor and hospital bills — and sometimes funeral expenses — for you and your passengers. But check to see if a combination of your life and health insurance would cover these items. If so, decline this optional feature, which could save as much as $100 a year.