If you drive a car, car insurance is an absolute necessity. It is important that you know all of the basics when you decide to insure your car. Everyone is familiar with the concept of car insurance, but not everyone knows everything that they need to know to make good decisions.

At its most basic, an insurance policy is no more than a simple contract between a car owner and an insurance company. The contract protects your financial interests in case you are involved in an automobile accident. Every state except Wisconsin and New Hampshire have laws that require a minimum amount of insurance coverage for every driver. Instead of minimum insurance coverage laws, Wisconsin and New Hampshire require that all drivers provide proof that the can pay for any damages incurred in an accident. If the driver does not have the necessary funds available, insurance is required.

There are six basic types of car insurance. Some types are required by local laws, but others are available at the discretion of the driver. The basic types of car insurance are collision, uninsured/underinsured motorist, bodily injury liability, personal injury protection, property damage liability and comprehensive coverage insurance.

Liability coverage is usually required for all drivers. With liability insurance, your insurance will cover the expenses of another driver if you are at fault in an accident. In addition to paying for any damage to the other vehicle,liability insurance will cover any medical bills the other driver may incur and your legal fees will be covered as well. Liability insurance is required in every state. This ensures that drivers will not be stuck with high repair fees or medical bills if they are involved in an accident that is not their fault. While states require a minimum amount of liability insurance, it may not cover the expenses completely if you are in a serious accident.

If you purchase collision coverage insurance, your insurance company will pay for your repair bills if you are at fault in an automobile accident. Collision coverage will pay for repairs or you may receive your car's actual cash value. The actual cash value is usually not the same as the replacement cost. Collision coverage is usually the costliest of all of the components of your insurance package. If you want to carry collision coverage but are worried about your premium, a high deductible can lower your payments.

A good addition to collision coverage is comprehensive coverage. If your car is ever damaged in an incident that is not traffic related, such as damages from a tornado or flood, vandalism or collision with an animal, comprehensive insurance coverage will pay your expenses.

While none of the states require comprehensive or collision coverage, if your car is financed, you bank or financial institution may require that you carry these types of insurance policies. This protects the loan owner from bearing the financial burden if a car owner defaults on a loan for a car that is irreparably damaged.