Why Is Car Insurance So Expensive?

Dustin Hawley | Apr 25, 2021

Before the pandemic, the rapid expansion of many major cities was also expanding the distances between home and work for many Americans. Add to this a rise in population, and the result is a growing burden on public transportation. It’s just one of the many reasons why car ownership has become a necessity for many individuals. 

why is car insurance so expensive

But the reality is, owning a car is still considered a luxury of sorts. Often, the challenging aspects of owning a vehicle extend beyond the initial purchase. Maintenance, repairs, and the seemingly endless rise in the cost of gasoline make owning a vehicle a potentially expensive venture. Then you have the price of car insurance.

The average annual insurance cost in the U.S. is $1,555, which can easily surpass all other expenses of a well-maintained vehicle. But why is insurance so pricey?

Let’s explore the reasons why car insurance is so expensive.

Why Do We Need Car Insurance?

From the moment they were introduced into the market, automobiles have been expensive products that, while being modern marvels of technology and innovation, have the potential of causing significant damage and injuries. The difficulties with collecting reparations eventually led state governments to create compulsory insurance laws to protect all parties involved. 

Under these conditions, drivers pay the insurers a monthly or yearly fee, known as an “insurance premium” in exchange for a specified degree of coverage in case of an accident. To better understand why insurance can be expensive, we need to look at the different types of coverage.

Liability Coverage

Liability or casualty coverage is the most common and usually mandatory type of insurance. It’s the most basic of policies and compensates damages for which the insured driver was held responsible. The minimum coverage amount varies between states and can be increased for a higher premium fee. 

Car insurance is split into three categories: 

  • Bodily injury per person
  • Bodily injury per accident
  • Property damage 

Liability insurance can be a budget-friendly choice (especially for owners of older vehicles), but it has limitations that you must be aware of. For instance, a low property damage limit can easily be exceeded in case of a major accident. Ensure that you have a sufficient amount of coverage in all three categories to protect yourself from the potential of a financial fallout if you were to get in an accident.

Full Coverage

The term full coverage is often misused, not to mention it is misleading. It provides drivers with a false sense of security. There’s no such thing as “full” coverage, but something close to a form of total protection can be achieved with the right combination of insurance packages. 

While liability coverage provides compensation for damages and injuries to an at-fault driver, collision coverage reimburses the costs of repairs. If nature causes damage to your car or if it's stolen, comprehensive coverage guarantees compensation. 

Uninsured And Underinsured Coverage

In an accident caused by another driver, the responsible party’s insurance company is obligated to compensate you for damages monetarily. However, if the driver does not have insurance, your only option for retribution would be pressing charges. This could lead to a long and expensive court process. 

The Insurance Information Institute estimates that roughly 13% of the drivers do not have insurance. If you take into consideration that these drivers most likely don’t have insurance because they can’t afford it, suing them for damages would be a moot point. 

In light of this reality, insurance companies have packages to protect drivers in those situations:  

  • Uninsured motorist bodily injury (UMBI)
  • Uninsured motorist property damage (UMPD)
  • Underinsured motorist bodily injury (UIMBI)
  • Underinsured motorist property damage (UIMPD)

When an at-fault driver has an insufficient amount of insurance coverage to pay your expenses, you may still need to take legal action to get the remaining amount. Both uninsured and underinsured coverages are paid out in full by your insurance company, leaving them with the task of pursuing reparations from the other party.

Loan & Lease Coverage

Loan, lease, or GAP coverage exists to protect drivers from unreasonable costs in cases where a car is totaled in an accident. The moment you purchase a new vehicle, it loses an average of 10 to 20 percent of its value almost immediately. So for a brief period, the amount you’ll owe for the vehicle is greater than its actual value. If you get involved in an accident within that time period, GAP coverage adjusts the value to make the costs more accurate and ensure drivers don’t have to come out of pocket.

So Why Is Insurance So Expensive?

To understand why insurance rates get so high, we covered the available types of coverage. So though liability coverage will allow you to drive your car legally, it’s insufficient in what it covers and won’t protect you much financially in case of an accident.

Naturally, you’d want to try and opt-in for collision and comprehensive coverage. This is where things get complicated, as you’ll need to negotiate individual clauses. When you add uninsured and underinsured coverage on top, you’re setting yourself up for a high premium.

So why are the prices for these different coverages so high? The reason is the insurance company is essentially betting on the odds of you not having an accident. Decades in the business have allowed them to accumulate vast statistics and data points on various accidents. Therefore, they can properly estimate the risks involved in a specific situation and adjust their pricing accordingly. So when you combine several insurance packages, the company needs to calculate these odds and apply them to each scenario.

One of the other reasons prices are so high is that modern vehicles have become very expensive to repair. Twenty years ago, a fender-bender at the stop sign would result in minor damages, the nature of which was often so arbitrary that neither party would even bother reporting them. But as technology has advanced and made our car more like mobile computers, a wide range of sensors, cameras, and other equipment are now built into the bumpers. So the same incident occurring today could result in thousands of dollars in damages.

Constant improvements in both active and passive safety systems have reduced accidents, but it comes at a cost - quite literally. On the contrary, older vehicles are more accident-prone and often present a greater risk of injury, which is why their premium prices aren’t much better. 


In many ways, high insurance premiums are something we need to come to terms with. It’s a necessary evil, as most states require some form of insurance to legally operate a motor vehicle. So perhaps the best way to deal with this is to change your perspective. Rather than thinking of it as a significant yet unnecessary expense, look at it as a way of ensuring your safety, both monetarily and from a health perspective. Having adequate coverage that will cover you in case of the unfortunate possibility of a serious accident, you’ll be able to have the peace of mind of knowing you’ll be taken care of.

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