When it comes to living expenses, auto insurance likely tops your list of "money down the drain." You spend hundreds of dollars a year on a product that offers a low probability of benefit to you, especially if you are a safe and careful driver.

In reality, auto insurance is as essential to our lives as the automobile itself. You may be a good driver, but what about the other drivers on the road - the man who has had too many drinks, the woman talking on a cell phone, or the teen who is just not paying attention?

While auto insurance is mandatory in the United States, you do have some choice over the amount of coverage you want and some control over your insurance costs.

Key provisions to consider

The following is a list of key items to consider when purchasing your policy:

  • Bodily Injury to Others/ Damage to Someone Else's Property. These categories cover damages you cause to pedestrians or drivers and passengers in other automobiles. Typically, your insurance coverage selections page will list dollar limits per person and per accident. A conservative rule of thumb is to purchase a bodily injury to others limit equal to or greater than the sum of the following assets: home equity, cash value of your vehicle, stocks, bonds, and bank accounts. Law requires a minimum level, which is listed on your policy. You can buy additional optional bodily injury to others (i.e., to increase the limit amounts) on a declining fee basis. For damage to someone else's property, a $50,000 or $100,000 limit should be sufficient, unless you are misfortunate enough to run into a Ferrari. These two categories comprise the bulk of your yearly premium, so setting deductibles and coverage limits accordingly will afford some control and flexibility in terms of pricing.

  • Bodily Injury Caused by an Uninsured Auto. Despite auto insurance requirements, a handful of motorists drive uninsured. This portion of your coverage covers you and your passengers at the time of an accident. In many states, law requires minimum limit amounts.

  • Collision. This optional coverage will pay for damage to your auto regardless of who is at fault, such as when your auto is hit by another vehicle or your auto hits other objects that cause damage to your vehicle. The insurer covers repairs or gives you the actual cash value of your car, whichever is less. Since optional collision coverage can be among the priciest single line items on your policy, the rule of thumb is to purchase it if your car is fairly new (less than five years old), or has a moderate-to-high actual cash value (see "Saving Money on Auto Insurance" below).

  • Comprehensive. This optional coverage pays for damage to your auto caused by something other than a collision. This includes fire, theft, hail, vandalism, riots, damage caused by animals, and glass breakage. Damage caused by wear and tear, freezing, and mechanical breakdowns are not covered. Comprehensive coverage is ideal for those living in areas where natural disasters are common, in mountainous regions, and in high-crime neighborhoods. But it is expensive at $100-$150 per year.

      • Factors Affecting Insurance Rates

      • Driving record. The better your record, the lower your rate.

      • Type of car. The more expensive the vehicle, the more expensive to repair or replace it, the more expensive to insure it.

      • Where you live. A city dweller who drives in heavy traffic is more likely to be involved in an accident than someone living in a rural area with very few cars on the road. Insurance rates reflect the relative probabilities.

      • Mileage. Drivers with long work commutes or who use their car for business can expect to pay more for insurance than those who drive much less.

      Saving Money on Auto Insurance

      The following are ways to keep your auto insurance rates at bay:


      • Increase the deductible. The larger the deductible, the greater your savings. Select an amount you are comfortable paying out of pocket before insurance takes over in the event of an accident.

      • Maintain a good driving record and credit rating.

      • Watch for "overlap" coverage. If you already have a great health and disability policy, don't purchase the optional medical payments on your auto insurance. If you subscribe to a roadside service such as AAA, you may not need the optional towing and labor.

      • Consider eliminating collision coverage as your car ages: The rule of thumb is to multiply the collision premium by 8. If the actual cash value of your car is less, this optional coverage probably does not make sense.

      • Consolidate policies. Many insurance companies offer discounts on your auto insurance if you also buy home, life, disability or other insurance from them.

      • Be informed. Know what your potential rates will be for a new car. Check Consumer Reports to identify high-theft and accident rate vehicles.