The 2 Reasons Why You Need Car Insurance

Both the state government and lenders require that you need car insurance, but for different reasons. In this article we discuss the reasons why lenders and states require car insurance. This will give you a better appreciation and understanding of why these requirements exist.

State Regulations

Most states require minimum levels of bodily injury and personal property insurance. This is because when you are driving, your actions can impact other people on the road.

Consider a fictitious example of Bad Driver Bob. One day, Bob is driving to work and collides with Unlucky Ursula. As a result of the accident, Ursula sustains a neck injury that requires a $100k surgery. Unfortunately for Ursula, Bob is not only a bad driver, but also an irresponsible one – he doesn’t have car insurance. Ursula either needs to pay for her surgery herself or sue Bob. Even if Ursula is successful in her lawsuit, Bob may not have money to pay Ursula or may declare bankruptcy – leaving Ursula on the hook for her surgery.

In this example, Ursula not only needed neck surgery, but was also now out of pocket $100k through no fault of her own! State minimum insurance laws exist for situations exactly like this. The state requires all drivers need car insurance to protect innocent victims in accidents. Although state minimum insurance is not usually enough to completely protect all drivers, it does help ensure that all drivers have some level of insurance to protect someone they hit.

Car Insurance Requirements By State

Because every state has different car insurance requirements, you will need to visit your state’s department of motor vehicles. Some sites, such as this Forbes article, provide a list of requirements by state. Requirements are constantly changing though, so if you use this Forbes article, or information from another third-party, be sure that it is accurate!

car insurance minimums by state example
Snapshot of Forbes article laying out insurance requirements.

3 States Without Car Insurance Requirements

Although in New Hampshire, South Carlina, and Virgina you do not necessarily need car insurance you should still definitely purchase it. In each state, if you get into an accident, you are legally responsible and will need to pay out of pocket!

  • New Hampshire is the only state that does not have a minimum car insurance requirement. However, if you decide to forgo car insurance, you do have to provide proof that you have sufficient funds to compensate someone in the event of an accident
  • South Carolina allows drivers to pay an uninsured motorist fee to avoid car insurance requirements. This fee, however, does not provide any insurance coverage, so in the event of an accident you will still be legally liable
  • Virginia is similar to South Carolina, allowing drivers to pay a fee instead of purchasing insurance. But like South Carolina, you may be legally liable in the event of an accident

Although South Carolina and Virgina both allow drivers to pay a fee to avoid insurance, very few drivers take advantage of this. The vast majority of drivers decide that they need car insurance regardless of state requirements!

What happens if you purchase below state minimum insurance?

If your state has minimum car insurance requirements, you must purchase at least enough insurance coverage to meet these minimums. If you purchase less than state requirements, you are driving illegally! If you are caught without enough insurance (or are caught driving with no insurance) there will likely be penalties. These penalties vary by state, but can include:

  • Fines
  • Getting your car impounded
  • Getting your license suspended
  • Potential jail time


How the Lending Process Works

When you buy a car, you will likely make a small down payment and receive a loan from a bank to pay for the rest of the car. The bank wants you to pay off the loan, but knows that not everyone will be able to. To protect themselves, the bank puts a “lien” on your car which gives them the right to repossess the car if you are unwilling or unable to pay (the lien on your car is called “collateral”).

If you are unable to or unwilling to pay off their loan, the finance company then would sell your car to try to cover the outstanding balance they are owed by your loan. Of course, you don’t want their car repossessed so over the course of the next 3-6 years you slowly pay off the loan until you finally own the car and the lien is released! But what happens if you get into a car accident and your car is damaged prior to paying off the loan?

Why Car Insurance is Required by Lenders

If you get into a car accident, the bank will have nothing to sell in the case you cannot pay your loan. Banks are naturally conservative and don’t like being exposed! In order to make your car is repaired after an accident the finance company will require that you purchase collision and comprehensive insurance which protects your car in the event it’s damaged.

Collision and comprehensive insurance repair or replace your car in the event of an accident. Unlike the liability coverage that states require, lender requirements protect YOUR property and not other people. Unlike state requirements, nearly all lenders will mandate that you need car insurance to protect themselves.


Although lender and state car insurance requirements exist, they are not typically enough to fully protect you in the event of an accident. You should understand these requirements exist, but should treat them as the minimum acceptable levels of insurance.

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