How Does Car Insurance Work?
Most states require drivers to carry auto insurance. A policy has a lot of parts that we can help you understand.
Auto insurance works by providing financial relief after damages and injuries involving your car. While this may seem simple, there's more to it. You have various coverage options, price points and companies to choose from.
Regardless of the company or type of car insurance you choose, each policy works in a similar fashion. You'll typically pay a monthly or annual premium for coverage. If you experience a covered peril, you can then file a claim for damages or injuries against your auto insurance policy up to its limits.
Learn how car insurance works:
What to know about car insurance
Except for a few states, having auto insurance is required by law. State requirements usually focus on liability insurance, which only pays for injuries and damages that you cause to others. There are other coverages available to protect you and your car. These include comprehensive, collision, personal injury protection and uninsured/underinsured motorist coverage.
When you're buying auto insurance, you'll pick the types of coverage you want, as well as your policy limits, based on your needs and budget. Once your car insurance policy is finalized, you can then file claims and get compensated in the event of a covered peril.
Choosing between minimum and full-coverage insurance
When choosing a policy, you may hear the terms minimum and full coverage.
Almost every state requires drivers to carry car insurance. This legal minimum insurance, also known as minimum coverage, typically offers liability insurance, which only covers damages and injuries you cause to others.
"Full coverage" isn't an actual type of car insurance. It's a term for a combination of coverages; comprehensive, collision and sometimes others, that helps pay for your damages and injuries after a crash. Full coverage costs quite a bit more than minimum coverage, since minimum coverage doesn't cover your injuries or damages.
Average cost: $53 per month
- Medical costs from auto-related injuries you cause to others.
- Repair or replacement of property you damage.
- Your court costs that occur due to litigation.
Average cost: $105 per month
It can include:
- Collision insurance to cover your own damages from a car crash.
- Comprehensive insurance that covers damage from something other than a collision.
- Other insurance, like personal injury protection and uninsured motorist coverage.
Other types of car insurance coverage
Personal injury protection
Also known as PIP, personal injury protection takes care of medical costs for you and passengers in your car after an accident. It also covers required rehabilitation therapy and lost wages. PIP is no-fault insurance, meaning it kicks in no matter who is at fault for an accident — that is either required or offered as optional coverage in 20 states.
Uninsured/underinsured motorist coverage
In order to protect yourself if you get into a crash with a driver with insufficient or no auto insurance, uninsured/underinsured motorist coverage can make sure you don't pay a large sum out of pocket. It can be especially useful if you get hurt in a hit-and-run accident.
Rental car reimbursement
Also known as loss-of-use (LOU) coverage, this type of auto insurance covers rental car costs while your vehicle is in the shop after you make an auto insurance claim.
How does my auto insurance policy work?
Regardless of what type of car insurance you select, the nuts and bolts of each policy are pretty much the same. The main parts of an auto insurance policy you'll probably deal with are:
- Claim: After a crash or other auto-related accident, you'll file a claim to get compensation. During the claim process, your provider will assess the damage, see how much of the damage is covered by your policy and calculate how much you will be paid out.
- Premium: This is the amount you pay in order to keep your car insurance policy active. Auto insurance providers usually require you to pay your premium monthly, biannually or annually.
- Limit: Every type of auto insurance has a maximum amount it will pay out on a claim. For example, say your liability coverage has a limit of $100,000 in bodily injury protection per person. If you hit someone with your car and the medical bill comes to $125,000, you're responsible for paying the remaining $25,000. Your auto insurance limits can be found on your policy's declaration page.
- Exclusion: Each auto insurance policy type has specific perils that are expressly not included in your coverage. This is often due to insurers trying to keep overall premium costs down, or because another kind of auto insurance policy covers the peril already. Your policy exclusions should be clearly listed. However, you should make sure to go over your coverage with your auto insurance company before you commit to a policy. Make sure you're not missing any coverage you need.
- Deductible: Your deductible is the amount you agree to pay towards a claim before your car insurance provider covers the rest. Common deductibles are $500 or $1,000 per claim. This means that if you have a $1,000 deductible and make an $8,000 claim, your insurer would cover $7,000 of the claim.
What factors affect your auto insurance premium?
Your auto insurance premium will likely take the biggest bite out of your budget, so you should know how it's calculated. Full coverage auto insurance costs $1,255 a year, on average. This rate is affected by:
- Your personal driving and insurance records: Auto insurers work hard to mitigate their risks, and they reward drivers whom they perceive as less risky. The cleaner your driving record and the fewer insurance claims you have made in the past, the lower your premium typically is.
- Your deductible: The higher your deductible, the lower your annual premium usually costs. If you can afford a high deductible, it may save you a significant amount of money over the long term.
- Your coverage limits: If you raise your auto insurance coverage limits above the basic minimum limits offered, your premium will rise accordingly. For many types of auto insurance, the premium increase may be quite low in comparison to the increase in coverage. It's worthwhile to at least consider higher coverage amounts for your peace of mind.
- Your location: If your ZIP code has a high crime rate, a history of traffic accidents or extreme weather patterns, your auto insurance costs may be higher.
How much car insurance coverage do I need?
You need to have the minimum liability insurance required by your state. However, this may not be enough to protect all of your assets in the event of an auto accident. States do not update their required liability limits often, and they may not reflect the actual costs that can occur.
Because of this, we recommend increasing your liability limits if your budget allows for it. For example, $100,000 in bodily injury protection per accident tends to be a common minimum coverage in many states. This seems like a lot of money until you have to pay for an extended hospital stay or a long court case. Either of these events can tear through $100,000 quickly, leaving you to pay the rest out of pocket. If possible, increase your liability limits to the following:
- $100,000 in bodily injury coverage per person.
- $300,000 in bodily injury coverage per accident.
- $100,000 in property damage coverage.
While state law doesn't require collision or comprehensive insurance, your lender will probably require it if you financed your vehicle. This is so they can protect their investment. Your lender will let you know what limits they require. Even if you buy your car on your own, full coverage can be an excellent investment if the car is new.
How do I buy auto insurance?
Once you know the coverage limits and budget range you need in a car insurance policy, it's time to start shopping around. One easy way to buy car insurance is to go online and compare quotes from different providers. You can also check out individual auto insurance companies and independent providers. The more options you explore to find your best auto insurance quote, the higher your odds of finding the best policy for you.
Compare rates from top car insurance companies
Basic auto insurance policies tend to have standard coverage options. This means you'll want to look at each provider's pricing, additional benefits and discounts. It's also a good idea to look at each insurer's customer satisfaction trends. Consumer review sites like J.D. Power, as well as other online review sites, provide great starting points for comparison.
QuoteWizard.com LLC has made every effort to ensure that the information on this site is correct, but we cannot guarantee that it is free of inaccuracies, errors, or omissions. All content and services provided on or through this site are provided "as is" and "as available" for use. QuoteWizard.com LLC makes no representations or warranties of any kind, express or implied, as to the operation of this site or to the information, content, materials, or products included on this site. You expressly agree that your use of this site is at your sole risk.