How Does Car Insurance Work?
Car insurance pays for car damages and injuries after an accident.
Without insurance, you would have to pay for damages you cause. For example, if you rear ended someone, your car insurance policy, not you, would pay to fix the car you hit.
Many states require a minimum amount of car insurance. You can get higher amounts of coverage so that the policy pays for more types of things or covers larger expenses, such as if you rear-end a Ferrari.
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What is car insurance?
Car insurance helps pay for damages that result from driving or having a car.
When you have car insurance, your insurance company will pay for damage to your car, your medical bills and damage to others that you're responsible for — as long as the incident is covered by your policy.
Chances are, you won't be involved in a car crash this year, but if you are, your insurance can pay for the damage. This means you won't be stuck with a sudden bill for thousands of dollars.
Auto insurance can cover damages if you:
- Get into a car accident or fender bender
- Hit a telephone pole
- Hit a deer or other animal
- Have a tree fall onto your hood
No matter how safe and skilled a driver you are, you can't control factors like the weather, the state of the roads or the actions of other people. Your car insurance policy helps you avoid large, unexpected bills.
For example, you could pay $50 per month for a basic car insurance plan. And if you rear-end someone, your car insurance company would pay the $10,000 repair bill to fix the other person's car.
In another example, say you paid $100 per month for a full coverage insurance plan. After the same accident, your car insurance company could pay to fix both the car you hit and your car.
What does car insurance cover?
The type of car insurance determines what it covers. For example, liability insurance pays for repairs to the other driver's car after an accident. And collision coverage will pay for the repairs to your own car.
There are four main types of car insurance coverage:
Type of insurance | What it covers |
|---|---|
| Liability insurance | Other cars or people |
| Comprehensive and collision coverage | Your car |
| Personal injury protection | Your injuries |
| Uninsured or underinsured motorist coverage | Your car and injuries |
Liability auto insurance
When you cause a car accident, liability auto insurance covers damages to the other person's vehicle or their injuries.
Two types of liability coverage:
- Bodily injury liability insurance pays for another person's injuries, including their medical bills, lost wages or funeral costs.
- Property damage liability insurance pays for repairing or replacing another person's property that you have damaged, including their car, home or other object.
Most states require liability coverage or require you to prove that you are financially able to pay for damages. If you don't meet the requirements, you could be fined or even face jail time.
Minimum insurance is not always enough. If you cause an accident and the damages are more than your insurance coverage, you are responsible for paying the remainder. If the other driver sues you, you could forfeit all your assets to pay for the damages.
Because of the potential damages that can happen when driving, experts recommend that you buy enough liability insurance to cover your net worth, or as much as you can afford.
Comprehensive and collision car insurance
Comprehensive and collision coverage pay for damages to your car that are not caused by another driver.
This is different from liability insurance, which only covers damage you do to someone else or their property.
- Collision coverage pays for damage to your car when you cause an accident. If it's unclear who is at fault, collision coverage will still pay for your repairs.
- Comprehensive coverage covers damage to your car from theft, vandalism, natural disasters or other situations that aren't a collision. Despite the name, it doesn't cover everything. For example, personal items stolen out of your car are not covered.
While collision and comprehensive coverage is optional, we recommend most people purchase them both. If you don't have this coverage, you will have to pay the full cost to repair your car after an accident.
However, it may not be worth it to get this coverage if you have a cheaper car that's valued at about four to six times the policy's yearly cost.
Personal injury protection and MedPay
Personal injury protection (PIP) pays medical bills for you and your passengers after an accident.
It is often called no-fault insurance because it pays regardless of who is at fault in an accident. And because it covers your passengers' injuries, you'll have additional protection beyond your own health insurance plan.
Some PIP insurance also covers lost wages, household and child care expenses and funeral costs.
Medical payments coverage, or MedPay, is similar to PIP. MedPay, however, only covers medical and funeral costs and generally does not cover lost wages, therapy or physical rehab, as PIP does.
PIP is required in some states. Because medical bills can quickly become crushingly expensive, it is a good idea to purchase either PIP or MedPay if you can.
Uninsured and underinsured motorist coverage
Uninsured or underinsured motorist coverage will pay for damages that are caused by someone who is uninsured or who doesn't have enough insurance.
Typically if the other driver is at fault in an accident, their liability insurance should cover your repairs. However, 1 in every 8 drivers on the road is uninsured.
This means there is a good chance that you could get into an accident with a driver who doesn't have enough insurance to cover your damages.
- Uninsured motorist coverage pays for damages to your car or your injuries that are caused by a driver who doesn't have insurance.
- Underinsured motorist coverage pays any additional personal or property damages when the other driver's insurance isn't enough to cover those car repairs.
Uninsured and underinsured motorist coverage is part of the minimum car insurance requirements in Connecticut, District of Columbia, Illinois, Kansas, Maine, Nebraska, New Jersey, North Carolina, North Dakota, Oregon, South Dakota, Vermont, Virginia and Wisconsin.
Because there are so many uninsured and underinsured drivers on the road, it's a good idea to have this coverage, even if it's not required.
Add-ons to car insurance plans:
Rental car coverage helps pay for a rental car while your car's being repaired after a claim. But you'll typically need both collision and comprehensive coverage before you can add this coverage to your policy.
If another driver causes a crash, their liability insurance should help cover the cost for you to rent a similar car while yours is in the shop. Your own insurance would cover a rental car if you have rental car reimbursement and you caused the accident.
Rental car reimbursement also covers you for a comprehensive claim that puts your car out of service, such as if you hit a pole or a tree limb falls on your car.
Gap insurance covers what's left on a car loan or lease after the car is totaled in an accident or stolen.
A full coverage policy with comprehensive and collision coverage will only pay the car's actual cash value. Because a car's value drops so quickly, there is often a gap between what the car is worth and how much you owe on your car loan.
Gap insurance covers that amount, paying the difference in the event that you can no longer use your car because of theft or damages.
It is usually optional, but it may be required by your loan or leasing company.
Roadside assistance coverage means you'll get professional help when you run into common car problems, such as if you need a tow, jump start or tire change.
What are your car insurance costs?
The average cost of car insurance is $58 per month for minimum coverage. However, you'll pay more if you are a young driver, don't have a clean driving record or choose a full coverage plan.
Your car insurance policy specifies what you have to pay and what the insurance company pays.
- Premium is your bill for the car insurance plan. Payments are usually made monthly or every six months.
- Deductible is the amount of money you must pay after every incident before your insurance company begins to cover costs. A lower deductible means you'll have fewer costs after an accident, but these plans are usually more expensive.
- Limit is how much money the insurance company will spend per accident or per injury.
How much you pay for a car insurance premium depends on:
- Personal details: Age, gender and location all factor into your rates.
- Credit and driving history: If you've proven yourself responsible behind the wheel and with your money, you'll pay less for car insurance.
- Car type: It costs more to insure a new, expensive or fast car. These cars are a higher risk and more expensive to repair.
- Which coverages you include: It's more expensive if you choose more types of coverage or coverage with higher limits.
- Discounts: You can lower your rates through a variety of discounts for safe drivers, good students, military, paying up front and more.
- Number of people covered on the policy: How much you pay for a policy also depends on whether you're covering just yourself, a couple or a large family.
How car insurance works after an accident
You've done your research, compared the best quotes and purchased a policy. You hope that you never have to use it, but eventually an accident occurs and you do.
If you get into a car accident, you'll need to gather the info you need and contact your insurance company to file a claim.
Collect all relevant evidence and documentation
Did you get into an accident? Here's what you should do:
- Pull off the road to a safe place, and call the police.
- Photograph the damage.
- Write a brief summary of the accident on your phone.
- Get the other driver's name, license plate number, insurance company and insurance policy number.
Avoid making any statements that imply you accept fault, and do not let the other driver know how much coverage you have.
If you have better coverage than the other driver, they may take advantage of that fact and blame you for the accident so they do not have to pay for the damage.
Silence — except for exchanging information — is generally the best approach. The exception is if you think the other driver's life is in danger.
Reach out to your insurance company
After gathering all the relevant info, you can start the insurance claims process.
Call your insurance company to open a case. Give your insurer as much detail as possible to speed up the claims process.
It's important to submit your claim before the insurance company's filing deadline and the state's statute of limitations deadline.
Work with the claims adjuster
Once the initial call is complete, your insurance company will give the claim to a claims adjuster or claims specialist. This person is your go-to for all questions regarding repairs, medical expenses and other aspects of your coverage.
The claims adjuster will assess the damage, and determine how much money you will get to pay for repairs. They may sometimes connect you with a recommended repair shop in their network, though you're legally allowed to choose any repair shop you like.
The money offered to you is known as a settlement offer. Many states have laws requiring companies to make this offer within a certain amount of time after you file the initial claim.
You can negotiate if you feel that the settlement offer isn't enough
If the insurance company isn't paying as much as you think they should, make your case using repair estimates.
You can also take legal action if the company's counteroffer is still not enough.
Remember that the insurance company won't pay more than your policy's maximum coverage amount. You are responsible for any additional expenses after your coverage maxes out.
Frequently asked questions
How does car insurance work?
You need to have a car insurance policy before you drive the car off the lot. It must meet the minimums required in your state, and many people get more coverage to pay for more types of damages. Your car insurance pays for damages that you cause. In most cases, if someone else crashed into you, their car insurance would pay for the damages.
What are the main types of car insurance?
Liability insurance will pay for another person's car repairs and their injuries if you cause an accident. Comprehensive and collision insurance will pay for damages to your car if you cause an accident or if there's an event such as a tree falling on your car.
What does car insurance not cover?
Insurance won't cover routine car maintenance, part failures or other repairs that are not the result of an accident or event. It also won't cover more damages than the policy limits.
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