How Car Insurance Works: Everything You Need to Know

Melanie Lockert
Written by
Melanie Lockert
Melanie Lockert
Written by
Melanie Lockert
Melanie Lockert is the founder of the blog and author of the book, "Dear Debt." Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Allure, Business Insider, Credit Karma, Fortune, and more. She is also the co-founder of the Lola Retreat and host of the Mental Health and Wealth show podcast. She lives in Los Angeles and enjoys jazz music, traveling, coffee, and spending time with her two cats and partner.
Courtney Mikulski
Edited by
Courtney Mikulski
Courtney Mikulski
Edited by
Courtney Mikulski
Senior Editor
Courtney Mikulski is a Senior Editor at Insurify with more than three years editing and producing personal finance content. She's experienced with insurance, credit cards, consumer lending, and banking products. Courtney works to provide easy-to-understand and actionable advice to readers looking for their next insurance provider. Her previous work with Bankrate, Reviews.com, and The Simple Dollar, helped readers make smarter financial decisions. When Courtney isn't working, you can find her hanging out with her cat or on a bike ride with her husband. She earned a bachelor's degree in journalism at Ohio University in Athens, Ohio. 

Updated January 25, 2023

Reading time: 10 minutes

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Car insurance provides a safety net and can cover the costs of property damage and injuries in various scenarios. Based on the coverage you have, you could be protected in an accident or if the weather damages your vehicle. Having the appropriate amounts of coverage can ensure you won’t have to pay for everything out of pocket. 

Quick Facts

  • Most states require drivers to have a car insurance policy with minimum liability coverage.[1] 

  • Some states may require personal injury protection (PIP) coverage, as well as minimum liability.

  • To get an auto insurance policy, you’ll have to pay a premium. If there’s an incident, you may need to file a claim and pay a deductible. 

How does car insurance work? 

Car insurance is a specific type of insurance companies offer that protects drivers and their vehicles in various circumstances. Generally, it covers medical and vehicle repair costs after an accident.[2]

Customers pay premiums in exchange for car insurance policies, which typically last six to 12 months. Policy benefits depend on the type of coverage you choose, such as liability coverage, collision coverage, or comprehensive coverage — or all of them, which is called full-coverage car insurance.[2] Liability insurance pays for damages and injuries to other parties when you’re found at-fault for an accident. Collision and comprehensive coverages protect your vehicle.

When you apply for car insurance coverage, the insurer will assess your risk through its own underwriting criteria and consider various factors when setting your premiums.[2] These factors can include your gender, location, age, and credit score.[3] 

If a covered event occurs — such as a collision with another vehicle  — you can file a claim with your insurance company. After paying your predetermined deductible, your car insurance will help cover costs associated with the incident so you can fix your car or pay for medical expenses.[4] 

See Also: The 10 Best Car Insurance Companies

What is a car insurance premium?

In order to get a car insurance policy, consumers must pay a car insurance premium. A car insurance premium is like a subscription for your policy coverage. Generally, you can select a policy length of either six or 12 months.[4] 

When paying for your car insurance premium, you can typically pay the total premium up front in one payment for a potential discount, or spread the premium over monthly payments. Insurance companies determine premiums by a set of criteria the car insurance provider considers, including your driving history, current age, location, and how much you drive.[3] 

If you file a claim and are found at fault, your car insurance premiums may increase when it’s time to renew your policy.[5]

What is a car insurance deductible?

Many car insurance policies have deductibles that you must pay before the car insurance company covers any qualified costs.[6] The deductible is a set amount, like $500 or $1,000, that you can choose and is your out-of-pocket cost when you file a claim.[7]

If you select a higher deductible, you’ll likely have a lower premium. But if you file a claim, you’ll pay more out of pocket. A lower deductible can mean paying more in premiums.[8] 

The car insurance premium is what you pay to have an active car insurance policy. The deductible is what you pay after filing a claim to access your policy’s benefits.[4] 

Read More: What to Do if You Can’t Pay Your Car Insurance Deductible

What is a car insurance claim?

After an accident or qualified incident that your insurance covers, you can file a car insurance claim. A car insurance claim is the process of notifying the insurer of the event and seeking financial assistance to cover the losses.[4] [6] 

Filing a claim can happen in different ways. If you have collision and comprehensive insurance, you may let your insurance company know details of the incident, like where it happened, when it happened, and what happened. If another driver is involved, collect their name, contact information, driver’s license, and plate number.[4] [9] Taking photos of any damage is a smart idea and may help the claims process. Then, a claims adjuster will assess the damage to your vehicle. 

Your car insurance company may share a recommended repair shop, but you can choose any repair shop you’d like.[10] Once your insurance company approves a claim, the insurer may issue you a check to pay for the car repairs or send the funds directly to the shop on your behalf.

However, if you’re at fault for an accident in an at-fault state, your insurance company will work with the other party’s insurance company to file a claim for the damage to the other driver’s property. While you might not pay up front for the damage you caused, your car insurance premiums will likely increase when you renew your policy.[5]

If you cause an accident in a no-fault state, where each party’s insurance company handles the damages and costs, you will file a claim with your own insurance company. Each party will then pay their deductibles and work with their insurance companies to assess damages and pay for repairs.

What does auto insurance cover?

What auto insurance covers largely depends on the type of policy you purchase. Generally, you can get liability-only coverage, or full-coverage options that include collision, comprehensive, and liability coverage.[2] The protections can vary, so let’s take a closer look at typical vehicle insurance coverage options available and what each covers. 

Liability

Most states have a minimum liability coverage requirement to drive on the road. This generally includes bodily injury liability and property damage liability. Bodily injury liability provides coverage in case of injury or death while property damage liability provides coverage in the event you damage someone’s property.[1] 

Liability coverage doesn’t include reimbursement for any damage to your vehicle. Every state has its own liability coverage limits that you must carry, but it may make sense to get higher limits.[4]

If you cause an accident and the other party suffers property damage or bodily injury, your liability coverage kicks in.[2] [4] 

However, it’s possible to max out your liability limits quickly and open up the possibility of the other party suing you for more to cover their medical or repair costs.[2] [4] Plus, liability coverage doesn’t provide assistance for damage or injuries to you as the driver.[11] The average cost of liability-only insurance in the U.S. is $2,362 a year, according to Insurify data.

Good to Know:

In a no-fault state, each driver’s insurance company covers the driver’s own damages, no matter who actually caused the accident. The no-fault system — which exists in 12 states — aims to help reduce lawsuits for damages.

Comprehensive

Comprehensive coverage kicks in for situations that aren’t collision-related. This coverage includes floods, fires, earthquakes, vandalism, car theft, as well as rock damage to your windshield.[12]

Comprehensive coverage is typically optional, but your lender or leasing company may require it if you financed or leased your vehicle.[4] If you have comprehensive coverage and some debris ends up cracking the windshield as you drive on the highway, you’ll be covered for the repairs.[12] The U. S. average for comprehensive coverage as of 2019 was $171.87, according to the Insurance Information Institute. 

Collision

Collision coverage comes into play in the event of a collision. This can mean a two-vehicle collision, hitting an object, backing into a pole, or even going over a pothole. Unlike liability coverage, if the accident is your fault you’ll still be covered for repairs to fix any damage due to the incident.[12] 

Similar to comprehensive coverage, collision coverage isn’t typically required, but your auto lender may require it.[4] This coverage can come in handy if you’re in a fender bender or serious accident and want to get your car properly fixed. The U. S. average for collision coverage as of 2019 was $381.43, according to the Insurance Information Institute.

Medical payments/personal injury protection (PIP)

Medical payments and personal injury protection (PIP) cover medical costs for you and anyone in your vehicle during an accident, regardless of fault.[13] Getting medical payments or PIP coverage helps ensure that you can pay any accident-related medical bills.[12] 

This coverage can also help you recoup lost wages. So if you get into an accident and need time off work to recover, PIP will cover you.[12] 

Keep in Mind:

Personal injury protection is mandatory in no-fault states states and may have minimum requirements. But even if it’s not a requirement in your state, car insurance providers must offer it. 

Uninsured/underinsured motorist bodily injury (UIM) and property damage

Uninsured or underinsured motorist coverage can provide benefits if you're hit by a driver that doesn’t have car insurance or levels of sufficient coverage to pay for any losses. This particular type of coverage can also come in handy for hit-and-runs.[12] 

Uninsured or underinsured motorist bodily injury covers costs related to your injuries if the other party is at fault but lacks appropriate coverage.[4]

Uninsured or underinsured motorist property damage can cover damage to your vehicle.[4] So if an uninsured driver hits your vehicle, this type of coverage can help pay for your injuries and repairs if needed. Your state may require this coverage, but if it doesn’t, it’s still a smart idea to protect yourself with this type of coverage.[1] 

Other optional coverages

On top of the primary coverage options listed above, you may be able to purchase additional coverage options from your car insurance provider. The cost will vary by insurer.

  • Rideshare coverage: If you drive your personal vehicle for a ridesharing app, such as Uber or Lyft, getting rideshare coverage can boost your coverage benefits on your car insurance policy. This can fill a gap to ensure you can get any repairs for damage or medical treatment if there’s an accident while you’re working. 

  • Gap coverage: Guaranteed auto protection, also referred to as gap insurance, can help you if you finance your vehicle and get into an accident. If the vehicle is totaled, gap coverage will pay any difference between the current balance on your auto loan and the car’s current value. In many cases, this is an optional add-on.[14]

  • Rental car coverage: If you rent a vehicle, your personal car insurance may cover you but it’s always best to ask. For example, having comprehensive and collision coverage may be enough and work with your rental car as well. The rental car company may still offer you specific rental car coverage that can protect you in the event of damage or theft. Some rewards credit cards also offer this coverage as a perk. 

  • Roadside assistance: If you’re stranded on the road, get locked out of your vehicle, or get a flat tire, roadside assistance coverage can help. Though it typically comes with its own deductible, your insurance company covers the rest of the cost of a tow or assistance.[15]  

  • Custom parts and equipment value: If you customize your vehicle with items that weren’t included when you bought it, you may want to get custom parts and equipment value coverage. So for example, you may put in a nice stereo and it gets stolen. This type of coverage can help cover the cost to replace it. There are generally limits to be aware of, so know what that cap is before purchasing.

Learn More: Car Insurance Discount Guide

How much car insurance do you need?

Having at least some form of car insurance is required in most states.[1] Every state has its own mandated minimums, but states typically require liability for bodily injury or property damage.[1] 

For example, California requires drivers to have coverage for $15,000 per person as well as $30,000 for an accident for bodily injury to cover another person, plus $5,000 for property damage liability.[16] Though these are minimums, you can purchase a higher level of coverage.[12]

Some states may also require personal injury protection or uninsured/underinsured motorist coverage. As an extra form of protection, you can get comprehensive and collision coverage as well.[1] 

How much car insurance coverage you need will depend on your state, finances, and type of vehicle. To be fully protected, getting enough liability coverage to protect your assets — as well as comprehensive and collision insurance — can cover your bases.[12] 

If you have an older vehicle, you may be able to carry less coverage than if you had a newer car because it’s generally cheaper to repair any damage from old vehicles.[4]

Good to Know:

The average U.S. car is more than 12 years old, according to a 2022 report by S&P Global Mobility.[17]

How to get car insurance

If you’re buying car insurance for the first time, you have many ways to get coverage. Regardless of where you apply for insurance, expect to provide information about the vehicle you want to insure as well as your personal information. This includes age, gender, address, driving history, plus any safety or anti-theft features on your vehicle.[18] 

Here’s how to get car insurance coverage.

  • Online: You can go directly to a car insurer’s website and apply for an auto insurance policy. 

  • Through an independent agent: Independent car insurance agents can work with you to find the best coverage options available. 

  • Using a quote-comparison tool: To make the researching process easier and shop around for the best car insurance coverage for your needs, consider a quote-comparison website. You can simply provide your ZIP code and some personal information to get customized quotes and see if you’re eligible for any discounts. The process is quick, typically about five minutes or less.

Car insurance FAQs

Buying a car insurance policy is important, and you may have some questions about how car insurance works. Here are some frequently asked questions about getting a car insurance policy and what is covered. 

  • Your insurance may also cover your rental car if you rent a vehicle and have a personal car insurance policy. But it’s important to clarify what exactly is covered or not. The rental car company may also offer car insurance for the rental in the forms of collision damage waiver or loss damage waiver. 

  • Depending on the type of coverage you purchase, car insurance can cover many different scenarios. Liability coverage can cover costs related to property damage or injury for the other party. Collision insurance can protect your vehicle in the event of an accident, and comprehensive coverage protects you against weather damage, theft, or vandalism.[12]

  • Usage-based car insurance charges drivers for car insurance based on how many miles they drive a day or month. It’s also called pay-per-mile, pay-as-your-drive, or pay-as-you-go coverage. Some insurers offer usage-based car insurance and may lower rates if you don’t drive your car often.[19]

  • Car insurance covers many things but doesn’t include routine car maintenance like oil changes or new tires. If your car is damaged from a qualified event — such as an accident or weather event — and you have collision and comprehensive coverage, your car insurance company may cover repairs when you file a claim.[4] 

  • To legally drive, you need a driver’s license and typically the minimum car insurance requirements from your state. So before purchasing a car, you need to buy an auto insurance policy from an insurer first. That way when you drive off the lot, you’re already insured and protected. 

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Sources

  1. III. "Auto insurance basics—understanding your coverage." Accessed January 19, 2023
  2. NAIC. "Auto Insuance." Accessed January 20, 2023
  3. III. "What determines the price of an auto insurance policy?." Accessed January 20, 2023
  4. California Department of Insurance. "Automobile Insurance Information Guide." Accessed January 20, 2023
  5. III. "Do auto insurance premiums go up after a claim?." Accessed January 20, 2023
  6. NAIC. "Consumer Glossary." Accessed January 20, 2023
  7. III. "Understanding your insurance deductibles." Accessed January 20, 2023
  8. III. "Nine ways to lower your auto insurance costs." Accessed January 20, 2023
  9. California Department of Insurance. "So You've Had an Accident, What's Next?." Accessed January 20, 2023
  10. III. "Determining your car's value and cost of repair." Accessed January 20, 2023
  11. Nevada Department of Insurance. "Understanding Auto Insurance." Accessed January 20, 2023
  12. III. "What is covered by a basic auto insurance policy?." Accessed January 20, 2023
  13. Washington state Office of the Insurance Commissioner. "Personal injury protection (PIP)." Accessed January 20, 2023
  14. Consumer Financial Protection Bureau. "What is Guaranteed Auto Protection (GAP) insurance?." Accessed January 20, 2023
  15. Texas Office of Public Insurance Counsel. "Know Your Coverage: Roadside Assistance." Accessed January 20, 2023
  16. California DMV. "Auto Insurance Requirements." Accessed January 20, 2023
  17. S&P Global Mobility. "Average Age of Vehicles in the US Increases to 12.2 years, according to S&P Global Mobility." Accessed January 24, 2023
  18. III. "What information do I need to give to my agent or company?." Accessed January 20, 2023
  19. NAIC. "Telematics/Usage-Based Insurance." Accessed January 20, 2023
Melanie Lockert
Written by
Melanie Lockert
Linkedin

Melanie Lockert is the founder of the blog and author of the book, "Dear Debt." Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Allure, Business Insider, Credit Karma, Fortune, and more. She is also the co-founder of the Lola Retreat and host of the Mental Health and Wealth show podcast. She lives in Los Angeles and enjoys jazz music, traveling, coffee, and spending time with her two cats and partner.

Learn More
Courtney Mikulski
Edited by
Courtney Mikulski

Senior Editor

Courtney Mikulski
Edited by
Courtney Mikulski
Senior Editor
Courtney Mikulski is a Senior Editor at Insurify with more than three years editing and producing personal finance content. She's experienced with insurance, credit cards, consumer lending, and banking products. Courtney works to provide easy-to-understand and actionable advice to readers looking for their next insurance provider. Her previous work with Bankrate, Reviews.com, and The Simple Dollar, helped readers make smarter financial decisions. When Courtney isn't working, you can find her hanging out with her cat or on a bike ride with her husband. She earned a bachelor's degree in journalism at Ohio University in Athens, Ohio.