Car insurance often seems bewildering, but a little education can quickly clear up any confusion about this necessary type of coverage. Understanding how car insurance works can make you more confident about purchasing the right policy and getting the most from this coverage when needed.
Keep reading to learn what car insurance is and how it works, what deductibles are,
- Car insurance protects you financially, possibly saving you tens of thousands of dollars or more in the event of an accident.
- Car insurance covers several types of losses associated with auto accidents.
- Determining how much insurance you need can be tricky, but you generally want enough insurance to protect all your assets.
- You can apply for coverage and often have a policy in place the same day.
What is car insurance?
Car insurance covers you if you are involved in an auto accident that results in damages. It is must-have coverage for anyone who plans to climb behind the wheel and drive.
“Insurance is a tool that protects individuals from catastrophic financial loss,” says Sarah Jacobs, vice president of personal lines product development at Nationwide Insurance.
How does car insurance work?
Car insurance protects your finances in the event of an auto accident, potentially saving you tens of thousands of dollars or more.
One type of coverage reimburses you for damages you cause to other people, their vehicle or other property. Most states require you to purchase this type of coverage, known as liability insurance.
A second type of coverage reimburses you for damages to yourself and your own vehicle. Typically, this collision and comprehensive coverage, which comprise full coverage, is optional if you don’t have a lien on your vehicle. But if you have a car loan, the lender will require you to purchase a full-coverage policy.
How does a deductible work?
The deductible is the amount you agree to pay before your insurance coverage will pay for a claim. Typical deductible amounts are $250, $500 and $1,000. Generally, the higher the deductible you agree to accept, the lower your premiums will be. But you must have enough savings to pay the deductible if you make a claim.
Read more: Here’s why raising deductibles saves you money
How does car insurance work when you’re at-fault for an accident?
Jacobs says that nailing down who is at fault in an accident is a significant factor in determining which coverages apply to the claim.
“If you are at fault, the damage to the other party’s vehicle, property, or any injuries usually fall under your liability coverage,” she says.
Damage to your own vehicle would fall under what is known as “first-party coverages,” such as comprehensive or collision, depending on who is at fault and what damage was caused.
How does car insurance work if another driver hits your vehicle?
If someone plows into your car, the state where you live determines how the claim will unfold. In most states, the at-fault driver’s insurance will pay the claim. However, if you live in a state with no-fault insurance, your own insurance will pay for the damages.
How does car insurance work if you’re an Uber or Lyft driver?
Even if your car is insured, you are not covered if you use car for work.
“Most personal auto policies do not provide protection when using a vehicle for business purposes such as pizza delivery, Uber or Lyft services,” Jacobs says.
So, if you operate a rideshare vehicle, check with your insurance company about adding a rideshare endorsement.
How do you file a car insurance claim?
Insurance companies typically ask you to contact them promptly after the accident and provide details about what happened. As part of the claims process, they will ask you to provide the other driver’s insurance information and to give them photos from the accident site if you have them.
However, each insurer has its own policies for filing a claim, so it is essential to contact your insurer and learn the precise steps necessary.
Learn more about car accident claims — here’s what you need to know
How do car insurance payments work?
Regarding receiving your check, the rules vary by insurer and state. The check will often be made to you and the repair shop.
The check may go directly to your lender if you have not paid off your auto loan and your car is totaled. If someone else is at fault, the driver’s insurance company may send a check directly to you.
Check out our detailed guide on car insurance claims checks
FAQs: Car insurance
What is a car insurance premium?
A car insurance premium is the money you pay in exchange for car insurance coverage. Many insurers charge a premium based on six months of coverage. However, it’s also possible you could be charged monthly or on an annual basis.
What does car insurance cover?
Car insurance covers several types of losses associated with auto accidents.
Types of coverage include:
- Bodily damage liability. Reimburses you for damages you cause to other people, such as if you injure or even kill them in an accident. Nearly every state requires you to carry this coverage.
- Property damage liability. Reimburses you for damages you cause to other vehicles or property. Once again, nearly every state requires you to carry this coverage.
- Collision and comprehensive. Collision reimburses damages to your own vehicle that result when you crash into another car or object. It also covers damages if you flip the vehicle without hitting anything. Comprehensive reimburses damages to your car that do not result from a collision. It also compensates you if your vehicle is stolen. These types of coverage are optional, although your lender likely will require you to purchase them if you have a car loan.
- Medical/personal injury protection (PIP). Some states require you to carry these forms of coverage, which reimburse you and injured passengers for things like medical expenses and lost wages.
- Uninsured/underinsured motorist. Reimburses expenses related to accidents that involve a driver who has no insurance or inadequate levels of coverage. It also protects you in the event of a hit-and-run accident.
Read more: Types of car insurance — what do they cover and how much do they cost?
What doesn’t car insurance cover?
Exactly what insurance covers differs from driver to driver.
“Coverage can vary greatly based on the company and an individual’s options,” Jacobs says.
For example, if you do not purchase collision and comprehensive insurance, you will not be reimbursed for damages to your own car in an at-fault accident (unless you live in a no-fault state).
In addition, there are things that virtually no policy covers. Car insurance does not cover you for everyday wear and tear that occurs to your car as you drive it.
A standard car insurance policy also will not cover you for situations where you are using the car for business purposes. You need a separate business auto insurance policy or some other form of supplemental insurance for that type of coverage.
Will car insurance cover your vehicle if it’s totaled?
If your car is totaled, you will be paid for the vehicle’s current value, not the price you paid when you purchased the car. But remember — an insurance company will not reimburse damages to your vehicle unless you carry comprehensive and/or collision coverage.
Learn more: What does total loss mean and what is a total loss threshold?
How much car insurance do you need?
Determining how much insurance you need can be tricky, but you generally want enough insurance to protect all your assets. You could be sued if you severely injure someone while driving. So, being underinsured is a significant risk.
“A qualified agent can help determine your coverage needs and how to best meet those,” Jacobs says.
And if you have a lot of assets, consider purchasing umbrella insurance that can boost your overall liability coverage level.
How do you shop for car insurance?
There are several ways to shop for car insurance: Getting quotes online, getting quotes from individual insurance companies, working with an insurance broker or going directly to a company to work with an agent.
Whichever method you pursue, make sure you get multiple quotes. This is the best way to compare and contrast policies to land the best deal. Repeating the rate-quote process at least once annually can help you discover if there are better plans that can save you money.
How is car insurance priced?
Many factors help determine the price you pay for car insurance. How carefully you drive plays a significant role. A better driving record — with fewer accidents and tickets — typically earns you lower rates. And if you agree to let your insurance company monitor your driving behavior, you may get a break on your premiums if you perform well behind the wheel.
Other factors that impact price are harder to control. The type of vehicle you drive, the car’s age, where you live, and your age and gender all affect the price you pay for coverage.
How do insurers value your car?
If your car has been damaged in a car accident, the insurance company will need to determine the repair cost. This usually involves asking an insurance adjuster to inspect the damage and provide an estimate of the expected repair cost.
Insurance companies typically will use a standard guide such as the Kelley Blue Book or the National Association of Automobile Dealers’ NADA guides when assessing the value of your car.
Other factors that may be used to determine your car’s value are:
- Age
- Condition
- Mileage
- Resale value
How long does it take to get car insurance?
It takes very little time to secure an auto insurance policy online. If you look for a policy online and find one that suits your needs, you can apply for coverage and get a policy the same day. The entire process can take 30 minutes or less.
Learn more about what is car insurance premiums
Final thoughts on car insurance
There are many ways to save on car insurance, ranging from purchasing your car insurance policy from the same insurer who provides your home insurance — which often nets you a discount — to taking driver safety courses.
But perhaps the best way to save is to regularly compare and contrast quotes from multiple insurance companies and choose the most affordable carrier that offers the coverage you need.
Sources
- Understanding your Insurance Deductibles – Explained by III
- No-fault Auto Insurance – Explained by III
- How Does a No-Fault Car Insurance Claim Work – Explained by Nolo
- Who gets the Claims Check – Explained by Insure
- Understanding your Auto Insurance Coverage – Explained by III
- Understanding the Valuation and Repair Process – Explained by III
- When Is A Car Considered Totaled – Explained by Allstate
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Laura Longero
Executive Editor
Laura is an award-winning editor with experience in content and communications covering auto insurance and personal finance. She has written for several media outlets, including the USA Today Network. She most recently worked in the public sector for the Nevada Department of Transportation.
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John McCormick
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John is the editorial director for CarInsurance.com, Insurance.com and Insure.com. Before joining QuinStreet, John was a deputy editor at The Wall Street Journal and had been an editor and reporter at a number of other media outlets where he covered insurance, personal finance, and technology.
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Leslie Kasperowicz
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Leslie Kasperowicz is an insurance educator and content creation professional with nearly two decades of experience first directly in the insurance industry at Farmers Insurance and then as a writer, researcher, and educator for insurance shoppers writing for sites like ExpertInsuranceReviews.com and InsuranceHotline.com and managing content, now at CarInsurance.com.
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Nupur Gambhir
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Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service.