How Does Car Insurance Work?
If you're a new driver or looking for a new car insurance provider, you might be wondering, "How does car insurance work?" Auto insurance can be perplexing. However, once you understand the fundamentals, it becomes much easier to comprehend.
In most states, auto insurance is required by law. It also protects against unanticipated losses and helps to avoid out-of-pocket expenses. It's simple to get the most out of your car insurance if you understand how it works, what coverage is and isn't available, and what to expect.
Do I Need Car Insurance?
Most states do not require auto insurance in order to obtain a driver's license, but the vehicle you drive must be insured. The insurance covers the vehicle and, in most cases, whoever is authorized to drive it.
Driving without the required car insurance can result in serious legal and financial consequences, such as license suspension, incarceration, accident damages, or car impoundment. As a result, your car insurance premiums will rise.
In the United States, over six million police-reported car crashes occur each year, resulting in personal injury and property damage. Safe driving can help you avoid accidents, but you never have complete control over what happens on the road. Accidents, as well as damages or injuries, are sometimes unavoidable.
How Does Car Insurance Work?
First, you'll receive an estimate (or quote) for the insurance price (the premium), with several options based on the maximum protection amounts (coverage). Coverage is determined by your state's requirements. In some states, for example, the insurance company is required to provide you with uninsured motorist coverage.
You choose the level of protection (coverage) you want and pay the premium for your insurance contract (policy) monthly, semi-annually, or annually.
If you are in an accident or want to file a compensation claim, you exchange insurance information with the other driver and call the police to have them come to the scene or ask how to file a report.
With the proper coverage, the insurance company handles the negotiating and payment of costs. In some cases, you will be responsible for a small sum known as the deductible—the amount you have agreed to pay in advance if you file a claim.
- If you file a claim, your car insurance premium may increase at the next renewal because insurance companies consider your driving record when calculating your premiums. One consideration is the number of years you've been claim-free.
In states that have "no-fault" insurance laws, each party's insurance company covers injury claims regardless of who is "at fault" in the accident. States enacted no-fault laws in order to reduce compensation lawsuits. The minimum insurance types and amounts required in no-fault insurance states vary.
What Does Car Insurance Cover?
Car insurance policies, at a bare minimum, cover your liability (or responsibility for an accident) for bodily injury to others and property damage you cause. Some types of insurance are required, while others are optional.
Here are some common types of coverage:
Bodily injury liability coverage | Pays for bodily injuries and other claims if you’re at fault in an accident; may include hospitalization, doctor’s visits, and legal bills. It does not reimburse you for your injuries but covers the other party you injured. |
Property liability coverage | Protects you from claims from damages you’ve caused to others’ personal property, such as cars, walls, fences, and other objects. It does not cover damage to your vehicle if you’ve been in an accident. |
Personal injury protection (PIP) | Commonly required in no-fault insurance states, PIP covers injury and economic expenses and losses for you, household relatives, car occupants, and pedestrians. |
Medical payments coverage | Covers injuries due to a car accident, whether you are at fault or not, for yourself, your family members, or your passengers. |
Uninsured and underinsured motorist | Covers claims when the driver who hits you is uninsured or underinsured, or if you’re the victim of a hit and run. |
Covers damage, other than a collision with another car or object. Some of the risks covered include contact with an animal, fire, theft, vandalism, explosion, earthquake, windstorm, hail, water, flood, riot, and often, glass breakage. | |
Covers the damage to your car if in a collision with another vehicle or object. |
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Optional, more customized insurance coverage can include:
Roadside assistance | Can cover towing costs, jump-starts, and help with flat tires, among other issues. Coverage varies depending on the insurer, and also known as emergency road service. |
Auto glass insurance | Glass may be included in comprehensive insurance coverage, but some insurance companies also offer full glass coverage or low- or no-deductible glass coverage. |
Rental reimbursement | Pays for a rental car while your vehicle is undrivable or being repaired due to a covered claim. Also known as rental reimbursement and transportation expense coverage. |
Custom equipment | Covers high-value car equipment, such as a stereo or custom wheels. |
Mechanical breakdown | Covers car repairs for new and leased vehicles, as an alternative to the dealer’s extended warranty. |
Rideshare insurance | Prevents gaps in coverage when a personal vehicle provides rideshare or delivery services. |
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How Car Insurance Is Priced
Car insurance rates are determined by your personal information, driving history, and specifics about your vehicle. The insurance company determines a base insurance rate and then applies discounts, credits, or surcharges based on your specific situation. Your premium is calculated by the insurance company for a specific term, such as six months or a year.
Insurance companies may use some or all of the following factors to determine how much to charge you:
- Your age, gender, address, marital status, and insurability or credit score are all factors to consider.
- All the car’s drivers and their driving histories
- Accidents, tickets, or violations
- Car use (commuting, travel, business)
- Car type (make, model, and year)
- Value of the car and any car modifications
- Anti-theft gadgets
- The total amount of coverage
- Your deductible
- Occupation, education level, and homeownership status
- Annual mile driven
Car Insurance Discounts
Every car insurance company provides discounts. One car insurance company may offer a lower rate based on how you use your vehicle, whereas another may not. Quotes from various insurance companies will provide you with the best price for your specific situation.
Here are some examples of car insurance discounts:
- Payment discounts (including paying the premium in full, paperless statements, autopay)
- Plan renewal or loyalty discounts
- Good-student discounts
- Defensive-driver course or safe drive discountsÂ
- Discounts for bundling more than one car, or multiple policies (home, renters)
- Discounts for keeping your car in storage
- Discounts for anti-theft devices
- New car discounts
- App-based or usage-based insurance discounts
- Military, union, or other job-related discounts
If your situation changes during the year and you're now eligible for a potential discount, contact your agent to see if they can apply it. For example, if you're now a good student with straight A's—and you weren't before—call your agent to see if they can apply it.
How to Get Car Insurance
To begin, you'll obtain a quote (or estimate) by providing an insurance company, independent agent, or broker with the necessary information about your vehicle, such as the make, model, and year, as well as your personal information. You can typically obtain several auto insurance quotes in a matter of minutes and, in most cases, have a policy issued immediately or on the same day. Most insurance companies' websites offer an online quote.
The insurance premium is fixed for a set period of time (term). If there have been changes, the price may change again when the policy is renewed. If you decide to switch insurance companies halfway through the period in search of a lower rate elsewhere, you may be eligible for a refund as well as penalties.