How Does Car Insurance Work?

Depending on the policy you choose, car insurance can provide financial protection in the event your car is damaged or stolen, you’re injured in an accident, or you’re at fault for an accident that causes bodily injury or property damage. Car insurance can also help you meet any minimum coverage requirements mandated by your state or required by a lender.

On this page we’ll cover some of the most common types of car insurance and offer some tips for deciding how much coverage you need and finding the most affordable car insurance available to you.

What Is Car Insurance? 

Car insurance helps in providing financial protection if you’re in a car accident, your vehicle is damaged in a non-collision event (e.g, a falling tree, hail, etc.), or your car is stolen. In exchange for a premium – the amount of money you pay for your policy – the insurer will pay for covered expenses. Depending on the type of policy you choose, this can include property damage or bodily injuries you or another driver or passenger sustained.

Every policy is based on limits, or the maximum amount the insurance company will pay on a claim. Some types of coverage also carry deductibles, or the amount you have to pay before the insurer will cover remaining costs.

There are several types of car insurance available, and you can customize a policy to get the insurance coverage you need.

Kinds of Car Insurance Coverage

Liability Insurance

Liability coverage pays for costs associated with an accident for which you’re found legally at fault. Generally there are two types of liability coverage which includes:

  • Bodily injury: This covers the expenses related to injuries or death for others (e.g., another driver, their passengers, or a pedestrian) when you are at fault. 
  • Property damage: This covers the expenses for repair or replacement of others’ property (e.g., fencing, a home, etc.) you damage when operating your vehicle. 

Most states require drivers to carry a minimum amount of liability coverage before they can register and operate a vehicle in that state. You can find out how much liability coverage you need by visiting your state’s Department of Motor Vehicles (DMV) or by visiting our Auto Insurance by State guide.

Uninsured Motorist Coverage

Uninsured motorist coverage provides financial protection if you are hurt in an accident and the other driver doesn’t have car insurance. Depending on where you live, this coverage may extend to cover property damage. Uninsured motorist coverage also pays if you are the victim of a hit-and-run.

Your state may require you to carry a minimum amount of uninsured motorist coverage. You may also want to consider underinsured motorist coverage, which typically pays the difference between your expenses and the policy limit of the driver at fault. However, in some states, underinsured motorist coverage is not applicable unless your underinsured motorist limits are greater than the liability limits of the other drivers.

Personal Injury Protection (PIP)

Also called “no-fault” coverage, this insurance pays the medical expenses for you or your passengers if you are injured in an accident, regardless of who is at fault. PIP may also apply if you’re riding a bike and hit by a vehicle. In some cases, PIP coverage may reimburse you for lost wages and expenses for tasks you can’t perform while recovering such as house cleaning.

PIP is generally optional, and isn’t available in every state. However, some states, like New York and Texas, require drivers to carry PIP. As always, check with your state’s DMV to determine if PIP is available in your state and if you are required to carry it.

Medical Payments Coverage (MedPay)

Like personal injury protection, MedPay pays the medical bills for you and your passengers for injuries sustained in a car accident, regardless of who is at fault. However, unlike PIP coverage, MedPay does not cover any additional or related expenses, like lost wages. MedPay is only required in Maine and Wisconsin. Elsewhere, MedPay is optional coverage you can purchase with your standard auto insurance policy. However, it is not available in all states.

Collision Coverage

Collision coverage pays for repairs if your car is damaged during a car accident or if it collides with another object like a building or tree, even if you’re at fault. It may also cover damage from potholes. 

Comprehensive Coverage

Comprehensive coverage pays for damage to your car that occurs during an event that’s not a car accident or collision with another object. Examples of covered losses include hail damage, damage from falling objects, a cracked or shattered windshield, vandalism, or damage from an animal.. It also reimburses you if your car is stolen.

Insurance Extras

To ensure you have the coverage you need, many auto insurance companies offer additional insurance add-ons and policies for purchase, including:

  • Roadside assistance: If you have a flat tire, need a tow, or are locked out of your car, this coverage reimburses you for services to get you moving again. 
  • New-car replacement: This type of coverage will pay to replace a totaled vehicle with a new one of the same make and model. Coverage is typically limited to vehicles that are relatively new – two years old, for example – but the cutoff varies by insurer.
  • Mechanical breakdown insurance: If your car breaks down and your manufacturer’s warranty doesn’t cover the repairs, this coverage will. 
  • Rental reimbursement: This add-on will cover the cost of a rental vehicle while your car is undergoing repairs.
  • Rideshare insurance: If you drive for a ridesharing company, this insurance provides additional coverage if you’re in an accident while working. 
  • Gap insurance: If your car is deemed “totaled” following an accident and you owe more on your car loan than the insurance company will pay, gap insurance will pay the difference.

How Much Car Insurance Do I Need?

To determine how much car insurance you need, start by looking at your state’s requirements. Most states require drivers to carry liability insurance, but some require additional types of coverage, like uninsured motorist coverage or PIP. Similarly, If you finance or lease your vehicle, it’s also best to check with the lender or lesser to determine what type and amount of coverage is required as part of your loan or lease agreement.

Keep in mind these are starting points and insurance coverage needs vary. If you don’t feel you’d be able to afford liability, medical, or legal expenses after an accident, it’s a good idea to consider purchasing a policy that will protect your assets.

How Much Does Car Insurance Cost?

According to our most recent data, the national average cost of auto insurance for 2022 is $1,553, though your rate can be higher or lower. To determine your rate, car insurers factor in things like your age, location, driving record, vehicle type, and your credit score. .

An accurate car insurance estimate also takes into account how much coverage you purchase and the deductible and limits you choose. The key to finding the cheapest car insurance company is to shop around with at least three different auto insurance companies.

The Cheapest Car Insurance Companies in 2022

Average Annual Rates:

  • USA: $1,000
  • Geico: $1,148
  • State Farm: $1,267
  • Nationwide: $1,327
  • Travelers: $1,371
  • American Family: $1,371
  • Progressive: $1,533
  • Farmer: $1,917
  • Allstate: $2,047

Are you overpaying for auto insurance? Find the cheapest insurance for you in our ranking of the Cheapest Car Insurance Companies of 2022.

How to Save Money on Your Auto Insurance

Car insurance can be expensive, but there are many ways to save money on your auto insurance.

  • Change your deductible and/or policy limits: Raising your deductible will lower your premiums. Also, if you lower the limits your policy will cover, it will lower your premiums. 
  • Ask for discounts: Many people know they could receive a discount for bundling their car insurance with their homeowners insurance, but there often are many more discounts available. Ask about discounts for automatic payments, taking a defensive driving course, or being claim free in recent years.  
  • Shop around: Auto insurance companies price car insurance differently, so get quotes from at least three different companies.
  • Improve your credit history: Car insurers often provide better rates to drivers with good credit. 

Frequently Asked Questions

How do I file a car insurance claim? 

Filing a car insurance claim can be overwhelming, and each insurance company has their own process and tools in place. However, there are some things you can do to make the process easier.

  1. Immediately call your car insurance agent. Explain what happened, and find out what your policy covers as well as any deadlines for filing a claim. 
  2. Gather required information. Depending on the nature of your claim, you may need to include a police report, photos of the damage, and the names and information of anyone involved in the accident. Your insurer should be able to provide you with a list of information or documents you need to include. 
  3. File a claim. You can usually submit an official claim over the phone or via your insurance company’s website or mobile app. 
  4. Ask about a rental car. If your policy covers a rental car, find out the process for getting the car or reimbursement.

Why are car insurance claims denied?

These are the three most common reasons insurance companies deny claims:

  • The driver is someone who lives with you or has access to your car and is of driving age but not on your policy.
  • You were using your personal car for business purposes at the time of the accident.
  • The car isn’t “garaged” at your house. This isn’t about the car being in your garage literally. It means that a car is insured on your policy, but it’s owned and kept at someone else’s address.

Insurers will also deny claims for what could be called self-inflicted damage. That includes damage done while off-roading or at the track. And almost no auto insurance policy (or warranty, for that matter) covers wear and tear – it’s a waste of time to file a claim for worn-out parts like brakes or seals.

Do insurance rates go up after I file a claim?

While car insurance rates may increase after a file is claimed, that’s not always true. Car insurers will look at the type of claim as well as who was at fault. If you were at fault, it’s likely your rates will go up, according to the Insurance Information Institute.

Do I need insurance if I’m not driving my car? 

If you own a car but don’t drive it, it may still be a good idea to purchase or keep your existing car insurance policy.

Most states have laws that require drivers to insure any vehicle that’s registered with the state. Failure to do so can result in fines and other penalties. Another thing to consider is whether or not you finance your vehicle. It’s likely your lender will require you to carry full coverage – usually liability insurance, comprehensive coverage, and collision coverage – until the balance of your loan is paid in full.

Even if there is no legal reason for you to keep your policy, there are benefits for doing so. Many insurers see a lapse in insurance coverage as a risk. That means you may pay more for coverage when it’s time to hit the road again. And, if your car is stolen, vandalized, or otherwise damaged while it’s parked, an insurance policy may protect you from the financial fallout.

If you’re not going to be driving, it’s a good idea to contact your insurance agent to see what options you have. They may be able to help you change your policy and lower your premiums until you’re behind the wheel again.

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