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 out of pocket. But with auto insurance, if you rear end someone, your policy, not you, would pay to fix the car you hit.
Most states require a minimum amount of liability car insurance, which covers any injuries or damage you cause in an accident. 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.
Car insurance can cover the cost of damage to your car, your medical bills as well as any damage or injuries you cause to others in an accident, provided the incident is covered by your policy.
Auto insurance typically covers damages when 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 from these kinds of accidents.
What does car insurance cover?
Car insurance is designed to protect other drivers and their property as well as you, your passengers and your vehicle should you get into an accident. There are four main types of car insurance coverage that each cover different things:
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.
Liability insurance pays for repairs to the other driver's car after an accident.
There are twotypes 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 that you have a minimum amount of liability coverage or that you can prove that you are financially able to pay for damages. If you don't meet the requirements, you can’t legally drive your car and could be fined or even face jail time if you do so.
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. And if the other driver sues you, you could potentially forfeit all your assets to pay for the damages. This is whyexperts 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 both, or what’s called “full coverage car insurance.”
The only time it may not be worth it to get this coverage is if you have a cheaper car that's valued at about four to six times the policy's yearly cost.
For example, say you pay only $50 per month for a minimum liability car insurance plan. That’s great until you rear-end someone. Your car insurance company would pay the repair bill to fix the other person's car, but not your own. You could then be out thousands of dollars, depending on how much work your car would need.
But if you pay, say, $100 per month for a full coverage insurance plan, after the same accident, your car insurance company would pay to fix both the car you hit and your car.
Personal injury protection and MedPay
Personal injury protection (PIP) pays medical bills for you and your passengers after an accident.
PIP is required in several states. 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. MedPay is required in Maine, New Hampshire, and Pennsylvania, but is available as an optional add-on in many others.
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, about 1 in every 6 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 $175 per month for a full coverage policy.
The best way to find the cheapest quote for what you need is to compare quotes from several companies before purchasing a policy. Keep in mind that you'll pay more if you are a young driver, don't have a clean driving record or choose a full coverage plan over a minimum liability one.
Your car insurance policy will specify what you have to pay and what the insurance company pays in the case of an accident.
- Premium is the amount of money you are regularly billed for your car insurance policy. Payments are usually made monthly or every six months.
- Deductible is the amount of money you must pay after every incident before your insurance kicks in to cover costs. To get a lower deductible you’ll have to pay a higher premium, but it also means fewer out-of-pocket costs after an accident.
- 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
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
Avoid making any statements that imply you accept fault, and do not let the other driver know how much coverage you have.
If 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.
-
Get the other driver's name, license plate number, insurance company and insurance policy number.
- Write a brief summary of the accident on your phone.
Keep conversation to a minimum. You don’t want to make any statements that imply that you were at fault, because they may take advantage of that fact and blame you for the accident so they do not have to pay for the damage.
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 two 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.
About the Author
Analyst
Stephanie Guinan is an Analyst for ValuePenguin/LendingTree. She specializes in simplifying complex insurance topics for consumers.
She’s also worked as an award-winning data journalist and content marketing writer. Stephanie’s work has been cited by Wall Street Journal, New York Times, Rolling Stone and more.
Expertise
- Health insurance and Medicare
- Home and auto insurance
- Crunching numbers
Referenced by
- Wall Street Journal
- New York Times
- Rolling Stone
Editorial Note: The content of this article is based on the author's opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.
