Q

How does car insurance work?

A

Car insurance is financial protection in case you cause an accident with your car, or in case your car is damaged or stolen. You pay for a certain amount of coverage, and as long as your policy is active, your insurance will kick in if needed.

Anna Swartz 1600Stephanie Nieves author photo

By

Anna Swartz

Anna Swartz

Insurance Expert

Anna Swartz is a Managing Editor at Policygenius, specializing in auto insurance. Her work has appeared in Mic, The Dodo, AOL, MSN, HuffPost, Salon and Heeb.

&

Stephanie Nieves

Stephanie Nieves

Property and Casualty Insurance Expert

Stephanie Nieves is an insurance editor at Policygenius in New York City, specializing in home and auto insurance. Her work has appeared in Business Insider, PayScale, Fairygodboss, and The Muse.

Updated June 18, 2021|11 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our

editorial standards

and how we make money.

Car insurance is essential financial protection for you and your car. When you cause damage or injure someone in an accident, car insurance covers the costs. Car insurance can also reimburse you if your car is damaged or stolen.

Ready to shop car insurance?

Start calculator

You use your car insurance by filing a claim (or a claim can be filed against you, if you hit another driver). Your insurance company will evaluate the damage to your car, or the damage you caused, and pay out to the appropriate party. In order to keep your car insurance policy in-force, meaning active, you’ll have to pay your monthly car insurance premiums on time and in-full.

Key Takeaways

  • Car insurance is financial protection for you and your car, it basically pays for any damage you cause in your car, or any damage to your car itself 

  • To keep your coverage active, you have to pay a monthly or annual premium

  • There are several coverages that make up a car insurance policy, including liability, comprehensive and collision 

  • There are some things car insurance will not cover, like regular maintenance issues

What is a car insurance policy?

A car insurance policy is essentially an agreement between you, the policyholder, and an insurance company. You agree to pay a monthly or annual premium, and the car insurance provider agrees to protect you financially from any covered losses.

Your car insurance protects you from the financial liability of damage you cause to another person’s car, or an injury you cause to other people with your car. It can also protect you from damage to your own car, including damage from collisions, theft, vandalism, and bad weather.

When you purchase car insurance, you have to set coverage limits or choose a deductible amount for every coverage in your policy. To do this, you’ll need to consider both the types of coverage you need, and how much of that coverage you’ll require.

You’ll need your car insurance if you cause an accident or if your car is damaged or stolen. You put your car insurance to work by filing a claim, which is how you redeem your coverage. If the incident is covered, your insurance company will pay for the cost of the damage you caused, or the damage to your car, depending on the situation.

The insurer may pay you directly; otherwise, a payment may be made to the other party, to the entity servicing the car, or to the medical providers treating the other party’s injuries. If your car is a lease, car insurance claim payments may be made out to your leaseholder or creditor. 

Is car insurance required?

Yes, every driver needs car insurance even when it’s not specifically required. Drivers are legally required to have car insurance in every U.S. state except New Hampshire and Virginia. However, drivers in both states are still financially responsible for any damage they cause in an accident, and the best way to ensure you’re protected is to have a car insurance policy. 

If you lease or finance your car, you’ll probably also be required to have more than the minimum amount of car insurance. Your lessor or lienholder may require you to have comprehensive and collision coverage to protect the car while you’re still making payments.

Driving without car insurance is against the law in most states, and can result in fines or even in the loss of your license. Even if your car is new, you need an active car insurance policy to drive it out of the lot. 

→ Learn more about car insurance requirements in every state

What does car insurance cover?

As we mentioned above, a car insurance policy is made up of different types of coverage that protect you in different situations. Here are the components that make up a typical car insurance policy:

1. Liability coverage

Liability insurance, the backbone of a car insurance policy, covers the costs if you cause an accident, damage property or injure someone with your vehicle. Liability insurance is required in most states.

2. Personal injury protection (PIP)

Personal injury protection covers medical and rehabilitation expenses if you or your passengers are injured in a car accident. PIP also covers other related expenses, like rehabilitation, or lost wages, up to your coverage limits. A type of no-fault coverage, PIP coverage can result in a payout regardless of who was driving. PIP is required in some states, while states without PIP have medical payments coverage, an optional coverage add-on that also covers injuries to you and your passengers. 

3. Collision coverage

Collision insurance covers damage to your own vehicle after an accident, no matter who was at fault. Collision insurance isn’t required by law, but, along with comprehensive coverage, collision helps make up what’s usually referred to as “full coverage” car insurance.

4. Comprehensive coverage

Comprehensive coverage covers any damage to your car that can happen when it isn’t being driven, including damage from extreme weather, falling objects, flood, fire, vandalism and theft. If you’re putting your car in storage for a significant amount of time, you can usually reduce your car insurance coverage to just comprehensive coverage, although be sure to switch it back before you get behind the wheel again.

5. Uninsured/underinsured motorist insurance

Uninsured/underinsured motorist coverage covers the costs if you’re in an accident caused by a driver who either doesn’t have insurance or whose insurance can’t pay for the full extent of the damage.

6. Gap insurance

If your car gets totaled or stolen, collision or comprehensive will usually only pay out the car’s actual cash value (ACV). But that amount, which factors in depreciation, might not cover the amount you still owe on a car loan or lease. Gap insurance is an optional coverage that pays out the difference, so you can pay off the loan or lease.

7. Roadside assistance

Roadside assistance, an optional coverage add-on, covers the types of emergencies that can leave you stranded on the side of the road, like flat-tire changes, jump-starts, fuel delivery or towing to the nearest mechanic. Roadside assistance is usually inexpensive to add to your policy.

What does car insurance not cover?

There are some situations in which you won’t be covered by car insurance. The exact exclusions in your coverage will vary based on your insurer, but you may be able to purchase additional coverage for situations that aren’t covered, like: 

  • Regular repairs - Maintenance issues and repairs for regular wear and tear are not covered by car insurance. You may be able to add mechanical breakdown coverage to help you pay for new brakes and engine parts, or fix a blown transmission or alternator

  • Ridesharing - Many auto insurance policies exclude coverage for damage that occurs when you’re driving others for a fare. Some companies offer rideshare coverage as a coverage add-on that can cover you when you’re on the clock for a rideshare company but not protected by their insurance

  • Damage that exceeds your coverage limits - Your car insurance company is only obligated to pay for damage up to your coverage limits at the time of an accepted claim, so if you cause $60,000 in damage but your coverage is capped at $50,000, you’ll be on the hook for the remaining $10,000

  • Intentional damage - If you total your car on purpose or vandalize your own car, your claim won’t be accepted and you risk being charged with insurance fraud

  • Unlicensed or excluded drivers - If you loan your car to an unlicensed driver or a driver who is specifically excluded from your policy and they get into an accident, the damage won’t be covered

How much car insurance do I need?

Almost every state requires you to have at least a minimum amount of car insurance coverage before you’re allowed to drive. However, the minimum amount of insurance required in your state won’t be enough to fully protect you. Say your state requires you have up to $15,000 worth of liability coverage, but you have an accident where you cause $50,000 worth of damages. Are you prepared to shell out an additional $35,000 once you surpass your coverage limit?

And your state may only require liability coverage, leaving your own vehicle unprotected. Unless you drive a car you don’t care about, maybe because it’s old or already damaged, you’ll want to include comprehensive and collision insurance in your policy, which cover the cost of damage to your vehicle. A policy that includes comprehensive and collision coverage in addition to liability is referred to as a “full coverage” policy. A standard full coverage policy might look like this:

BASIC COVERAGESPOLICY LIMITS
Bodily injury liability$50,000 each person, $100,000 each accident
Property damage liability$50,000 each accident
Medical expenses (personal injury protection)$5,000 each person
Uninsured/underinsured motorist$50,000 each person, $100,000 each accident
Comprehensive$500 deductible
Collision$500 deductible

Both comprehensive and collision coverages require you to set a deductible. The deductible is the amount you need to pay out of pocket before the insurance company picks up the rest of the bill.

Usually, the deductible is around $500 to $1,000, and the higher the deductible, the less you pay in premiums. But don’t set your deductible higher than what you could reasonably afford — you may actually have to pay it someday.

When choosing your car insurance limits and deductibles, think about how much you can reasonably pay out of pocket in case you cause an accident or your car is damaged, as well as the value of your car and the likelihood that it might be damaged or stolen.

Make sure to set your liability limits high enough that insurance will fully cover the costs of an accident you caused. If you’re liable for someone’s medical injury or property damage, but you can’t pay their costs, your assets could be seized to cover the amount you owe.

→ Learn more about how much car insurance coverage you need

Ready to shop car insurance?

Start calculator

The average annual car insurance premium in the U.S. is around $1,190, according to a 2021 report from the NAIC [1] . But car insurance costs are specific to every driver, which makes it hard to predict what any given person will pay for car insurance.

Let’s look at sample quotes for an average driver. Say our driver is a 30-year-old woman unmarried, with a clean driving record. She drives a 2014 Toyota Camry and lives in Minnesota, a state that falls in the middle when it comes to the average cost of car insurance in every state in the U.S.

Her quote for full coverage insurance from one of the largest auto insurers in the country came to an annual total of $1,136 for the year. That’s about in line with other average costs: AAA’s 2018 Your Driving Costs study examined the ownership costs associated with different types of vehicle and broke down the average cost of car insurance by vehicle type.

Type of carAnnual cost of car insurance
Small SUV$1,074
Medium SUV$1,102
Minivan$1,114
Hybrid$1,200
Large sedan$1,209
Electric$1,215
Medium sedan$1,232
Pickup$1,242
Small sedan$1,315

Averages aside, your premiums may be much higher or lower depending on your individual factors, like your age, ZIP code, credit score, and the make and model of car you drive. Let’s take a look at how car insurance rates are calculated.

How are premiums calculated?

When you apply for car insurance, the carrier will look into your personal details to calculate the level of risk you pose. They’re basically trying to figure out how likely you are to file a claim.

Certain factors are obvious — having a poor driving record will raise your risk factor, meaning higher premiums. But others are less obvious. Here are some of the factors that go into calculating your car insurance premiums:

  • Deductible and coverage amounts - The lower you set your coverage amounts and the higher you set your deductible, the less you’ll pay for car insurance. But remember that you might have to actually file a claim someday, and you could wind up paying that high deductible, or your low coverage amounts could leave you on the hook for high costs if you cause expensive damage. If you’re setting low coverage amounts or a high deductible just to save on premiums, consider that doing so could cost you much more down the line

  • Age and gender - Age can have a big effect on premiums — drivers under 25 pay significantly more because they’re seen as less experienced and riskier to insure. In some places, your gender will also affect premiums, although some states forbid car insurance companies from taking gender into account

  • Location -  Your ZIP code will also factor into your premiums — city drivers will pay more, because higher density means more chances for accidents, vandalism or theft. Your premiums may also be higher if you live in an area with high repair costs, or if you park your car on the street instead of in a garage

  • Credit history - It may seem unfair, or unrelated, but your credit score will also affect your car insurance rates. Drivers with poor credit will be seen as riskier to insure, and will see higher premiums. Some car insurance companies are friendlier to drivers with bad credit than others, which makes it especially important for those drivers to shop around and compare quotes

  • Insurance history - If you’ve let your car insurance lapse, meaning gone without coverage for periods of time, you’ll pay more for insurance now. And if you’ve filed claims frequently, even if they were claims for not-at-fault accidents, your rates may be higher as a result

  • Driving record - If your driving history is marked with accidents and moving violations, you’ll almost definitely see higher premiums as a result. However accidents and violations don’t stay on your record forever. Typically, car insurance companies only look at the past 3-5 years of your driving history, meaning that, once enough time has passed, an accident will “fall off” your record and won’t affect your rates anymore

➞ Read more about how car insurance premiums are calculated

How do you file a car insurance claim?

No one wants to have to file a claim with their car insurance, but accidents do happen, and this is what car insurance is for. If you get into a car accident, regardless of who was at fault, the first thing you should do is call 911. You’ll need an officer on hand to make an official report and first responders can assess everyone for injuries.

Stay on the scene long enough to exchange information with the other party and give a statement to the police officer as well as take photos of the damage for evidence. (Don’t discuss the accident with anyone besides the cop, including details such as who was at fault.)

When there are two parties at fault, you’ll want to file a claim with both your insurance and that of the other party. For bodily injuries and damage to your car caused by the other driver, their liability coverage will render a payout to you.

You may also receive a payout from your own collision insurance coverage if your car has been damaged. While it may seem counterintuitive to involve your own car insurance in another person’s obligation, your car insurance carrier can actually provide the resources you need to make sure the other party’s insurance fulfills your claim. If you’re at fault, the other party will make a claim through your car insurance company, and your provider will payout to them.

You’ll file a claim either online or by calling your representative at the car insurance company. Some car insurance companies also have mobile apps for smartphones that let you start a claim at the scene. At the scene of an accident, collect as much information as possible, including:

  • Policy numbers for everyone involved

  • Photographs of any damage and of the scene of the accident

  • License plate numbers and descriptions of the cars

  • Names of witnesses and the responding police officer

The car insurance company will assign you a claims professional, who will guide you through the process. This person, who is also known as a claims adjuster or representative, will help you gather the documents you need for your claim, but they will also make an evaluation and “adjust” the amount of money you’re owed.

A thorough investigation may be performed, including visiting the car at the body shop or reviewing your medical records related to the incident.

Once the investigation concludes, the car insurance company will make a payment. In the case of collision coverage, the car insurance company may make the payment to the body shop or car repair service to cover their invoice, in what’s called a first-party claim. (Check your state laws, however, as some states require the payment to be made to you so that you can pay for the repairs.)

When you’re claiming liability coverage, the at-fault party’s insurance will make the payment directly to you, in what’s called a third-party claim. The payment is also made directly to you with a personal injury protection claim, but the amount you can receive is dependent on how much your health insurance will already cover.

When not to file a claim

Your car insurance rates are contingent on you being a good driver. If you cause an accident, the car insurance company may reevaluate the risk you pose and raise your rates the next time your policy is up for renewal.

For that reason, you may want to avoid filing a claim, especially if the damage to your car is less than your deductible. Say you back your car into a tree, scraping and denting the bumper. Since no one else is involved, and the cost to fix the damage could be less than the deductible for your collision coverage, it might not be worth it to make a claim.

However you must file a claim if there are two parties involved. You won’t know what kind of damage the other party suffered until you receive the invoice, and you could be on the hook for tens or even hundreds of thousands of dollars.

But if you’re the only driver involved, and the damage is either minor or nonexistent, you might save on higher premiums if you just cover the bill out of pocket. If the damage is just slightly higher than the deductible, you may also consider just paying it yourself, as you’ll have to pay the bulk of it anyway.

Frequently Asked Questions

How do car insurance payments work?

When you purchase car insurance, you can pay your premium for the year upfront or in monthly increments. Most companies allow you to set up automatic payments with your credit or debit card, but you may also be able to pay through a check, a money order or an electronic funds transfer that will directly deposit money from your bank to your insurer.

What does car insurance usually cover?

A “full coverage” car insurance policy covers accidents with another driver, as well as perils like fire, vandalism, and theft. Your own medical expenses would be covered with personal injury protection or medical payments coverage. If you have roadside assistance, your car insurance will also cover any emergency services you need when you’re stranded on the side of the road.

How does insurance work when you get into an accident?

Typically, when you get into an accident, your insurance company will work with the other driver’s company to determine who was at-fault. The at-fault party’s insurance pays for the damage and injury they caused. Depending on the coverages in your policy, damage to your own car may also be covered, even if you were at fault. If you get into an accident caused by someone who doesn’t have any insurance or enough to cover the damage they caused, your uninsured/underinsured motorist coverage will pay for the damage.

What happens if I travel out of state?

Your car insurance will cover you when you travel out of state. If you get into an accident covered by your policy while out of state, and you only have the minimum coverage required by your own state, the car insurance company will make up the difference with the other state’s minimum coverage.

More about

Auto Insurance

Do I need car insurance if? Your insurance questions answered

How to tell if you should buy your own car insurance.

Read more

How long does car insurance last?

Published May 10, 2021 | 3 min read

Most auto insurance policies last six months or a year, and most policies automatically renew at the end of the policy term.

Read more

Can someone else insure my financed car?

Updated June 22, 2021 | 3 min read

Insurance and lenders likely will not allow someone else to insure your financed car, unless they can prove insurable interest in the vehicle.

Read more