Q

What is car insurance and how does it 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.

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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.

&

Rachael Brennan

Rachael Brennan

Property and Casualty Insurance Expert

Rachael Brennan is a senior insurance editor at Policygenius, specializing in auto insurance. She worked for 21st Century Insurance, BlueCross BlueShield Massachusetts, and HealthPass New York. She also spent two years working as a content expert for dozens of auto insurance websites through 360Quote LLC.

Updated October 7, 2021|4 min read

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Car insurance can cover all kinds of unexpected damage, from injuries you cause in an accident to damage that can happen to your own car. It’s also mandatory — drivers are legally required to carry a minimum amount of liability coverage in most states, which covers damage and injuries you’re liable for if you cause an accident. 

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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 covers the damage to the other driver’s car when you’re responsible for causing an accident

  • Car insurance can also pay to fix your car if it is damaged in a collision or by a non-driving hazard, like hail or vandalism

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

  • You can buy car insurance directly from an insurance company or through an independent marketplace like Policygenius, where you can compare multiple quotes at once

What is car insurance?

A car insurance policy is essentially an agreement between you and the insurance company. You agree to pay a monthly or annual premium and the car insurance provider agrees to pay for claims, up to the limits of your policy.

How does car insurance work?

Your car insurance pays for damage you cause to another person’s property, or an injury you cause to other people with your car. You need to choose a coverage limit for your liability insurance. You can choose to buy the state minimum levels of liability insurance, but choosing higher levels of coverage can protect you from having to pay tens of thousands of dollars or more out-of-pocket in the event of a serious accident.

You put your car insurance to work by filing a claim. 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 insurance company may pay you directly; otherwise, a payment may be made to the other driver or to the mechanic fixing your car. If your car is a lease, a claim may be paid to your leaseholder or creditor.

Do I need car insurance?

Yes, every driver should have car insurance, even when it’s not specifically required by law. Drivers are legally required to have car insurance in every U.S. state except New Hampshire and Virginia. 

However, drivers in both of those states are still financially responsible for any damage they cause in an accident, and the best way to make sure you’re protected is to have a car insurance policy. Driving without car insurance is against the law in most states, and can result in fines or even in the loss of your license.

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.

→ Learn more about how much car insurance coverage you need

What does car insurance cover?

Car insurance is broken into various types of coverage, allowing drivers to build a policy that meets their needs. For example, someone with an older vehicle that is completely paid for may only want liability coverage and roadside assistance, while someone with a newer, more expensive car may want liability, comprehensive, collision, gap insurance, and roadside assistance.

Type of CoverageWhat does it do?Who needs it?
LiabilityPays for damage or injuries you cause to other people and their property. Divided into two parts: bodily injury liability and property damage liabilityEverybody
ComprehensivePays to repair or replace your car when it is damaged by falling objects, vandalism, storms/weather, animals, or theftPeople who cannot afford to replace their car out-of-pocket, people who have a loan for their vehicle
CollisionPays to repair or replace your car when it is damaged in a collisionPeople who cannot afford to replace their car out-of-pocket, people who have a loan for their vehicle
Personal Injury Protection (PIP)Pays for you and your passengers’ medical expenses after an accident, regardless of who was at faultPeople in no-fault states, people who are concerned about having the funds to pay for medical bills after an accident
Uninsured/Underinsured Motorist (UM/UIM)Pays for medical costs when someone else causes an accident and doesn’t have the insurance they need to cover itPeople who want extra protection if they are hit by an uninsured or underinsured driver
Roadside AssistancePays for emergency services when you’re stranded on the side of the road, including towing, tire changes, and gas, oil, or battery deliveryPeople who want extra protection if they break down on the side of the road
Gap CoveragePays the difference between what you still owe on a loaned or leased car and it’s depreciated value if it gets totaledPeople who have a loan or lease on their vehicle

Drivers who want to have coverage for their own car in case it’s damaged by collisions, theft, vandalism, bad weather, etc. can choose to purchase comprehensive and collision insurance (if you have a leased or financed car, you’re probably required to add these coverages). Unlike liability insurance, these coverages require you to choose a deductible

→ Learn more about what car insurance covers

What does car insurance not cover? 

Car insurance covers most types of damage that are sudden and accidental, but damage that occurs slowly over time is not covered, nor is standard required maintenance. This includes:

  • Maintenance problems, like faulty wipers or a malfunction steering system

  • Regular wear and tear like worn-out tires

  • Mechanical failure or engine failure

  • Electrical breakdown

However, you may be able to get coverage for regular repairs through mechanical breakdown insurance (MBI) if it’s offered by your insurance company. MBI pays for damage to the mechanical parts of your car, covering anything from new brakes or engine parts to sending someone over to fix a blown transmission. But coverage can be pricey, and could raise your premiums by hundreds of dollars a year.

→ Learn more about what car insurance doesn’t cover

How to buy car insurance 

Comparing quotes from multiple companies is the best way to make sure you are getting the cheapest rates and the best coverage for you. The insurance experts at Policygenius can provide you with quotes from a variety of companies and help guide you through the insurance buying process.

No matter where you choose to buy insurance, there are several steps you should take, including: 

  1. Figure out how much car insurance coverage you need

  2. Fill out an application, including things that might impact your rates like your age, your ZIP code, and your driving history

  3. Get your quotes and compare coverage options and rates

  4. Pick a car insurance company and get insured

  5. Cancel your old car insurance policy

If you’re switching car insurance companies, you should make sure you have your new policy in place before canceling your existing one. That way, you can avoid a lapse in coverage, which could raise your rates significantly when you go to apply for insurance.

→ Learn more about how to buy car insurance 

How are car insurance rates 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 extensive damage.

  • Age and gender: 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:  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: Drivers with poor credit 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. However, some states have laws preventing insurance companies from rating you based on your credit history.

  • Insurance history: If you’ve let your car insurance lapse or filed claims frequently (even if the accident wasn’t your fault) 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, 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.

    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.

    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.

    How can I find cheap car insurance?

    The best way to find cheap car insurance is to compare quotes from multiple companies. Where one company might charge you $120 a month for car insurance, another might charge you $80 for the same coverage. If you want the cheapest car insurance regardless of your insurer, you should look for any available discounts, or set higher deductibles for comp and collision coverage.

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