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What is car insurance and how does it work?

Car insurance is a type of financial protection that covers the cost of another driver’s medical bills and repairs if you cause an accident with your car, or in case your car is stolen or damaged some other way.

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By

Andrew Hurst

Andrew Hurst

Senior Editor & Licensed Auto Insurance Expert

Andrew Hurst is a senior editor and a licensed auto insurance expert at Policygenius. His work has also been featured in The New York Times, The Wall Street Journal, Forbes, USA Today, NPR, Mic, Insurance Business Magazine, ValuePenguin, and Property Casualty 360.

&Rachael Brennan

Rachael Brennan

Senior Editor & Licensed Auto Insurance Expert

Rachael Brennan is a senior editor and a licensed auto insurance expert at Policygenius. Her work has also been featured in MoneyGeek, Clearsurance, Adweek, Boston Globe, The Ladders, and AutoInsurance.com.

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Expert reviewed

This article has been reviewed by a licensed Policygenius expert to ensure that sources, statistics, and claims meet our standard for accurate and unbiased advice.

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By

Britta M. Moss

Britta M. Moss

Property & casualty claim consultant and expert witness

Britta M. Moss, CPCU, SCLA, AIC-M, has over 25 years of insurance industry experience. In her work as a property and casualty claim consultant, she provides consultation and expert witness services in claim handling standards, practices, and norms.  She has been retained by law firms representing plaintiffs and those representing insurer defendants involved in disputes or litigation regarding coverage analysis, investigation, liability determination, damage evaluation, negotiation and settlement.  She is a graduate of The Ohio State University. 

Updated|6 min read

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Car insurance protects you from paying for another driver’s injuries and repairs by yourself after you cause a collision. Some types of insurance also pay for damage to your own vehicle. To use your car insurance, you must file a claim. Once you make a claim, your company will evaluate the damage and pay a settlement up to your policy’s limits.

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Most states and many lenders require you to carry auto insurance coverage. In order to keep your car insurance policy active, you’ll have to pay your monthly premiums on time. If your policy lapses, you’ll be unable to drive legally and pay more for coverage in the future.

Key takeaways

  • The different forms of car insurance protect you from paying for expensive medical bills and property damage yourself.

  • Liability car insurance covers the cost of other driver’s injuries and property damage after an accident you cause. 

  • Some types of car insurance can also pay to fix your car after it’s damaged in a collision or by a non-driving hazard, like a tree branch.

  • Car insurance doesn’t cover regular maintenance issues, wear and tear, or damage that’s more expensive to repair than the amount of insurance you have.

How does car insurance work?

Your auto insurance policy is an agreement between you and the insurance company. As long as you continue to pay for coverage, the provider will cover the cost of injuries, vehicle repairs, and other types of property damage.

When you purchase car insurance, you’ll choose coverage limits that determine the amount of financial protection you receive from your policy. As you increase your policy’s car insurance limits, the money you owe — called your insurance premiums — goes up.

You use your insurance when your car is damaged, stolen, or after an accident with another driver. While the source of damage and who was responsible affects how the claims process works and whose insurance pays for damage, generally you make a claim to avoid paying for the costs of an accident yourself. Also, insurance follows the car, which means if a friend or family member borrows your car and causes an accident, your insurance policy will cover the damage.

An insurance company can choose to pay you or a mechanic for the cost of repairing your car. If your car is a lease, a claim may be paid to your leaseholder or creditor.

→ Learn more about what's included in a car insurance policy

How do car insurance claims work?

You make a claim to cover the cost of injuries and property damage after an accident. An insurance claim is like making a record of the event that damaged your car that your insurance company verifies. Once you file a claim for damages and your claim is verified, your insurer can cover the costs.

Many of the most well-known insurance companies allow drivers to make claims online or by using the insurer’s app. When you initiate a claim after an accident, your insurer will ask you for the following details:

  • Contact information from any other drivers and witnesses

  • Whether anyone was injured

  • License plate numbers and descriptions of any other cars involved

  • Photos and descriptions of the scene and any damage

  • Names and details of responding law enforcement officers

During the claims process, you will have to work with an insurance adjuster. An adjuster determines fault after an accident and decides how much you’re owed for damages. If your claim is successful, you’ll get a payout for the cost of your damages and injuries.

→ Read about whether it’s better to make a claim or pay out of pocket after a crash

What does car insurance cover?

Car insurance works by paying for injuries and property damage caused by different covered sources. The damage your policy covers depends on the amount of car insurance you have and whose fault the damage was.

If you have just enough coverage to meet your state’s requirements, you have a minimum-coverage policy. A policy with comprehensive and collision coverage is called full-coverage insurance.

  • Liability insurance: Also called third-party auto insurance, liability insurance keeps you from having to pay for the injuries and damage you cause to other people and their vehicles or property. After a crash that you cause, the other driver makes a claim with your insurer for the damage. If you have enough coverage, you won’t have to pay for the damage yourself.

  • Full-coverage insurance: If you add comprehensive and collision coverage to your policy, you’re fully covered from damage that you cause to your own car (minus your deductible). Full coverage also covers the cost of repairing your car even if it’s not damaged in a collision. For example, full-coverage insurance applies to damage from weather, animals, and theft.

→ Read more about how liability and full-coverage insurance work

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What does car insurance not cover?

While full coverage car insurance provides a significant amount of protection, it doesn't cover everything; truly full coverage is a myth. 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. Though it can be expensive, MBI pays for damage to the mechanical parts of your car, like new brakes, engine parts, or a blown transmission. 

→ Read more about what car insurance doesn’t cover

What are the types of car insurance?

Whether you have minimum- or full-coverage car insurance, your policy is actually made up of various types of coverage with their own roles. Depending on your needs, your car, your driving habits, and what you can afford, you can add different types of car insurance to a basic policy.

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 Coverage

What does it do?

Who needs it?

Liability

Pays for damage or injuries you cause to other people and their property. Divided into two parts: bodily injury liability and property damage liability

Everybody

Comprehensive

Pays to repair or replace your car when it is damaged by falling objects, vandalism, storms/weather, animals, or theft

People who cannot afford to replace their car out-of-pocket, people who have a loan for their vehicle

Collision

Pays to repair or replace your car when it is damaged in a collision

People 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 fault

People 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 it

People who want extra protection if they are hit by an uninsured or underinsured driver

Roadside Assistance

Pays for emergency services when you’re stranded on the side of the road, including towing, tire changes, and gas, oil, or battery delivery

People who want extra protection if they break down on the side of the road

Gap Coverage

Pays the difference between what you still owe on a loaned or leased car and it’s depreciated value if it gets totaled

People who have a loan or lease on their vehicle

Do I need car insurance?

Drivers must have car insurance in every 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. 

Since car insurance works by protecting you from paying for medical bills and damages yourself, every driver should have coverage — even if the law doesn’t require it. 

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.

→ Read about the minimum car insurance required in your state

How to buy car insurance

You can buy car insurance directly from an insurance company, through an agent, or by using an online marketplace like Policygenius. No matter where you choose to buy insurance, there are several steps you should take: 

  1. Figure out how much car insurance coverage you need

  2. Fill out an application, including 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.

While there are a few ways you can get car insurance, we recommend comparing rates from multiple companies to get the best rate in your area. We can provide you with quotes from a variety of companies and help guide you through the insurance buying process.

→ Learn more about how to buy car insurance 

What to look for when comparing car insurance quotes

Getting car insurance quotes is easy — but knowing what to look for when comparing options can be harder. Make sure that when you're comparing policy options, you're considering:

  • Cost: This is the biggest factor for most people, but don't just compare costs for the quotes you're getting. You should also look up average rates in your city or state to make sure you're getting a good deal.

  • Coverages: Make sure you're comparing policies with the same coverages and coverage limits (it helps to know what you're looking for before you shop).

  • Policy term length: Car insurance policies usually come in 6-month or year long terms. Make sure you know what each company is offering when you're comparing quotes.

  • Third-party ratings: Check independent reviews before you pick a company, to make sure that you're choosing one that scores well for customer service and claims satisfaction.

Compare rates and shop affordable car insurance today

We don't sell your information to third parties.

What does car insurance cost?

The way that auto insurance works means that you pay more for higher insurance limits in order to avoid being seriously financially affected by high medical bills and expensive repairs after a crash. This means that the cost of car insurance depends on the amount of coverage you have. 

We found that the cost of minimum-coverage car insurance for a 30-year-old driver that meets their state’s liability requirement is $617 per year. A full-coverage policy for the same driver is $1,725 per year — $1,104 per year more. Minimum-coverage car insurance is 64% cheaper than the cost of being fully covered.

→ Read about what car insurance costs different types of drivers

How are car insurance rates calculated?

When setting rates, insurance companies use claims data to estimate different drivers’ chances of being involved in future crashes and making claims. This means that people who have been in crashes before, gotten tickets or a DUI, or don’t have much experience driving will pay more than average for car insurance.

  • Deductible and coverage amounts: The lower you set your coverage amounts and the higher you set your deductible — the amount that’s subtracted from a final claim settlement — the less you’ll pay for car insurance. 

  • 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 unless a state has laws that don’t allow insurers to set rates based on credit. Some 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 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, your rates won’t be affected anymore after 3-5 years with a clean driving record.

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.

Authors

Senior Editor & Licensed Auto Insurance Expert

Andrew Hurst

Senior Editor & Licensed Auto Insurance Expert

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Andrew Hurst is a senior editor and a licensed auto insurance expert at Policygenius. His work has also been featured in The New York Times, The Wall Street Journal, Forbes, USA Today, NPR, Mic, Insurance Business Magazine, ValuePenguin, and Property Casualty 360.

Senior Editor & Licensed Auto Insurance Expert

Rachael Brennan

Senior Editor & Licensed Auto Insurance Expert

gray linkedin icon link

Rachael Brennan is a senior editor and a licensed auto insurance expert at Policygenius. Her work has also been featured in MoneyGeek, Clearsurance, Adweek, Boston Globe, The Ladders, and AutoInsurance.com.

Expert reviewer

Property & casualty claim consultant and expert witness

Britta M. Moss

Property & casualty claim consultant and expert witness

gray linkedin icon link

Britta M. Moss, CPCU, SCLA, AIC-M, has over 25 years of insurance industry experience. In her work as a property and casualty claim consultant, she provides consultation and expert witness services in claim handling standards, practices, and norms.  She has been retained by law firms representing plaintiffs and those representing insurer defendants involved in disputes or litigation regarding coverage analysis, investigation, liability determination, damage evaluation, negotiation and settlement.  She is a graduate of The Ohio State University. 

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