Car Insurance: How It Works and Why You Need It

If you’re new to driving or thinking about switching car insurance companies, you may be asking yourself, “How does car insurance work?” Auto insurance can be complicated. But once you learn the basics, it becomes easier to understand. — Worldculturepost

Auto insurance is legally mandatory in most states. It also covers unexpected losses and helps avoid paying out of pocket. You can get the most out of your car insurance when you understand how car insurance works, what coverage is and isn’t available, and what to expect.

Key Takeaways

• Car insurance is a necessity for driving a car in the U.S.
• There are a variety of insurance options.
• Requirements for car insurance vary by state.
• The cost of car insurance varies by insurer, so shop around for the best price.
• Higher deductibles can save you 40% or more on car insurance.

Do I Need Car Insurance?

You don’t need auto insurance to have a driver’s license in most states, but the car, truck, RV, or motorcycle you’re driving must be insured. The insurance covers the vehicle and, usually, whoever is allowed to drive the vehicle.

Driving without the required car insurance can have serious legal and financial consequences, such as losing your license, going to jail, paying for accident damages, or having your car impounded. Your car insurance costs will be higher as a result.

More than six million car crashes are reported by the police every year in the U.S., including personal injury and property damage.1 Driving safely can help prevent accidents, but you’re never in full control of what happens on the road. Accidents are sometimes inevitable, as are damages or injuries.

Some or all of your auto coverage may apply to any car you might rent, in most cases. Check with your insurance company to find out how your car insurance works with a rental.

pros of Car Insurance:

1. >Makes sure you’re driving a car legally
2. Safeguards your savings and assets by covering unexpected expenses related to legal, medical, and property claims
3. Can offer “extras” for emergencies, such as rental reimbursement and towing assistance
4. Protects a valuable asset (your car) from loss or severe damage

Cons of Car Insurance:

1. Costly if you have limited driving experience
2. Only having the state minimum required by law could result in serious financial consequences if you’re at fault in a costly accident
3. Filing claims can make your annual costs go up
4. Comparing insurance offers, document language, and limitations can be confusing

Car Insurance: How It Works and What It Covers

First, you’ll receive an estimate (or quote) for the insurance cost (the premium), with several different options based on the maximum protection amounts (coverage). Coverage is based on your state requirements. For example, in some states, the insurance company is required to offer you uninsured motorist coverage.

You choose the protection (coverage) you want and pay the premium of your insurance contract (policy) in monthly, semi-annual, or annual payments.

If you have an accident or want to make a compensation claim, you exchange insurance information with the other driver and contact the police to come to the scene or ask them how to file a report.

With the right coverage, the insurance company handles negotiating and paying costs. In some cases, you'll be responsible for a small amount, known as the deductible—the amount you’ve agreed in advance to pay if you make a claim.

When you file a claim, your car insurance premium could increase on the next renewal, because insurance companies take your driving record into account when calculating your premiums. One factor is how many years you’ve had a claims-free history.

In states with “no-fault” insurance laws, each party’s own insurance company covers injury claims, no matter who is “at fault” in the accident. States initiated no-fault laws to reduce lawsuits seeking compensation. No-fault insurance states have different minimum insurance types and amount requirements.

What Does Car Insurance Cover?

At a minimum, car insurance policies cover your liability (or responsibility for an accident) for bodily injury to others and property damage you cause. Some insurance coverage is mandatory, while other types are optional.

Only buying the minimum in liability insurance could leave you responsible for thousands (or hundreds of thousands) of dollars in damages. The insurance industry recommends a minimum of $100,000 per person and $300,000 per accident in liability insurance, but this amount of coverage may not reflect consumer groups' recommendations for all customers.

Here are some common types of coverage:

• Bodily injury liability coverage: Pays for bodily injuries and other claims if you’re at fault in an accident; may include hospitalization, doctor’s visits, and legal bills. It does not pay you for your injuries but covers the other party you injured.
• Property liability coverage: Protects you from claims from damages you’ve caused to others’ personal property, such as cars, walls, fences, and other objects. It does not cover damage to your vehicle if you’ve been in an accident.
• Personal injury protection (PIP): Often required in no-fault insurance states, PIP covers injury and economic expenses and losses for you, household relatives, car occupants, and pedestrians.
• Medical payments coverage: Covers injuries due to a car accident, whether you are at fault or not, for yourself, your family members, or your passengers.
• Uninsured and underinsured motorist: Covers claims when the driver who hits you is uninsured or underinsured, or if you’re the victim of a hit and run.
• Comprehensive coverage: Covers damage, other than a collision with another car or object. Some of the risks covered include contact with an animal, fire, theft, vandalism, explosion, earthquake, windstorm, hail, water, flood, riot, and often, glass breakage.
• Collision coverage: Covers the damage to your car if in a collision with another vehicle or object.

Optional, more customized insurance coverage can include:

• Roadside assistance :Can cover towing costs, jump-starts, and help with flat tires, among other issues. Coverage varies depending on the insurer, and also known as emergency road service.
• Auto glass insurance: Glass may be included in comprehensive insurance coverage, but some insurance companies also offer full glass coverage or low- or no-deductible glass coverage.
• Rental reimbursement: Pays for a rental car while your vehicle is undrivable or being repaired due to a covered claim. Also known as rental reimbursement and transportation expense coverage.
• Custom equipment: Covers high-value car equipment, such as a stereo or custom wheels.
• Mechanical breakdown: Covers car repairs for new and leased vehicles, as an alternative to the dealer’s extended warranty.
• Rideshare insurance: Prevents gaps in coverage when a personal vehicle provides rideshare or delivery services.

How Car Insurance Is Priced

Car insurance is priced based on your personal information, driving experience, and specific details about your car. The insurance company calculates a base insurance rate, then applies discounts, credits, or surcharges depending on your circumstances. The insurance company calculates your premium for a set term, such as six months or one year.

To determine how much to charge you, insurance companies could use some or all of these factors:

• Your age, sex/gender, address, marital status, and insurability or credit score
• All the car’s drivers and their driving histories
• Accidents, tickets, or violations
• Car use (commuting, travel, business)
• Car type (make, model, and year)
• Value of the car and any car modifications
• Anti-theft devices
• The total coverage amount
• Your deductible
• Occupation, level of education, homeownership status
• Annual mile driven

A higher deductible lowers the cost of your premium. For example, your collision and comprehensive premiums may be reduced by 40% or more by increasing your deductible to $1,000, with some insurance companies.

Car Insurance Discounts

Each car insurance company offers discounts. One car insurance may offer a lower rate based on how you use your car, while another may not. Quotes from different insurance companies will give you the best price for your specific situation.

Examples of car insurance discounts:

• Payment discounts (including paying the premium in full, paperless statements, autopay)
• Plan renewal or loyalty discounts
• Good-student discounts
• Defensive-driver course or safe drive discounts 
• Discounts for bundling more than one car, or multiple policies (home, renters)
• Discounts for keeping your car in storage
• Discounts for anti-theft devices
• New car discounts
• App-based or usage-based insurance discounts
• Military, union, or other job-related discounts

If your situation changes during the year and you’re now eligible for a possible discount, call your agent to see if they can apply it; for example, now you’re a good student with straight As—and you weren’t before.

How to Get Car Insurance

First, you’ll receive a quote (or estimate) by providing an insurance company, independent agent, or broker with the required information about your car, including the make, model, and year, and your personal information. You can usually get several auto insurance quotes in a few minutes, and in most cases, get a policy issued right away or on the same day. Most insurance company websites can provide an online quote.

Before buying a new or used car, check with various insurance agents to get quotes. Some used vehicles are almost uninsurable due to costly parts or the chance of theft.

The insurance cost is fixed for a set time period (term). When the policy renews, the cost may change again if there have been changes. If you choose to change insurance companies partially through the period for a lower rate elsewhere, you may get a refund and face penalties.