What Is a Car Insurance and How Does It Work? [Coverage & Cost]

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Each responsible driver should be aware that having car insurance coverage is mandatory. But how does car insurance work? Unfortunately, due to some insurers’ complex terminology, not every driver has a complete understanding of how exactly car insurance works. This guide addresses the various types of car insurance and which one is right for you.

What Is Car Insurance?

Car or auto insurance protects you and your vehicle from unforeseen risks. You sign a contract with your insurance company in which you agree to pay premiums to be protected from financial losses resulting from an accident or some other damage to your vehicle.

The purpose of car insurance is to save you money when your vehicle is damaged by natural calamity or in an accident. It also covers the car from theft and burglary. In some cases, you may accidentally end up damaging property or hurting others, so your car insurance policy will also cover such third-party liabilities.

NOTE: According to car insurance statistics, the national average on car insurance in America was $1,517 in 2019.

How Does Car Insurance Work?

Purchasing car insurance can be uncomplicated if you find top auto insurance companies. But understanding car insurance before purchasing insurance is essential before making a deal.

You must choose the type of coverage that you need, including policy limits for injuries and damage. Then, with full coverage, you need to select a deductible—the amount you pay after an accident before the insurance company steps in to assist with your claim.

As outlined in the policy, the insurance company will pay your losses in exchange for a premium. The policy includes customized coverage amounts for each client, according to their needs and budget.

The terms of the policy are usually in 6 to 12-month timeframes and are renewable. When it’s time to renew and pay another premium, the insurance company will notify the client.

Accident Cases

How does auto insurance work if you get into an accident? The procedure for filing claims is almost identical for all car insurance companies:

  • After the accident, contact your insurance company, and they’ll direct you to the next step.
  • Collect the documentation needed to file your claim (which your insurer will help you with), including a copy of the police report and proof of claim.
  • Monitor the progress of your claim through the insurance company and follow up with the claim specialist.

What Does Car Insurance Cover?

The purpose of car insurance is to protect you from various unexpected situations on or off the road. Note these eight types of car insurance that cover different types of accidents.

Property Damage Liability Coverage

As a part of a car insurance policy, property damage liability coverage helps repair the damage you cause to another person’s vehicle. In most states, property damage liability coverage is required by law. But keep in mind that it doesn’t cover the damage to your own car.

Comprehensive Coverage

What does comprehensive car insurance do? It helps pay for repairs or replace your vehicle that is damaged in an accident or stolen. In addition, comprehensive insurance coverage covers vandalism, fire, or falling objects, such as hail or trees.

Collision Coverage

What does collision car insurance do? Like comprehensive coverage, It helps pay for repairs or replace your vehicle damaged in an accident with another car or other objects, such as trees or fences. The lender typically requires collision coverage if you’re financing or leasing your vehicle. If your vehicle is paid off, then collision coverage is optional.

Bodily Injury Liability Coverage

If you cause a car accident in which another person is injured, bodily injury liability coverage will help pay their medical expenses and lost income due to their injuries. Bodily injury liability coverage can also help pay for legal fees if you’re taken to court over the accident. In most states, having bodily injury liability coverage is required by law.

Personal Injury Protection (PIP) 

The purpose of PIP car insurance (or no-fault insurance) is to help pay for your medical bills, lost wages, and costs not covered by the insurance company, regardless of who’s at fault. In most states, personal injury protection insurance is optional.

Medical Payments

Medical payment coverage—also known as medical expense coverage or med pay—helps pay for medical and funeral expenses after a car accident, regardless of who caused the accident. This type of coverage is optional and not available in all states.

Uninsured Motorist Coverage

Uninsured motorist coverage provides coverage when the policyholder is in an accident with someone who doesn’t have insurance. It’s an add-on to a standard car policy and pays for injuries to passengers and policyholder. And in some instances, it pays for damage to property if the other driver is responsible for the accident but uninsured.

Underinsured Motorist Coverage

An uninsured motorist is an at-fault driver who doesn’t have car insurance that meets the required minimum liability amount, or their insurance company cannot pay the claim. For example, a hit-and-run driver would be considered an uninsured motorist.

NOTE: 15 States require drivers to have PIP as part of their ‘no-fault’ car insurance.

Key Takeaways

What does car insurance cover? The car insurance definition includes insurance against loss arising from damage and unforeseen risks to an insured vehicle.
A car insurance policy saves you money when your vehicle is damaged by natural calamity or in an accident. It also covers the car from theft and burglary.
Policies include customized coverage amounts to each client, according to their needs and budget. The terms of the policy are usually 6 to 12-month timeframes and are renewable.
The purpose of car insurance is to protect you from various unexpected situations on or off the road.

Cost of Car Insurance

Understanding car insurance costs is crucial. There are two primary costs associated with buying car insurance: deductible and premium. A car insurance premium depends on the following factors:

Location

Due to more accidents, theft, and vandalism, drivers from urban areas pay higher car insurance than drivers in rural areas or small towns. Anti-theft features and where you park your car (in a secure garage or on the street) also impact the bottom line.

Driving Record

The better your driving record is, the lower your premium will be. For example, if you’ve had traffic violations, you’ll more than likely pay more than if you have a clean record. You could also pay more if you’re a new driver with no insurance track record.

History of Car Insurance

New drivers purchasing their first car insurance policy can expect to pay a higher rate because the lack of driving history with insurance hinders the insurance company from evaluating the client’s risk.

Vehicle Safety

The primary factor in the cost of insurance is the cost of your car. High-quality, safety-oriented vehicles will more than likely qualify for premium discounts. Insurance companies consider how safe a vehicle is (how well it protects the occupants) and how much potential damage it can cause on another car.

Deductible Amount

How does car insurance deductible work? The deductible amount is inversely proportional to the premium. Therefore, increasing your deductibles is going to lower your rates and vice versa. The deductible is what you pay from your own money if you file a claim for auto repair bills. Deductible amounts range from $250 to $2,500.

NOTE: Car insurance costs vary by state. For instance, in New York, the minimum car insurance coverage is $1,323, but the maximum is almost $3,000.

Filing a Car Insurance Claim

Suppose you’ve been in a car accident, and your car has been totaled. You’d like to file a claim, but how do car insurance claims work?

Call the Police When the Accident Occurs

If no one has been hurt, and the damage is only material, call the police so that they can make a police report. The report will give a clear picture of exactly what occurred before and during the accident, which will make the insurance claim process more manageable.

Gather Information About the Other Person

Document everything you can from the scene of the accident. Gather information from everyone involved, including personal information of the other driver and witnesses, license plate numbers, and insurance policy numbers.

Give a Statement to the Police and Take Pictures of the Damage

Given the history of car insurance, you should give a truthful statement to the officer about what exactly happened, sticking to the facts. Take photos of the accident from all angles, and note any conversations with the people involved.

When Both Drivers Are at Fault

In a situation when both drivers are at fault, the laws of the state—in which the accident happened—will determine how insurance adjusters should assign liability. In certain states, neither party qualifies to pursue compensation from the other driver’s insurer. But in other states, both parties can pursue compensation from the other or seek recovery.

When the Other Driver Is at Fault

For example, in a situation where another person crashes into you, you should make a third-party claim against their liability insurance—you are the third party to the insurance company of the other driver and himself.

How Do Car Insurance Claims Work?

Filling a claim as soon as possible after an accident can be crucial for your finances. You can file a claim online or call an insurer to do it for you. In both cases, you need to make sure to provide the following:

  • The make, model, year, and color of the cars involved in the crash.
  • Driver(s) and passengers’ personal info.
  • The exact location, date, and time of the accident.
  • Your speed.
  • Weather conditions.
  • Road conditions.
  • The exact time the officers arrived; their names and badge numbers.
  • Name and contact of witnesses.

If you don’t file and report your car accident in a timely fashion, there’s a chance that the insurance company won’t accept your claim.

Conclusion

How does auto insurance work? First, before sitting behind the wheel, make sure to be well-informed about a driver’s responsibility. Having a car insurance policy and being aware of its benefits can make your situation easier when in an unpleasant circumstance. And you need to be a careful, responsible driver.

FAQ

What does car insurance usually cover?

The most basic car insurance policies consist of six types of coverage: bodily injury liability, personal injury protection (PIP), property damage liability, collision, comprehensive, and uninsured and underinsured motorist coverage.

How do car insurance payments work?

A car insurance policy covers many risks and protects you financially. Car accidents can cost a lot, especially if the damage is substantial or someone is injured. The role of the insurance is to cover the bills and protect the driver from potentially harmful financial liability.

Do I have to pay my deductible if I'm not at fault?

You can wait until the at-fault driver’s insurance company contacts you and pays the damage, or if you want a quicker solution, you can file a claim with your insurer, pay your deductible, and have them cover the other costs for damages.

How does insurance work when you get into an accident?

In our guide, ‘how does car insurance work,’ we’ve covered how to use it when you get into an accident. The insurance company will cover the costs from the accident and appoint an adjuster to your case, who will take care of the whole situation.

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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