How Does Car Insurance Work? – Forbes Advisor

Car insurance is designed to protect you financially in the event of an accident. If a tree falls on your vehicle or you are the victim of a hit and run, auto insurance can help pay for your car repairs and treatment for your injuries. also provides liability coverage, should you be at fault in an accident that causes injury or property damage to others.

Understanding how auto insurance works can help ensure you have the right coverage and avoid surprises if you file an insurance claim.

Reading: Car accident how does insurance work

what is car insurance?

Auto insurance provides some financial protection against collision-related expenses, including those resulting from lawsuits, and other losses related to your vehicle, such as theft and vehicle damage from weather.

When you pay your auto insurance bill, your auto insurance company agrees to pay for the losses outlined in your policy.

do you need car insurance?

Almost every state requires you to have auto insurance. If you are at fault in an accident that causes bodily injury or property damage to others, you should be able to cover all of the bills. this includes paying your legal defense if you are sued for an accident you caused and any judgments and settlements that result from a lawsuit against you.

Most states have financial responsibility laws, which means that to drive legally, you need proof that you are capable of paying for damages and medical bills if you cause an accident. Without proof of assets, you could face legal penalties, such as suspension of your driver’s license and vehicle registration. And if you cause an accident and don’t have auto liability insurance, you could wipe out your savings.

auto insurance helps protect your assets.

to rent or finance a car

Lenders or leasing companies may require you to purchase comprehensive and collision insurance to protect their interest in your car. Requiring both types of coverage ensures that you can recover your losses if your car is damaged or destroyed.

Car rental companies may require you to purchase differential insurance. this type of coverage pays the gap between what you owe on the car lease and what you receive from your insurance company for the value of the vehicle if totaled.

to avoid paying out-of-pocket expenses related to the accident

When you’re at fault in an accident that causes bodily injury or property damage, your liability insurance can help cover medical bills and other repair costs.

If you are sued for causing the accident, liability insurance also pays for your legal defense costs.

Without sufficient liability insurance, you could be hard-pressed for any expenses that exceed your policy limits.

to pay for your injuries and those of your passengers

If you or your passengers are injured after an accident, auto insurance can help pay for doctor visits and surgeries. After being in an accident, the last thing you probably want to deal with is a hefty hospital bill.

to pay for damage to your own vehicle

From Mother Nature to road debris, countless hazards can damage your car. While state-mandated liability insurance may pay for repairs to other drivers’ vehicles in the event of an accident, having adequate coverage for your own vehicle may help pay for vehicle repairs.

what does car insurance cover?

An auto insurance policy is usually a combination of several types of coverage. while some are generally required by law, others are optional. For this reason, auto insurance companies allow you to customize your policy to fit your needs and budget.

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Here are some standard auto insurance coverage options.

civil liability insurance

If you are responsible for an accident, liability insurance covers the cost of medical treatment for injuries and repairs for property damage you cause to others. It may also cover your legal costs, such as attorney fees, if someone sues you for damages after an accident.

Usually, you’ll want to purchase enough liability insurance to cover what you stand to lose in a lawsuit. While most states require liability insurance, the exact limit requirements vary by state.

medical payments or personal injury protection coverage

No matter who is at fault in an accident, medical payments coverage, sometimes called medpay, or pip insurance (pip) can pay for injuries to you or your passengers. while these are similar, pip offers more complete coverage. pip generally covers reimbursement for medical expenses, lost wages, funeral costs (if necessary), and services to help the injured person complete regular tasks.

medpay and pip availability varies by state.

underinsured or uninsured motorist coverage

Not everyone drives with adequate car insurance. For this reason, insurance companies offer underinsured or uninsured motorist coverage to help you if someone crashes into your car and you don’t have enough liability insurance to cover your injuries or damage to your vehicle.

collision coverage

Collision coverage applies to your own vehicle after a collision. No matter what hits your car, like another vehicle or object, collision coverage can help pay for the cost of repairs. If your vehicle is totaled, collision coverage pays you the actual cash value of your vehicle, less any deductible.

full coverage

Car damage doesn’t always come from crashes. damage can also result from theft, vandalism, or mother nature. For example, if a tree falls on your vehicle while it’s parked in your driveway, comprehensive auto insurance may pay for the repairs. If your vehicle is a total loss, Comprehensive would pay you the value of the vehicle at the time of the incident, less your deductible.

additional coverage

many auto insurance companies offer additional options such as:

  • rental reimbursement coverage to pay for a car rental while your vehicle is being repaired after an accident covered by your policy.
  • gap insurance to cover the difference between the value of your car and how much you still owe on the loan, if your car is stolen or totaled.
  • roadside assistance to help you if you get stuck on the side of the road.
  • related: what does car insurance cover?

    what is the car insurance deductible?

    An auto insurance deductible is the amount deducted from your auto insurance claims check. Let’s say you file a damage claim for $2,000 and your deductible is $500. the insurance company will send you a check for $1,500.

    Selecting a higher deductible lowers your premium because you’re assuming more of the cost if you file a claim.

    what is the price of car insurance?

    Many considerations go into calculating the price you pay for coverage. These are some of the typical factors used by insurance companies to calculate the price of auto insurance.

    driving history

    The better your driving record, the lower your rate. If you’ve received multiple traffic violations or been involved in accidents, you’ll likely pay higher premiums than drivers with a clean record.

    If you need auto insurance for a teenager or a new driver, you’ll pay more until they have a strong track record for insurers to review.


    See also: How do you know if you need sr22 insurance

    People who work from home and rarely use their vehicles may pay less for coverage than someone who travels every day. This is because drivers who accumulate more miles on their cars increase the probability of having an accident.

    zip code

    Where you live also affects your auto insurance rate. metropolitan areas often have higher crime rates and traffic congestion with accidents, so urban drivers tend to pay more for coverage.


    With age comes experience, and auto insurance companies tend to agree. That’s why middle-aged drivers with more driving experience will pay less than people just starting out. drivers between the ages of 40 and 50 generally enjoy the lowest rates.


    Statistics also show that women have fewer accidents and DUIs than men. For this reason, men sometimes pay more for coverage than women.

    Related: How Gender Affects Car Insurance Rates

    make and model of the vehicle

    Because the cost to repair or replace vehicles varies, the cost of coverage will also vary. Cars with high-tech safety features, for example, may cost more to insure than cars without.

    Insurance claims for vehicles like yours will affect what you pay for auto insurance, especially collision and comprehensive insurance.

    related: most and least expensive vehicles to insure


    Insurance companies can use a credit-based insurance score to determine your likelihood of filing a claim. Drivers with bad credit will typically pay higher auto insurance rates, sometimes much higher than even drivers who have an accident on their record. Using credit to set car insurance rates is prohibited in California, Hawaii, Massachusetts, and Michigan.

    Related: How Does Bad Credit Affect Auto Insurance Rates?

    how do you buy car insurance?

    Before you buy an auto insurance policy, you’ll want to identify the types and amount of coverage you want. then it is best to shop around to compare auto insurance quotes. Be sure to get quotes from multiple companies so you can see what a good deal looks like.

    Go online to compare auto insurance quotes

    Many insurance websites offer free insurance quotes once you provide some personal information. To make sure you’re doing an apples-to-apples evaluation, compare the same types of coverage on multiple insurance company sites.

    talk to an insurance agent

    You can contact an insurance agent by phone, online, or in person. An independent agent can provide you with quotes from multiple insurance companies and help you identify the best coverage options available for your needs. Be sure to ask about auto insurance discounts that are available.

    related: how to take out car insurance in 5 easy steps

    how do you make a car insurance claim?

    If you need to file an auto insurance claim, here are the steps to take.

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    1. Contact your auto insurance company right away. Even if you are not at fault in an accident, contact your insurer. a representative can guide you through the next steps to avoid any problems in the future.
    2. verify documentation. During your call with the insurance company, verify the documents they need to process your claim. for example, insurers will require a police report for a vehicle theft claim.
    3. use the mobile application. Many insurance companies have mobile apps that allow you to file a claim, upload photos, schedule an appraisal, reserve a rental car, and track the status of your claim.
    4. track vital deadlines. Taking action right away will help you avoid missing crucial deadlines, like submitting invoices or additional claim details.
    5. Create an insurance claim file. Carefully fill out all of your claim forms. It’s also wise to keep a record of all your claim documentation, photos, and detailed accounts of conversations with insurance representatives. This way, if there are questions about your claim later, you’ll know who you talked to and when.