How does car insurance work?
Car insurance provides financial protection for drivers in case of injury or property damage. Each driver buys a policy from a car insurance company, which promises set levels of coverage in the event of an accident. Car insurance may provide payouts for the driver’s vehicle repairs and medical bills, along with any damage that the insured driver or vehicle might cause to other people or property. The policy’s coverage requirements and costs vary by state and from driver to driver, depending on certain factors like the person’s age, zip code and driving record.
There are many types of car insurance available to drivers, but most of them are optional. You pick the areas of coverage that you want and the amount of coverage in each category. You also choose your deductible, which is the amount that you’re responsible for paying when you make a car insurance claim (your insurance company pays whatever is left). Most policies offer coverage for six months or one year at a time, and you can pay for them in a variety of ways: up front, on a monthly basis, or in several installments over the course of your policy.
Most states have specific car insurance requirements that drivers need to meet in order to drive legally. Drivers can choose to carry the state minimum or buy additional insurance. A state might require drivers to buy more than the minimum insurance if they cause a bad accident or violate a serious traffic law – by driving while intoxicated, for example.
Car insurance is required because it’s important: Without insurance, drivers would be a split-second from financial ruin every time they get behind the wheel. The most severe collisions easily cost hundreds of thousands of dollars in damages. And the top three reasons people go bankrupt are medical bills, job loss, and uninsured catastrophes – all of which can result from a car accident. With car insurance, every driver can spend less time worrying about paying for costly damage on their own.
Keep reading below to learn more about how car insurance works in general and how to make it work well for you.
What Different Types of Car Insurance Do
Most of the time, car insurance doesn’t actively do anything – and hopefully, you’ll never need it to. But if you get into an accident, car insurance can help with everything from paying your medical bills to repairing your car, depending on what coverage you have.
Although it’s legal to carry only your state’s minimum car insurance coverage, some optional protection is usually worth the money. For example, state minimums don’t require you to carry any car insurance that protects your vehicle – just other people’s. That means you can still get stuck with a hefty bill if your car is damaged in an accident you caused.
There are many types of optional car insurance that are worth considering, each with a specific function.
What the Major Types of Car Insurance Cover:
- Bodily liability insurance: Required in most states. Bodily injury liability insurance covers any medical bills that other people might have after a collision where you’re at fault.
- Property liability insurance: Required in most states. This covers damage that you cause to other people’s property with your car.
- Medical payments (MedPay) coverage: Required in some states. It helps pay for your medical bills after an accident.
- Personal injury protection (PIP) insurance: Required in some states. PIP insurance helps with your medical bills after an accident, regardless of who caused the accident.
- Uninsured/underinsured motorist insurance: Required in some states. This insurance covers you if the other driver has no insurance or flees the scene.
- Collision insurance: Optional. Collision coverage can help repair your vehicle after an accident with another car. This type of policy combined with comprehensive insurance is often called “full coverage.”
- Comprehensive insurance: Optional. Comprehensive insurance is for damage that doesn’t come from an accident with another car. It covers things like vandalism and fallen tree branches landing on your vehicle.
- Gap insurance: Optional. Gap insurance helps drivers pay off the rest of their car loan if their vehicle is totaled or stolen.
- Roadside assistance: Optional. This coverage reimburses you for services like towing and flat-tire replacement.
- Rental reimbursement: Optional. This reimburses you for a rental car while your damaged car is being repaired after a collision.
How to Use Car Insurance
After an accident, the police collect evidence and details about what happened. If another driver caused the accident, their insurance pays for your repairs. If you caused the accident, your insurance pays for repairs to the other driver’s car – and for yours, if you have certain types of coverage.
Even in “no fault” states, police and insurance companies will determine who caused an accident in order to see whose car insurance should pay for property damage. No-fault rules only apply to medical payments. That means each driver’s insurance covers their own injuries (as well as passengers’ injuries), no matter who was at fault, in those states.
Regardless of whether you live in a no-fault or fault state, your next step is to file a claim with your insurance company online or over the phone. If necessary, you should also schedule a vehicle damage inspection. An inspection helps your company determine who is at fault for the accident and how much repairs should cost.
You can take your car to the body shop of your choice for repairs. Your insurance company will either reimburse you or pay the body shop directly. Depending on your insurance coverage, you can get paid up to the cash value of your car (minus your deductible) if your car is totaled. Payouts for other types of coverage vary based on the specifics of the policy, but the claims process works the same way.
Is Car Insurance Required?
In 48 of the 50 states, anyone who owns and drives a car needs to prove that they have a financial safety net in case of a costly accident. Over 30 states allow you to make a cash deposit in place of buying car insurance – but your deposit has to be $25,000- $160,000. Unsurprisingly, most drivers choose to buy car insurance to meet the financial responsibility requirements instead.
Penalties for violating the financial responsibility law vary from state to state, but if you’re caught driving without insurance, you can face fines, lose your license, get your car impounded, or even go to jail. And of course, without an insurance company to pick up your bills, you are personally liable for any car repair or medical costs that result from an accident involving your car. You can even be sued by people you injure or by the owner of any car or property you damage.
As a result, people who don’t own a car but drive one should also have an insurance policy. Car insurance companies offer non-owner policies that cover someone driving a vehicle that they don’t own, like a roommate’s car or an employer’s taxi. With a non-owner policy, you just get coverage for yourself and any damage you might cause, not any damage the car might sustain. This type of coverage is cheaper than a car-and-driver policy, since the car’s owner should already have coverage for the vehicle you’re using.
Who Sells Car Insurance?
There are over 80 different car insurance companies operating across the U.S. They offer insurance policies for cars, trucks, motorcycles, and RVs. Often, they sell policies for things like boats and houses, too.
The 10 largest car insurance companies are:
- State Farm
- Liberty Mutual
- American Family
Car insurance companies make money by charging you now for their promise of future bill coverage if you’re in an accident. But they hope you never need to cash in on that promise.
However, car insurance is a good gamble for you, too. When you buy a policy, you’re betting a few hundred dollars to help safeguard your finances from the possibility that you might face tens of thousands of dollars in medical bills or car repair payments. And since car accidents and car damage are extremely common, there is a good chance that you’ll need to use your insurance.
Either way, you’re better off losing a few hundred dollars and guaranteeing yourself the financial assistance you’ll need in a serious accident. There are plenty of reputable car insurance companies to choose from, so you’re sure to find reasonably priced coverage in your state.
How to Get Car Insurance Quotes
To get car insurance quotes, gather your personal information, such as your driver’s license number, Social Security number, and your car’s VIN. This information helps companies learn about your driving history and any potential risks and benefits associated with your car, like safety ratings. They use your data as a factor in your quote.
Next, decide what kind of coverage you want or need. For example, do you need collision coverage for a new car, or is your vehicle too old to be worth spending thousands of dollars to repair? The more coverage you buy, the more you’ll pay for insurance. But as a general rule, it’s a good idea to buy as much coverage as you can afford – each category represents protection from potentially large bills.
Final Thoughts & Next Steps
Don’t drive until you have a car insurance policy that meets your state’s requirements! You don’t want to be caught violating state laws or get stuck paying tens of thousands of dollars after a car accident.
For next steps and more information, here are some additional resources to help you learn about car insurance and buy a policy:
- Types of car insurance
- How to get car insurance
- Car insurance discounts
- How to switch car insurance companies
- Full coverage insurance
- Car insurance claims
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