Car insurance often seems bewildering, but a little education can quickly clear up any confusion you might have about this important type of coverage.Knowing exactly how car insurance works can make you more confident about purchasing the right policy and getting the most from this coverage when you need it.
- Car insurance protects you financially, possibly saving you tens of thousands of dollars or more in the event of an accident
- Car insurance covers several types of losses associated with auto accidents.
- Determining how much insurance you need can be tricky, but you generally want enough insurance to protect all your assets.
- Many factors help determine the price you pay for car insurance. How carefully you drive plays a big role.
- You can apply for coverage and in many cases have a policy in place the same day.
What is car insurance?
Car insurance covers you if you are involved in an auto accident that results in damages. It is must-have coverage for anyone who plans to climb behind the wheel and drive
“Insurance is a tool that protects individuals from catastrophic financial loss,” says Sarah Jacobs, vice president of personal lines product development at Nationwide Insurance.
How does car insurance works?
It protects your finances in the event of an auto accident, potentially saving you tens of thousands of dollars or more.
One type of coverage reimburses you for damages you cause to other people, their vehicle or other property. Nearly all states require you to purchase this type of coverage, known as liability insurance.
A second type of coverage reimburses you for damages to yourself and your own vehicle. Typically, this type of coverage — such as collision and comprehensive coverage — is optional, although if you have a car loan, the lender might require you to purchase the insurance.
How does a deductible work?
The deductible is the amount you agree to pay before your insurance coverage kicks in. Typical deductible amounts include $250, $500 and $1,000. As a general rule, the higher the deductible you agree to accept, the lower your premiums will be.
Read More to Know Why Raising Deductibles Saves you Money
How does car insurance work when you’re at fault and when you’re not at fault?
Nailing down who is at fault in an accident is a significant factor in determining which coverages are applicable to the claim, Jacobs says.
“If you are at fault, the damage to the other party’s vehicle, property, or any injuries usually fall under your liability coverage,” she says.
Damage to your own vehicle would fall under what are known as “first-party coverages,” such as comprehensive or collision, depending on who is at fault and the damage caused.
How does car insurance work if another driver hits your vehicle?
If someone plows into your car, the state where you live determines how the claim will unfold. In most states, the other driver’s insurance will be responsible for paying the claim.
However, if you live in a state with no-fault insurance, your own insurance will pay for the damages.
How does car insurance work if you’re an Uber or Lyft driver?
Even if your car is insured, don’t assume you are covered when you use the car for work.
“Most personal auto policies do not provide protection when using a vehicle for business purposes such as pizza delivery, Uber or Lyft services,” Jacobs says.
So, if you engage in these types of activities, check with your insurance company to find out whether business coverage is available.
How do you file a claim?
Insurance companies typically will ask you to contact them promptly after the accident and to provide details about what happened. As part of the claim process, they will ask you to provide the other driver’s insurance information and to give them photos from the accident site if you have them.
However, each insurer has its own policies for filing a claim, so it is important to contact your insurer and learn the precise steps necessary.
Learn more about Car accident claims – Things you need to know
How do insurance payments work?
When it comes to receiving your check, the rules vary by insurer and from state to state. In many cases, the check will be made out to both you and the shop doing the repairs.
If you have not paid off your auto loan and your car is totaled, the check may go directly to your lender. If someone else smashes into you, it is possible the driver’s insurance company will send a check directly to you.
In short, there are many different ways you might be paid. But if you are insured, a claim will be paid one way or another.
Check out our detailed guide on spending car insurance claims checks
Car Insurance Explained – Frequently asked Questions!
What is a car insurance premium?
A car insurance premium is the amount of money you pay to get insurance coverage. Many insurers charge a premium based on six months of coverage. However, it’s also possible you could be charged monthly or on an annual basis.
What does car insurance cover?
Car insurance covers several types of losses associated with auto accidents.
Types of coverage include:
- Bodily damage liability. Reimburses you for damages you cause to other people, such as if you injure or even kill them in an accident. Nearly every state requires you to carry this coverage.
- Property damage liability. Reimburses you for damages you cause to other vehicles or property. Once again, nearly every state requires you to carry this coverage.
- Collision and comprehensive. Collision reimburses damages to your own vehicle that result when you crash into another car or object. It also covers damages if you flip the vehicle without hitting anything. Comprehensive reimburses damages to your vehicle that are not the result of a collision. It also compensates you if your car is stolen. These types of coverage are optional, although your lender likely will require you to purchase them if you have a car loan.
- Medical/personal injury protection (PIP). Some states require you to carry these forms of coverage, which reimburse you and injured passengers for things like medical expenses and lost wages.
- Uninsured/underinsured motorist. Reimburses expenses related to accidents that involve a driver who has no insurance or inadequate levels of coverage. It also protects you in the event of a hit-and-run accident.
Read more about Types of car insurance: What they cover and what they cost
What doesn’t car insurance cover?
Exactly what insurance covers differs from driver to driver. “Coverage can vary greatly based on the company and the options an individual chooses,” Jacobs says.
For example, if you do not purchase collision and comprehensive insurance, you will not be reimbursed for damages to your own car in many cases.
In addition, there are things that virtually no policy covers. Car insurance does not cover you for normal wear and tear that occurs to your car as you drive it.
A standard car insurance policy also will not cover you for situations where you are using the car for business purposes. For that type of coverage, you need a separate business auto insurance policy or some other form of supplemental insurance.
Will car insurance cover your vehicle if it’s totaled?
Yes. If your car is totaled, you will be paid for the vehicle’s current value, not the price you paid when you purchased the car.
However, keep in mind that an insurance company will not reimburse damages to your own vehicle unless you carry comprehensive and/or collision coverage.
Learn more about Total loss: What does it mean and what is a total loss threshold
How much car insurance do you need?
Determining how much insurance you need can be tricky, but you generally want enough insurance to protect all your assets. If you severely injure someone while driving, you could be sued for $1 million or more. So, being underinsured is a big risk.
“A qualified agent can help determine your coverage needs and how to best meet those,” Jacobs says.
And if you have a lot of assets, consider purchasing umbrella insurance that can boost your overall liability coverage level.
How do you shop for car insurance?
There are several ways to shop for car insurance. One way is to approach several individual insurance companies and get separate policy quotes from each.
TipA faster way to shop is to use a website like Carinsurance.com to aggregate quotes from several different providers.
Whichever method you pursue, make sure you get multiple quotes. This is the best way to compare and contrast what is on offer and to land the best deal. Repeating the rate-quote process at least once annually can help you discover if there are better plans that can save you money.
How is car insurance priced?
Many factors help determine the price you pay for car insurance. How carefully you drive plays a big role. A better driving record — with fewer accidents and tickets — typically earns you lower rates. And if you agree to let your insurance company monitor your driving behavior, you may get a break on your premiums if you perform well behind the wheel.
Other factors that impact price are harder to control. The type of vehicle you drive, the car’s age, where you live, and your age and gender all play a role in the price you pay for coverage.
How do insurers value your car?
If your car has been damaged in a car accident, the insurance company will need to determine the cost to repair the vehicle. This usually involves asking an insurance adjuster to inspect the damage and to provide an estimate of the expected repair cost.
If the damages are severe, the insurance company may opt to total the car rather than giving you funds to repair the car. In this case, you will receive a check for the vehicle’s depreciated value.
Insurance companies typically will use a standard guide such as the Kelley Blue Book or the National Association of Automobile Dealers’ NADA guides when assessing the value of your car.
Other factors that may be used to determine your car’s value are its:
- Age
- Condition
- Mileage
- Resale value
How long does it take to get car insurance?
In the modern era, it takes very little time to secure an auto insurance policy. If you look for a policy online and find one that suits your needs, you can apply for coverage and in many cases have a policy in place the same day. The entire process can take 30 minutes or less.
How do accidents and speeding tickets affect my insurance?
Accidents and speeding tickets can have a significant impact on how much you pay for insurance coverage. A 2021 Insurance.com survey found that a single speeding ticket for driving 30 mph over the speed limit results in an average car insurance rate increase of 30%.
Meanwhile, car insurance rates increase 31%, on average, after one at-fault accident with more than $2,000 in damage, a 2021 Carinsurance.com study found.
Learn more about How much does insurance go up after an accident
How can you save on car insurance?
There are many ways to save on car insurance. For example, raising your deductible typically cuts your premium costs. That is because a higher deductible for you means less risk for the insurer.
There are many other ways to save, ranging from purchasing your car insurance policy from the same insurer who provides your home insurance — which often nets you a discount — to taking driver safety courses.
But perhaps the best way to save is to regularly compare and contrast quotes from multiple insurance companies and to choose the most affordable carrier that offers the coverage you need.
Compare Car Insurance Quotes from 25+ Companies (With Rate Calculator) and save your money
Sources:
- Understanding your Insurance Deductibles – Explained by III
- No-fault Auto Insurance – Explained by III
- How Does a No-Fault Car Insurance Claim Work – Explained by Nolo
- Who gets the Claims Check – Explained by Insure
- Understanding your Auto Insurance Coverage – Explained by III
- Understanding the Valuation and Repair Process – Explained by III
- When Is A Car Considered Totaled – Explained by Allstate
