How Does Car Insurance Work? A Beginner’s Guide to Understanding Your Coverage

Car insurance is a tool that most drivers use to protect themselves, their vehicles, and their financial assets after an accident. Many different types of coverage and features can be included in your policy.

Read our guide to how car insurance works to learn about the types of coverage, how a deductible works with car insurance, and what factors affect your car insurance.

State Car Insurance Requirements: What You Must Know

Most states have minimum car insurance requirements. This typically includes some level of liability coverage. Some states may also require other types of coverage, such as personal injury protection (PIP) or uninsured/underinsured motorist coverage.

State laws set minimum coverage limits by considering how much the average state citizen would need to remain financially protected after an accident. However, some states may have alternatives to car insurance so you don’t have to buy a policy.

You can choose to purchase coverage more than the required coverage limits or other coverages, depending on your own needs and budget. However, you may not drive or legally register a vehicle in a state without meeting its insurance requirements. You will have to show proof of insurance if you are pulled over. The penalties for driving without insurance typically include license suspension, registration suspension, fines, and vehicle impoundment.

Understanding What Car Insurance Covers: Protection Beyond Accidents

The primary types of car insurance are liability coverage, collision coverage, and comprehensive coverage.

Liability

Liability car insurance is typically broken down into two separate coverage limits: bodily injury liability and property damage liability. Bodily injury liability covers injury-related expenses to other people (excluding you and your passengers) if you are at fault in an accident. Similarly, property damage liability covers damage to other people’s property if you are at fault in an accident.

Collision

Collision coverage can provide extra financial protection after an accident. In many cases, if you are not at fault for an accident, you can file insurance claims with the at-fault driver’s insurance company to receive compensation for injuries and property damage. However, collision coverage covers damage to your vehicle after an accident regardless of who is at fault. If the other driver’s insurance cannot cover your damages, you can file a claim with your own auto insurance company to get your car repaired.

Comprehensive

Comprehensive insurance goes above and beyond collision insurance to protect your car in non-collision incidents. It may cover incidents such as theft, vandalism, fire, flood, animal-related damage, or falling items. However, each insurance company will have varying policies, so you should check to see what your policy covers or excludes.

While liability insurance is typically required by the state, comprehensive and collision insurance are not. However, lenders may require these coverage types if you have a loan on your vehicle. Full coverage car insurance, having all three types, offers the highest level of protection for your assets.

Car Insurance Deductibles Explained: How They Impact Claims

Some auto insurance policies, typically collision and comprehensive coverage, have a feature known as a deductible. An insurance deductible works as an amount that you must pay out of pocket before the insurance company will provide coverage for a specific claim.

How does a deductible work for car insurance? Say that you have a collision policy with a $500 deductible. You get into an accident that results in $1,200 in damages to your vehicle. You file a claim with your insurance company to get the repairs covered. While your insurance company approves the claim, you must pay $500 in repairs, while the insurance covers the remainder.

Deductibles can affect your car insurance premium. The higher your deductible, the less you will have to pay for your insurance. This is because the insurance company would have to pay less for claims. Most deductibles will range between $250 and $2,000. Some companies will let you control your deductible, depending on your driver profile.

Factors Affecting Your Car Insurance Rates

Car insurance rates will vary based on the driver's profile and vehicle information.

Personal Factors

Driver-related factors that can affect your premiums include:

• Age – In most cases, car insurance rates will decrease with age, until you hit around age 75. Then, your rates will begin to increase again.
• Gender – Men often pay higher rates than women, because statistics indicate they are higher-risk drivers.
• Marital status – Married couples may pay less than single people.
• Credit history – Companies may view drivers with better credit as more financially stable, reducing their premiums.
• Location – If you live in an area with higher crime or accident rates, you will likely pay more for insurance.
• Driving record – Drivers with previous accidents or tickets will pay more than drivers with clean driving records.
• Claims history – If you have filed claims within a certain period (dictated by each insurance company), you may pay more for insurance.

Other Factors

Vehicle-related and other factors that affect your car insurance rates include:

• Vehicle type – Different makes and models will have varying repair and replacement costs. More expensive vehicles are likely to cost more for insurance, so researching the cheapest cars to insure may be helpful when car shopping.
• Coverage types and limits – If you purchase more than the state requirements, you will pay more for additional coverage types and higher coverage limits.
• Annual mileage – The more you drive, the more likely you will be involved in an accident and the more you will pay for insurance.
• Discounts – Some car insurance companies provide discount auto insurance with opportunities like military discounts, student discounts, or autopay discounts that will reduce your premiums.

Some of the ways to get cheap car insurance are to keep a clean driving record, only buy insurance that you need, and search for discounts that can help reduce your rates.

How To Choose the Best Car Insurance for Your Needs

The best car insurance for you will depend on where you live and your financial situation. To begin with, you must purchase car insurance that meets your state’s car insurance requirements.

If you have a loan on your vehicle, the lender may also require you to purchase collision coverage, comprehensive coverage, or gap insurance. Gap insurance works if a car is totaled, covering the difference between the value of the car new and when it was totaled.

Other types of coverage that some companies offer as add-ons include rental car reimbursement, new car replacement coverage, roadside assistance, or mechanical breakdown insurance. These will cost more but may offer advantages for your situation.

One of the best ways to find a policy that works for you is to compare car insurance quotes from multiple companies. This can help you find a company that offers the coverage you need at the best price. Online comparison tools like EverQuote let you enter basic information to compare multiple quotes all in one place.

Shop Around for the Best Quotes

Car insurance protects your financial assets in many different incidents, including collisions and more. Your car insurance policy should be tailored to your financial needs. Enter your ZIP code into EverQuote’s free online quote comparison tool to find a policy that works for you.