How Does Auto Insurance Work? Let’s Find Out…
Car insurance is essential in the U.S. to legally drive on the roads. If you drive without the basic insurance that most states require, you could face serious consequences.
In addition, you could face financial difficulties if you don’t have car insurance and are involved in an accident.
In this article, we take a closer look at all the information that you need around car insurance—including what it is and how you can go about getting insured at the cheapest possible rate.
Firstly, What Is Car Insurance?
Car insurance is a type of insurance policy that protects you financially against the costs relating to damages or injuries if you are involved in an accident.
You can also benefit from this financial protection if you are involved in a non-collision event, such as if your car is damaged by a falling tree or hail.
In exchange for what is known as an insurance premium—which is the amount of money you owe an insurer to cover you and maintain your insurance policy—the insurer will pay for these expenses.
Every insurance policy is based on limits. A limit is the maximum amount of money that the insurance company will pay for a claim.
Some types of insurance coverage also carry a deductible. We’ll go into more detail about this later on, but in essence, a deductible is the amount of money you will need to pay before your insurance company pays out for a claim.
There are several car insurance types available and you can customize your insurance policy to suit your needs and your budget.
Do I Need Car Insurance?
Any person who owns a car and drives in the U.S. needs car insurance. If you drive without car insurance, you could face serious consequences and have points added to your driver’s license.
Apart from points, you could also get:
- A hefty fine.
- Your license suspended.
- Jail time.
The only place where car insurance is not required by law is in New Hampshire. Having said this, New Hampshire still requires you to carry proof that you can pay for damages and injuries if you are involved in an accident.
This proof is known as ‘proof of financial responsibility’.
Each state has its own car insurance requirements. When you call an insurance company to discuss your car insurance with them, they will make sure that the insurance you choose covers these state-mandated requirements.
What Does Auto Insurance Cover?
Auto insurance covers a variety of accidents and mishaps that can take place while driving, or even if the vehicle is standing still.
Coverages do vary by state, but here are the standard insurance coverages that you will find on most auto insurance policies across the U.S.
Minimum Liability Coverage
Auto liability insurance—also known as minimum liability coverage—is legally required in 50 states across the U.S., plus Washington D.C.
In other words, you need liability insurance in order to drive. If you are involved in an accident and it was your fault, this insurance will cover the expenses of the other driver and his or her passengers, but not yours.
Liability insurance includes two types of car insurance. They are called property damage liability coverage, and bodily injury liability coverage.
Let’s look at the difference between the two:
Bodily injury liability coverage
If you are responsible for a car accident, bodily injury liability insurance pays for the medical costs of the people that are injured (excluding yourself).
This coverage will also help cover payment for legal defense in the event that you are sued for any damages.
Property damage liability coverage
Property damage liability coverage helps to cover the cost of repairs if you are at fault in an accident that damages another vehicle.
It will also cover you if you damage property such as a fence or building.
Liability insurance coverage does not pay for any damage to your own vehicle. For this, you may want to consider additional insurance coverage.
Every state has its own coverage limits when it comes to liability insurance. When you speak to an insurer regarding your auto insurance policy, they will advise what those coverage limits are for your state.
You can also take a look at our dedicated article on liability insurance to find out what the limits are for your state.
Comprehensive coverage protects you financially against damage to your car from events that are beyond your control, but which are neither classified as a car accident, nor a collision.
This coverage can include various incidents, such as:
- Fire and explosions.
- Windshield and glass damage.
- Falling objects.
- Damage caused by rodents.
- Car accidents with animals.
Collision coverage pays for repairs to your vehicle if it is damaged during a car accident, or if it collides with another vehicle or object.
This insurance coverage may even pay for the replacement of your car in certain circumstances. In general, this coverage pays out for collisions with the following objects:
- Another vehicle (whether parked or in motion).
- Telephone poles.
- Guard rails.
- Road signs.
- Trees and shrubs.
- Homes and other buildings.
Unlike some insurance coverages, you will not need to select a limit for collision coverage. Collision insurance covers the actual cash value of your car instead.
Key Point: What Is Actual Cash Value?
Actual cash value, or ACV, is the amount of money that it will cost to replace your car, minus the value that it’s lost over time from general wear and tear.
When you make a claim, your insurance provider will hire a third party to determine this amount.
Medical payments, or personal injury protection (PIP)
Medical payments coverage is provided for in most U.S. states, while personal injury protection is only provided for in the states that require it to be offered.
Both these coverages pay for medical bills, or medical expenses if you or your passengers are injured in a car accident, irrespective of who is at fault.
Uninsured motorist coverage and underinsured motorist coverage
Uninsured motorist coverage helps to protect you financially by paying your repair costs and medical bills if you are involved in an accident with another person who does not have liability car insurance.
Underinsured motorist coverage helps to cover your costs if you are involved in an accident with someone who does not have enough liability car insurance for the state that the accident occurred in.
These coverages are entirely optional, but can definitely help you to pay for medical bills after an accident that was not your fault. It can also help to pay for damages to your car.
Car rental reimbursement
If you need a rental car while your car is in the repairs shop being fixed after an accident or collision, then car rental reimbursement may be a good option for you.
Typically, you can add this car insurance policy to the collision coverage and comprehensive coverage that you take out with your car insurance company.
Gap insurance helps to protect you against the depreciation of your car’s value. Once you’ve bought a new car, its value starts decreasing significantly.
If you are financing or leasing your vehicle, this depreciation will leave a gap between what you owe and the car’s value. Gap insurance covers this difference.
Car insurance companies offer this optional insurance for anyone who needs backup and support on the road when something goes wrong. Typically, this auto insurance policy will help you if:
- You get a flat tire.
- Your battery dies.
- You run out of gas.
- Your car engine dies.
What Does Car Insurance Not Cover?
There are a few instances in which you cannot make a car insurance claim.
General maintenance: Your car insurance company will not cover the wear and tear, or general maintenance of your vehicle.
Unlisted driver: If a driver is not listed on your policy, car insurance coverage will not cover them if they are driving your car.
Intentional damage: Your auto insurance company will also deny a claim based on intentional damage to your car—that is if you intentionally damage the car yourself.
How Is Car Insurance Priced?
Auto insurance companies consider many factors when they are calculating the car insurance premium on a car insurance policy. When pricing an auto policy, an insurer will consider:
- Your age.
- Your driving history.
- Your credit score.
- Where you live.
- Where you work.
- The make and model of the car you drive.
What is a car insurance premium?
Your auto insurance premium is the amount of money that you will pay your car insurance company in exchange for a car insurance policy. You generally have the option to either pay your premium monthly, or pay it in full for the year.
If you do pay your car insurance premium in full, there is a good chance that your insurance company will give you a discount on your annual premium.
What is a car insurance deductible?
A deductible is the out-of-pocket expense that you will need to pay before your insurer will cover your claim.
For example, if you have a $500 deductible and the cost of the repairs to your car is $2,000—you will pay $500 and your insurer will pay the remaining $1,500.
It’s important to note that the higher your deductible, the higher the part of the claim expense that you are responsible for. However, you will enjoy lower car insurance premiums.
If you choose a lower deductible you will pay slightly higher car insurance premiums, but will have less to pay toward a claim.
How Do I Get Car Insurance?
Many auto insurance companies make the process of getting car insurance coverage in place fairly quick and simple.
All that you need to do is follow this process:
Compare car insurance quotes
Head to the top of our page and enter your zip code. We will ask you a few questions and provide you with dozens of quotes tailored to your exact needs.
Call your insurance agent
Choose one of the quotes we provide you with and follow up with your preferred insurance company. Ask the insurance agent to go through your insurance policy options in detail.
Confirm your coverage
Your insurance agent will confirm the coverage you have selected, as well as your premium, deductible, and coverage limits.
How Do I File a Car Insurance Claim?
If you have been in an accident or your car has been damaged in some way, you should notify your insurance agent immediately.
Your insurance company will allocate a claims adjuster to your case. This person’s job is to assess the damage to your car and determine how much the insurer is obligated to pay you based on the coverage limits of your policy.
Ask your insurer to provide you with the information that it needs to process your claim. This information could include:
- A police report.
- Photos of the damage.
- Contact details of the other party.
- Copies of your driver’s license and that of the other party.
- The insurance information of the other party.
Once you have emailed them this information, or uploaded it to their mobile or web app, your insurance company and the claim adjuster will keep in contact with you to update you on the progress of your claim.
Get the Best Quality, Cheapest Car Insurance Today with CheapInsurance.com
It’s no secret that car insurance rates are on the increase. If you’re on the lookout for car insurance for the first time or you want to find a better provider, you need to ensure that you get the coverage you need at the best possible price.
Finding a good insurer can be a time-consuming process. Fortunately, we are here to help you find the insurance coverage that you need—at the best price.
All you need to do is head to the top of this page and enter your zip code. You will find a wide selection of insurance quotes to choose from.
Once you have an idea of the auto insurance premiums that you could be paying, it will be time for you to contact the insurers that are offering you the cheapest rates to get a formal quote.
Getting car insurance should be quick, simple, and stress-free, and you deserve to get the best insurance rates possible.
At CheapInsurance.com, we’ve got you covered!