What Is Auto Insurance & How Does it Work?

Auto insurance is one of many different types of insurance policies. It’s essential to understand the definition of car insurance since it provides financial protection in several situations. For example, it can pay for expenses if you get involved in an accident. Depending on your policy, it can also help cover repair costs if your vehicle sustains damage, and it might even offer financial protection if someone steals your car.

An auto insurance policy includes several types of coverage. Liability insurance is the most common. However, you can also add comprehensive and collision coverage to your plan, which adds protection for your vehicle. You can also set your policy up to cover medical payments and incidents involving uninsured motorists.

Most states require some form of car insurance policy. However, each state has a different minimum requirement for auto insurance (these refer to coverages and their respective limits). Purchasing an auto insurance policy requires you to pay a premium. Although it adds an expense to your household budget, it is more cost-effective than spending out-of-pocket for injuries or vehicle damages.

Car insurance provides financial protection if the insured is at fault in an accident. Purchasing more coverage than a liability-only plan provides can also cover the insured and their vehicle.

Auto insurance is usually sold as a package, which includes liability-only protection as basic coverage. Add–ons can expand benefits to include medical payments, damages to the insured driver’s vehicle and even gap insurance to pay off the loan if it’s totaled.

Most drivers need more than basic liability-only coverage to protect their income and assets in the event of a large auto claim. According to the Insurance Information Institute, 78% of insured drivers purchase comprehensive coverage in addition to liability coverage, and 74% also purchase collision coverage.

The more financial risk you have, the better auto insurance policy you should have to protect yourself and your family. Understanding how auto insurance works can help you find the best car insurance quotes.

A car insurance policy is more than just coverages. There are terms to be aware of, as well as key components that make up the typical auto insurance policy.

Knowing what’s included in your policy can help you make the best choice when shopping for car insurance. You’ll also be able to more easily compare quotes to determine what coverages are best for you and your family.

Also called a dec page, this is the main page of your car insurance policy that states what’s included or excluded in your policy, including:

This is the broad document that shows the auto insurance policy is a legally binding contract between you and the insurance company. It includes a breakdown of what’s covered and what’s not, as well as explaining your responsibilities and those of the insurer based on what’s included in the policy.

Most car insurance companies offer a six-month policy, though some offer an annual auto policy. If you pay the auto insurance premium in full, you will save the most money. Companies usually add on installment fees if you choose to pay the premium monthly, costing you more money in the long run. But do take note that the no down payment car insurance will allow you to get insured with the lowest upfront payment.

Here is a breakdown to show you how you can save more money on an annual car insurance policy by paying it in full.

• Annual premium: $1,000
• Installment fees: $5
• Paying the premium in full: $1,000
• Paying the premium semi-annually: $1,005
• Paying the premium monthly: $1,060 (12 x $5 = $60)

The amount that your car insurance policy will cover when you’re involved in an accident is dependent on your policy limits. The higher your policy limits, the greater your upfront costs, but your insurer provides more coverage. Having a higher deductible will lower your premium, but you will have to pay more out-of-pocket if you file a claim.

It’s always a good idea to review your auto insurance policy coverages, limits and deductibles at each renewal. This way, you can make any adjustments if your personal situation changes.

To understand how a car insurance claim works, review the scenario below when a vehicle gets $6,000 in damage.

• Deductible: $500
• Damage to Your Car: $6,000
• Insurance Claim Payment: $5,500

You pay $500 out of pocket to repair the damage, while the car insurance company contributes the remaining $5,500.

Being involved in an accident, no matter how minor, can be stressful. In these situations, it can be difficult to remember how to use your car insurance properly and what steps are involved in making a claim.

Each scenario is different and may not follow these exact steps, however, this step-by-step process can help with most claims scenarios:

Every state has its own set of rules and regulations when it comes to car insurance. Almost every state, with the exception of New Hampshire, requires you to have a minimum amount of coverage for liability, and most require uninsured and underinsured motorist coverage as well. Optional coverages like full coverage car insurance may be required if you have a loan or lease on the covered vehicle.

To learn how car insurance works in your state and what’s required or optional, check out the search tool below.

Each scenario involving your auto insurance will cause different coverages to come into play. To illustrate this, we’ve come up with five common car insurance claim scenarios to show how the three most common car insurance coverages would work.

Though no one wants to be at fault in an auto accident, having the right insurance coverage in place will make the situation easier. If there are injuries in your car or theirs, call the police to the location and an ambulance if needed. Exchange information with the other driver, including your car insurance policy number so you can file a claim once you’re home.

• Liability: Liability coverage will pay up to the policy limits for damage to the other person’s car, as well as for bodily injuries to them and their passengers.
• Comprehensive: Not applicable.
• Collision: Collision coverage will pay for your car damages or the book value of the vehicle if it’s totaled, whichever is greater, less your deductible (usually between $250 and $1,000).

If your car is hit by another driver, most likely they will be deemed at fault in the accident. If they have auto insurance, their liability coverage will pay for your injuries and car damage. You could also collect for medical payments under your own policy. Uninsured/underinsured motorists coverage would be used if the other person was not insured or did not have policy limits high enough to pay for your damages and/or injuries.

• Liability: Not applicable.
• Comprehensive: Not applicable.
• Collision: In some instances, you may use your collision coverage to get your car fixed if there were delays with the other person’s auto insurance. If you use this coverage, the deductible may still apply.

Damage caused by a storm is covered under comprehensive coverage. Hopefully, you were not in the car when it happened but if you were, you could also use the medical payments or PIP coverage.

• Liability: Not applicable.
• Comprehensive: Comprehensive coverage would pay to fix the car or total it for the book value, less the deductible on the policy (between $0 and $1,000).
• Collision: Not applicable.

Including uninsured and underinsured motorist coverage on your auto policy is a great idea for scenarios like this. When someone hits your car and doesn’t have insurance, you should call the police to file a report. Get as much information from the other driver as possible, including driver’s license number, name and address. Deductibles vary on this coverage and are usually mandated by the state, where required.

• Liability: Not applicable.
• Comprehensive: Not applicable.
• Collision: This coverage does not apply unless you lack uninsured motorist coverage. If you don’t have uninsured motorist coverage, but you do have collision coverage, your insurance company may fix the vehicle (less your deductible) and then sue the other person for the costs incurred.

Being severely injured in an accident is one of the worst-case scenarios, but it is an unfortunate reality for many people. Data from the CDC shows medical costs and productivity loss due to auto accidents cost more than $75 billion per year. Some costs can be paid with medical payments/PIP coverage. Uninsured and underinsured motorist coverage might also come into play if someone else was at fault.

• Liability: This coverage does not apply unless you’re deemed at fault and cause injuries or property damage to another person.
• Comprehensive: Not applicable.
• Collision: This coverage may apply if you were at fault and your car needs to be fixed or totaled.