Updated February 2, 2021

How Does Car Insurance Work

Read more about Car Insurance

Does insurance cover you or the car? Depends on your policy. Read on to learn about the payout, how full coverage works and what happens if you're at fault.

Why You Need Car Insurance

Car insurance helps pay for car repairs, injuries, and property damage after an accident. Your liability coverage pays for damages you cause to other people or their property. Additional coverage like collision or comprehensive pays for damages to your car regardless of who was at fault.

Here are the most common scenarios in which car insurance can be used.

Car Accident Where You're at Fault
If the police or insurance company determine you caused an accident, insurance will pay some of the expenses (depending on your policy and coverage).

This may include:

  • Vehicle Damage
  • Medical Expenses for Yourself or Others

You Harm Someone With Your Car
If you injure someone in a non-collision situation (like hitting a pedestrian while driving), insurance will pay some or all of the injured person's medical expenses.

Property Damage
If you damage someone's property with your vehicle, insurance may pay some or all of it. Some common examples: are hitting someone's mailbox while you're driving or backing into a sign in a parking lot.

Keep reading to learn what types of car insurance are right for you.

Types of Insurance

Car insurance has many several coverage levels and options. There are six main categories :

  1. Liability Insurance: This coverage is specifically for injuries you cause to another person with your vehicle or damage to property caused by your vehicle. Liability insurance does NOT cover damage to your own car or any of your medical expenses.

  2. Personal Injury Protection: Personal injury protection, also known as PIP, covers your medical expenses if you or your passengers are injured in an accident. Unlike other insurance types, PIP is a no-fault coverage. In other words, benefits will be paid out regardless who was at fault.

  3. Collision Insurance: Collision insurance covers the damage to your vehicle if you're in an accident.

  4. Comprehensive Insurance: This covers your vehicle when it's damaged by something other than an auto accident. Examples include:

    • Hail Damage
    • Cracked Windshield
    • Vandalism

    Comprehensive insurance also protects you if your car is stolen.

  5. Uninsured and Underinsured Insurance: About 1 in 8 people drive uninsured in the U.S. Uninsured and underinsurance coverage helps when an uninsured person hits you with their car.

  6. Gap Insurance: A standard insurance policy will cover only what the car is worth. But since a car's value decreases over time, financed or leased articles may be worth less than the amount owed. Gap insurance picks up the difference between the car's value and the amount left on the loan.

  7. "Full Coverage": Drivers who want to be fully covered in any situation may choose to have all six coverage types mentioned in this list. This is referred to as "full coverage."

Is Car Insurance Necessary?

Protecting yourself with insurance is always a good idea, whether it's medical, life, or car insurance. But for most states in the US, car insurance is a legal requirement.

Minimum coverage requirements vary from state to state. In many states, liability insurance and uninsured/underinsured insurance is the minimum coverage necessary. Other states require these along with personal injury protection. Each state also mandates a minimum dollar amount of coverage.

Be sure to fully understand your state's minimum car insurance requirements. Failure to have adequate coverage can mean big fines, lots of out of pocket expenses, and maybe a suspended driver's license.

In most cases, you can check the minimum coverage requirements on your state's Department of Motor Vehicles website.

How Much Car Insurance Do You Need?

Car insurance should protect you, and others, from the financial consequences of a car accident. If you don't have enough coverage, you could be at risk for substantial out-of-pocket expenses.

Here are a few things to keep in mind when deciding how much car insurance you need:

Check Your State's Minimum Requirements
Find your state's mandatory coverage types and minimums at the Insurance Information Institute. You'll need at least that much coverage. But remember, state minimum coverage limits are usually pretty low. This means that you may pay from your own pocket if there is an accident.

Can you afford to pay thousands of dollars? If not, you'll want to increase your coverage limits.

Consider Other Coverages You Already Have in Place
If you have a great medical insurance policy, then you might opt to lower the personal injury portion of your car insurance policy.

Don't Forget About the Deductible
This is the amount you'll pay before the benefits begin.

Car insurance deductibles can vary, from $250 to $500 to $1,000. Some plans even offer $0 deductibles.
The coverage limits you select and the deductible you choose affects the overall cost of your car insurance.

A high deductible and lower coverage maximum will cost you a lot less - but be careful. You could be on the hook for big expenses if you get in an accident. Your best option is selecting a plan with the highest coverage that still fits in your budget.

How Can You Get Car Insurance?

Most companies have online tools to help you find the right policy. Many of the largest car insurance companies also have local agents you can visit.

Insurance companies will ask you for some information to calculate your insurance premium. This may include your:

  • Age
  • Gender
  • Address
  • Occupation
  • Vehicle type

You'll also be asked who else will be driving the car.

Along with these details, the insurance company will check your driving record.

Your driving record has a big impact on car insurance premium. Drivers with a history of speeding tickets, for example, are considered riskier, so they'll have higher premiums. Same goes for drivers with previous accidents on their record.

Even a single accident can cause insurance premiums to increase.

Your credit score is used to determine your overall risk when it comes to car insurance. A lower credit score usually means a higher premium.

What to Do if You Have an Accident

Follow these steps when you're involved in a car accident:

  1. Contact Your Insurance Company as Soon as Possible: Speak with an agent to share an account of the accident.

    In any accident situation, start by calling the police or emergency assistance, if necessary. Your safety and those of your passengers is the first priority.

  2. Exchange Insurance Information with the Other Person Involved: Make sure to record:

    • Names
    • Addresses
    • Phone Numbers
    • Insurance Details

    Take a photo of the front and back of the other driver's ID and insurance card.

    If you need to report another type of damage or theft, contact the insurance company as soon as you notice the problem.

  3. Meet with the Insurance Adjuster: Your call to the insurance company begins the claims process.

    Most companies will then assign an insurance adjuster to your case. This is a single point of contact who will work with you throughout the claims process.

    The adjuster will ask questions about the incident and request the other party's insurance details. Typically, they will also ask you for a police report.

You Should Know: A police accident/incident report is a summary of the accident details that's written by the responding officer.

If it's clear who was at fault in the accident, the officer will note this on his report.

With this information, the adjuster will begin reviewing your claim. If necessary, they may request other information. In complicated cases, your claim may be reviewed by one or more other people at the insurance company.

Ultimately, your insurance will decide which damages they're going to cover and how much they're going to pay.

If the accident involves another party, your adjuster will reach out to the other person(s) directly to work through the claims payout. If any money is due to you, the adjuster will explain the amount you can expect to receive.

Depending on the severity of the accident, you may be tempted to get a lawyer. If you're planning on hiring an attorney, make sure to read this article from Injury Claim Coach to learn the questions you need to ask and the steps you need to take throughout the process.


Should I always file a claim?
Car insurance protects you from financial burden. But it's important to remember your car insurance premium - the amount you have to pay for insurance - is based not only on your personal details, but also your record of accidents.

Multiple accidents or frequent damage to your vehicle will result in higher premiums. Before filing an insurance claim for a minor incident, consider the long-term effect the claim will have on your insurance bill.

What if I'm driving in another state?
Within the United States, car insurance generally covers you no matter where you drive. If you're involved in an accident in a state that requires more coverage, most insurances will cover the difference.

If you're planning on driving in another state for an extended period of time, it's best to contact your insurance company to review your coverage.

Does my insurance cover anyone else who drives my car?
Unfortunately, this is not a yes or no question. In general, collision and comprehensive coverage "follow the car." This means collision and comprehensive benefits apply regardless of who is driving.

However, the way this coverage is applied can be different. In some cases, the insurance will only apply if the person driving is an "eligible driver," meaning someone you specifically listed on your policy.

Other insurance companies might consider anyone living in your household as an eligible driver. Still other companies might just cover anyone else who is driving.

Does my insurance cover me if I drive someone else's car?
Collision and comprehensive coverage doesn't follow you when you're driving someone else's car. More likely, that car's coverage will be in effect.

Liability coverage, on the other hand, often does "follow the driver," no matter what they're driving. But it's always best to contact your insurance company to learn how your specific coverage works.

How do I pay my life Insurance premiums?
This depends on the individual insurance company. Some companies require a lump sum payment every six months. Others may allow payments every three months or even monthly payments.

What the Experts Say

CreditDonkey asked a panel of industry experts to answer readers' most pressing questions. Here's what they said:

Bottom Line

Car insurance can protect you financially in the event of an accident or other issue involving your car. Insurance rates and policies vary - as do requirements in different states.

Research online or speak with an agent to find the best policy for your needs and budget.

Write to Amber Blevins at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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