How Does Car Insurance Work?

Car insurance allows you to file claims with an insurance company when facing major vehicle repair and medical costs after an accident.
Written by R.E. Fulton
Edited by Jessica Barrett
Car insurance
demonstrates financial responsibility to the state and provides essential protection against costs associated with car accidents, car theft, and other threats to your vehicle. 
  • Paying for car insurance allows you to submit a claim for unexpected expenses stemming from a car accident or other covered event
  • Most drivers need some combination of liability insurance, medical expenses coverage, and physical damage coverage
  • When you file a car insurance claim, an adjuster from your insurance company will estimate the damage—and that’s what your payout will be based on. 
  • The average cost of a standard
    full-coverage car insurance
    policy is $1,712 per year, but you can save by raising your deductible and comparing quotes. 

How does auto insurance work? 

Car insurance provides financial protection when: 
  • You cause a car accident 
  • You’re injured in a car accident
  • Your vehicle is damaged or stolen 
In exchange for regular payments, your car insurance company agrees to pay for expenses stemming from any of those events—up to your policy’s limits. 

What does car insurance cover? 

There are six basic types of car insurance coverage that may be included in a standard policy. 

Liability insurance: Protection from lawsuits

Liability insurance covers medical expenses and vehicle repairs for other drivers if you’re at fault in an accident. 
There are two basic types of liability coverage: 
  • Bodily injury:
    Bodily injury liability (BIL)
    coverage allows other parties to file claims with your insurance company if they’re injured in a crash that you were responsible for. 
  • Property damage:
    Property damage liability (PDL)
    coverage allows other parties to file claims with your insurance company if you damage their vehicle or other property in an at-fault accident. 
Property damage liability insurance is required by law in every state except
New Hampshire
, where car insurance is only required for certain drivers with violations. Bodily injury liability insurance is required in every state except New Hampshire and
Click here to learn more about
liability car insurance

Collision insurance: Vehicle coverage after a crash

Collision coverage pays for damage to your vehicle caused by a crash, including: 
  • Multi-car collisions
  • Fender benders
  • Single-car rollover events
  • Hitting a pole, guardrail, or pothole 
It is not required by law but is a requirement from lenders for financed or leased vehicles. 
Click here to learn more about
collision insurance

Comprehensive insurance: Theft, weather, and natural disasters

Comprehensive coverage pays for damage to your vehicle caused by something other than a car accident, such as: 
  • Theft
  • Vandalism 
  • Falling trees or other objects
  • Hitting an animal
  • Windshield and glass damage
  • Severe weather
  • Natural disasters
Comprehensive insurance isn’t required by law, but it is a requirement from lenders for leased or financed vehicles. 
Click here to learn more about
comprehensive insurance

Uninsured/underinsured motorist coverage: Simplifying medical costs

Uninsured motorist coverage can cover your medical bills and vehicle repairs in the event of an accident with an uninsured driver. 
There are three basic types of uninsured motorist coverage: 
  • Uninsured motorist bodily injury coverage (UM): Covers medical bills from an accident caused by an uninsured driver
  • Underinsured motorist bodily injury coverage (UIM): Covers medical bills that go past the at-fault driver’s liability limits
  • Uninsured motorist property damage (UMPD): Covers property damage from an accident caused by an uninsured driver
All three types of uninsured motorist coverage are required by some state laws and not by others. In many states where UM/UIM/UMPD is not required, the coverage must be rejected in writing. 
Click here to learn more about
uninsured/underinsured motorist coverage

Medical payments (MedPay): Health expenses after an accident

Medical payments coverage covers medical costs for you and your passengers after an accident—regardless of fault. MedPay also covers: 
  • Emergency treatment costs
  • Rehabilitation and nursing care
  • Some medical equipment
  • Funeral expenses 
This coverage, which is only required by law in Maine, supplements any health insurance coverage you may have and simplifies the process of financing medical care after an accident. 
Click here to learn more about

Personal injury protection (PIP): No-fault medical coverage

Personal injury protection (PIP) covers a wide range of medical expenses for drivers and passengers in no-fault states. PIP pays for: 
  • Medical bills for anyone covered on the policy, including when struck as a pedestrian
  • Lost wages
  • Rehabilitation costs
  • Psychiatric care
  • Household services required due to injury or disability
  • Death benefits
PIP coverage is required by law in all no-fault states. 
Click here to learn more about
personal injury protection (PIP)

It’s the little things: Extra coverage you can add

In addition to the six main types of coverage outlined above, drivers can choose insurance add-ons that bolster financial protection: 
Average cost to add
Who needs it?
Gap (or “guaranteed asset protection”) coverage pays for the difference between the insurance payout for a totaled car and the amount remaining on your auto loan.
$20 to $40 per year
New car owners
Roadside assistance (or towing and labor coverage) pays for emergency towing, lockouts, and other services in the event of a vehicle breakdown. 
$50 to $100 per year
Rural drivers and anyone with an older vehicle
Rental car coverage covers all or part of the cost of a rental vehicle while your covered vehicle is in a repair shop following a valid claim. 
$25 to $50 per year
Drivers who can’t afford to be without a car for a few days

What’s included: The anatomy of a standard car insurance policy

Standard Policy Screenshot
Image: Standard plan quote from the Jerry app. Coverage selections are for a 30-year-old woman with a clean driving record in Sunset Valley, TX. The pictured plan was quoted for $180/mo from Progressive.
Most car insurance policies contain some amount of the following: 
  • Personal coverage: Bodily injury and property damage liability, PIP/medical payments coverage, and uninsured/underinsured motorist coverage. While your plan must meet your state’s legal requirements for each type of coverage, the plan above shows a moderate amount of coverage that exceeds Texas state minimums. 
  • Vehicle coverage: Comprehensive, collision, roadside assistance/towing, and rental car reimbursement coverage. The $1,000 deductibles in this plan make it more affordable, while a $500 deductible would cost more to maintain. 
A minimum coverage auto insurance policy only meets your state’s legal insurance requirements. A standard or “full coverage” policy includes collision and comprehensive coverage, typically along with higher liability limits. 
How much car insurance do I need?
At a minimum
You need enough liability coverage to meet your state’s legal requirements, along with any other type of coverage required in your state (e.g. uninsured motorist coverage or personal injury protection). 
You should have car insurance coverage to cover the likely cost of any car accident. That means: 
  • At least $50,000 per person/$100,000 per accident of bodily injury liability
  • At least $50,000 per accident of property damage liability 
  • Collision and comprehensive insurance to cover the actual cash value of your vehicle
You should have insurance coverage to cover the likely cost of a serious car accident. That means: 
  • At least $100,000 per person/$300,000 per accident of bodily injury liability 
  • At least $100,000 per accident of property damage liability 
  • Collision and comprehensive insurance to cover the actual cash value of your vehicle
  • New vehicle replacement insurance or gap insurance in case your vehicle is totaled

Car insurance costs: What you’ll pay and why

Car insurance costs are typically charged in annual, semi-annual, or monthly premiums. Your car insurance premium is based on a wide range of factors, including your driving history, age, and vehicle type. 
The average cost of a standard full-coverage car insurance policy is $1,712 per year. Broken into monthly payments, that’s about $143 per month. 
But insurance rates aren’t standardized—in fact, every car insurance company uses a different set of metrics to calculate rates, and every driver receives a different rate based on
rating factors
  • Age: Young drivers pay more than middle-aged and older drivers due to a higher statistical rate of accidents and violations. 
  • Coverage selections: A high-coverage policy that includes collision and comprehensive insurance will cost more than a liability-only policy with the minimum amount of coverage. 
  • Credit-based insurance scores: Some insurance companies calculate an insurance score based on your credit rating since there is a statistical correlation between low credit scores and a higher risk of claims.
  • Driving record: Insurance companies look at your
    Motor Vehicle Report
    CLUE report
    when issuing a policy. If you have past violations or accidents, you’ll pay a higher rate. 
  • Gender: Male drivers pay more than female and non-binary drivers due to a higher risk of violations and accidents. 
  • Insurance history: Drivers without a prior insurance history pay higher rates than drivers who are continuously insured. 
  • Location: Drivers in major cities or areas with a high rate of car accidents or auto thefts pay higher rates than drivers in safe areas. 
  • Vehicle type: Compact SUVs with high safety ratings, like the Subaru Forester and Ford Escape, are cheapest to insure. Luxury vehicles, off-road vehicles, and sports cars cost more to insure. 
To keep your car insurance costs low, compare insurance quotes from at least three different insurers before purchasing an auto policy. 
Terms to know
  • A car insurance quote is an estimated, time-sensitive price given by an auto insurance company for a certain insurance plan. 
  • A car insurance premium is the amount you pay to your insurance provider each month or year to maintain your policy. 
  • A car insurance deductible is the amount you agree to pay out of pocket before your coverage kicks in on a collision, comprehensive, or PIP claim. 

How to file a car insurance claim

After a car accident or another covered loss, you may need to
file a claim
with your auto insurance. Here’s how it works: 
  • Document the damages: Take photos of the accident scene and the damage to your vehicle. Make note of the date, time, and location of the incident. If you’re filing a car accident or theft claim, there may also be a police report. 
  • Reach out to the insurance company: For collision and comprehensive claims, you’ll file with your own insurance company. You can also file through your insurer for damage caused by other drivers and they will recover from the at-fault party’s insurance company. 
  • Work with the claims adjuster: The adjuster assigned to your case takes photos and writes an estimate for damage and issues payment based on the insurance estimate. 
  • Get the repairs: Some insurance companies will give you a list of recommended shops that can help expedite your claim, but you’re also able to choose your own mechanic or body shop.
Does insurance go up after a claim? Any claim made on your policy—including liability claims by other drivers and collision claims that you file—can raise your premiums temporarily. The amount of the increase depends on the severity of the accident, liability, and the size of the claim. 
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