Find Cheap Auto Insurance Quotes in Your Area
Car insurance helps you manage the financial risks of owning a car and driving on the roads. Unexpected accidents happen all the time, and the costs of damages can be financially crippling. When you purchase car insurance, you are paying an insurance company to cover the costs of damages in the event of an accident so you don’t have to pay for them yourself.
The general definition of auto insurance is straightforward enough, but the details can get confusing. To help clarify how auto insurance works, we’ll provide an overview of what car insurance is, what car insurance covers, how car insurance payment works and how to use car insurance in an accident.
What is auto insurance?
Auto insurance covers the cost of damages when a car accident occurs. These types of damage include:
- Bodily injury to yourself or others
- Physical damage to your car or another car
- Damage to your property or someone else’s property
No matter how safe and skilled a driver you are, you cannot control factors like the weather, the state of the roads or the actions of other people. By buying an auto insurance policy, you’re paying the insurer so that, should an accident occur, you are financially protected and don’t have to pay an overwhelming amount in damages and repairs.
What car insurance pays for
All auto insurance exists to protect you in case of an unexpected accident. However, different kinds of auto insurance cover different kinds of accident scenarios. These types of car insurance, among others, include:
- Bodily injury and property damage liability insurance
- Comprehensive and collision insurance
- Personal injury protection (PIP) and medical payments coverage (MedPay)
- Uninsured/underinsured motorist coverage
Below is an explanation of these different kinds of car insurance and how they work.
Liability auto insurance
As its name implies, liability auto insurance covers the other person’s damages when you are liable, or at fault, in a car accident. Most states mandate liability coverage, and states that don’t require liability coverage do require you to prove that you can be financially responsible for any damages.
Liability auto insurance policies combine two different types of coverage:
- Bodily injury (BI)
- Property damage (PD)
Bodily injury liability insurance covers any costs that arise from bodily injury to the other party, ranging from funeral costs or lost wages to medical and dental bills. Property damage liability insurance covers the costs of repairs to or replacement of the other party’s property damaged in an accident, whether that be their car, home or some other object.
When you call an insurer to ask about liability insurance, the agent will generally quote you three numbers in a row, such as 25/50/10 or 15/30/10. Called “split limits,” these numbers represent the maximum amount your insurer will pay to cover:
- Bodily damages to one person
- Bodily damages to all people involved in the accident
- All property damage caused to others in an accident
Each state sets minimum requirements for liability damages. If you drive without insurance that meets these minimum limits, you could be subject to fines or even jail time.
If, on the other hand, you are at fault in an accident where the damages go above these minimums, you will be responsible for paying the remainder. If the other driver sues you, you could forfeit all your assets to pay for the damages.
Given this risk, experts recommend that you purchase the maximum amount of liability coverage you can afford, ideally enough to cover your total net worth or more.
Comprehensive and collision car insurance
Liability damage only covers damage done to someone else’s person or property. It does not cover any damage caused to your own property.
Physical damage car insurance, by contrast, does cover the cost of damage to your car. If you want to avoid paying the full cost of repairs when you are at fault in an accident, you should purchase this kind of insurance.
There are two kinds of physical damage car insurance:
- Collision coverage: Pays for damage to your car when you are at fault in an accident. If it’s unclear who is at fault in an accident, collision coverage will still pay for your repairs.
- Comprehensive coverage: Covers damage to your car that does not occur during a collision. This damage could result from theft, vandalism or natural disasters. Despite what its name indicates, however, comprehensive car insurance does not cover everything. Personal items stolen out of your car, for instance, would not be covered.
While collision and comprehensive coverage are both optional, we recommend purchasing them both. If you don’t have this coverage, you will be responsible for the full cost of repairs to your car after an accident. If you do, you will only need to pay your deductible, and insurance will pay the rest.
Personal injury protection and MedPay
Personal injury protection (PIP), also known as “no-fault insurance,” pays medical bills for you and your passengers after an accident. It is often called no-fault insurance because your insurer will pay regardless of who is at fault in an accident.
Some PIP insurance covers lost wages, household and child care expenses and funeral costs. States vary as to whether they require PIP, but because medical bills can quickly become crushingly expensive, it is always a good idea to purchase it if you can.
Another option that many consumers choose is MedPay. Though comparable to PIP, MedPay only covers medical and funeral costs and generally does not cover lost wages, psychiatric care or rehabilitative care like PIP does.
Uninsured/underinsured motorist coverage
If the other driver is at fault in an accident, their liability insurance should cover your repairs. “Should” is the crucial word here, however: One in every eight drivers on the road is uninsured, which means there is a significant chance that you could get into an accident with a driver who lacks the insurance needed to cover your damages.
- Uninsured motorist coverage pays any personal or property damages from an uninsured driver.
- Underinsured motorist coverage pays any additional personal or property damage costs when the other driver’s insurance is insufficient to cover those damages.
Because there are so many uninsured and underinsured drivers on the road, some states require drivers to carry this kind of coverage as part of the minimum insurance requirements.
Some insurers allow you to extend your liability coverage to any rental car you may drive. If you travel frequently and use rentals often, you might want to investigate this kind of coverage.
It’s likely a better deal than paying for an individual rental policy from a rental car company each time you rent a car.
Gap insurance covers the terrible scenario in which you have a car loan or lease and the car is totaled in an accident or stolen.
Comprehensive and collision coverage will only pay the car’s actual cash value, and because cars depreciate in value so quickly, there is often a gap between the car’s cash value and how much you owe on your car loan.
Gap insurance covers that gap, paying the difference in the event that you can no longer use your car because of theft or damages. It is an optional type of coverage you can add on to your existing policy.
Roadside assistance coverage
Ever been stuck on the side of the road with a flat? Roadside assistance coverage helps you get out of this common situation.
Paying for roadside assistance coverage on your auto insurance policy means you’ll get professional help when you run into common car problems, such as needing to have your battery jump-started, your car towed or your flat changed. Like gap insurance, roadside assistance is an additional type of coverage you can add on to your existing policy.
How paying for auto insurance policies works
The payment structure for auto insurance can be confusing. The following explains the various pieces of an auto insurance policy and who pays for each:
- Premium. An auto insurance premium is the amount of money you pay the insurance company for the coverage it provides. Payments are usually made once a month or every six months.
- Deductible. Comprehensive and collision car insurance include a number known as a deductible. The deductible is the amount of money you must pay after every accident before your insurance company begins to cover costs. As a general rule, a higher premium gives you a lower deductible and a lower deductible gives you a higher premium.
- Coverage limit. This is how much money the insurance company will spend on an accident after you have paid your premium and, when applicable, your deductible.
Insurers take different approaches to calculating premium costs, but a few things remain consistent from insurer to insurer:
- Personal details. Age, gender and location all factor into how much you will pay in premiums.
- Credit and driving history. If you’ve proven yourself responsible behind the wheel and with your money, your premium will likely be lower.
- Car type. Want a fast, new and expensive car? It’ll cost you to insure it. Insurance companies typically charge higher premiums for cars that are more costly to repair.
- What coverages you include. Want to add roadside assistance or gap insurance? You’ll pay more for these added coverages.
- Discounts. Are you a student with good grades? Have you served in the military? Are you willing to pay the full cost of a six-month policy up front? These are just some of the reasons insurers may be willing to offer you a discount.
- Number of people covered on the policy. Do you have a family of four? A house of six roommates? The more drivers added to your policy, the more risk there is that one of them will get in a crash. Your premium will likely increase to reflect that risk.
How car insurance works in an accident
You’ve done your research, shopped around for the best quote and purchased a policy. You hope that you never have to use it, but eventually an accident occurs and you do.
How does auto insurance work in the practical moment when your car sustains damage? Keep reading for a brief overview of how car insurance claims work and what to do if you get in an accident.
Collect all relevant evidence and documentation
Did you get into an accident? Here’s what you should do:
- Pull off the road to a safe place.
- Call the police.
- Collect as many details about the accident as you can.
- Photograph the damage.
- Write a brief summary of the accident on your phone.
- Take down information about the other driver’s car and insurance information.
- Be sure to get the name of their insurance company and their policy number.
Avoid making any statements that imply you accept fault, and do not let the other driver know how much coverage you have. If you have better coverage than the other driver, they may take advantage of that fact and blame you for the accident so they do not have to pay for damages. Silence — except for exchanging information — is generally the best approach, unless you have good reason to believe the other driver’s life is in danger.
Reach out to your insurance company
Having assembled all the relevant information, it’s time to let your insurance company do what you’re paying it to do. Here are the steps you should take:
- Call your insurance company to open a case. Give your insurer as much detail as possible to speed up the claims process.
- File the report quickly. It’s important to submit your claim before the insurer's claim filing deadline and the state’s statute of limitations deadline.
Once the initial call is complete, your insurer will hand your claim over to a claims adjuster or claims specialist. This person is your go-to for all questions regarding repairs, medical expenses and other aspects of your coverage.
The claims adjuster will assess the damage, determine how much compensation you are owed and sometimes direct you to a specific shop or company for repairs. The money they offer you is known as a “settlement offer.” Many states have laws requiring companies to make this offer within a certain amount of time after you file the initial claim.
If you feel that the settlement offer is insufficient, you can negotiate it. Be prepared to make your case as robustly as possible, and come prepared to back up your position. You may need to take legal action if the counter-offer the company makes is insufficient.
Remember also that the company is not obligated to pay you more than the maximum amount of coverage on your policy. You are responsible for any additional expenses after your coverage maxes out.
If you believe the other driver or drivers are at fault for the accident, reach out to their insurance company to explain the situation. You may be entitled to have your repairs paid for by their liability coverage.
Certain states, however, are no-fault states and mandate that all drivers have personal injury protection. If you live in one of these states, then there is no need to file a claim with the other driver’s insurance company. You would file a claim with your own insurer.
No one likes being in a car accident, and the complexities of auto insurance across different states and different companies don’t make it any easier. Armed with a solid knowledge of how auto insurance works, however, you can successfully select the coverage that suits your particular needs and engage your insurer when an accident happens.