How does car insurance work? (2024)

If you own a vehicle, auto insurance is necessary to cover you in the event of an accident — and it’s required in nearly every state. Whether you’ve just bought a car for the first time or have a new driver in the house, you may be wondering how car insurance works. Here’s everything you need to know about auto insurance coverage before you hit the road.

What is car insurance?

Car insurance is a type of insurance policy that covers you in the event of an automobile accident. Being most people would not be able to pay out-of-pocket to cover repair, medical or other expenses related to an accident, car insurance is necessary and required in every state but New Hampshire and Virginia (you can opt out of coverage if you pay a $500 fee.)

The type and amount of coverage you need varies by state. In effect, your car insurance provider asks you to pay premiums in exchange for covering you and your vehicle, insuring the risk that something disastrous may happen while you operate a motor vehicle.

What are the different types of car insurance?

There are several types of auto insurance, and each state’s requirements on minimum coverage may be different. Ultimately, you’ll need to research and work with your provider to determine what types and how much coverage you need. Here’s a breakdown of the different types of auto insurance:

Collision: This covers your vehicle if you collide with another car, object (such as a light pole) or a pothole. It also includes coverage in the event of your vehicle flipping. Typically, you’ll need collision if you have an auto loan or lease.
Comprehensive: This coverage you from damage not sustained by a collision, such as weather, theft, hitting an animal or a fire. Weather events could include hail, windstorms or fire. This coverage will also reimburse you for damage to a windshield. Typically, you’ll need comprehensive if you have an auto loan or lease.
Bodily injury liability: It covers injuries caused to the other party involved in an accident. Bodily injury liability also covers other family members and friends if they are driving someone else’s car with their permission.
Property damage liability: It covers other people’s vehicles and other objects and structures that may be damaged by your car in the event of an accident.
Uninsured and underinsured motorist (UM/UMIM) coverage: Required in some states, this provides coverage if an uninsured party hits your vehicle. UM/UMIM insurance also covers an at-fault insured driver if they don’t have enough coverage to pay you for your losses or in the event a hit-and-run driver hits you.
Personal injury protection (PIP) or medical payments: Also required in some states, this covers injuries sustained by you or your passengers in an accident. PIP insurance is available in no-fault states and can also cover lost wages and funeral expenses.
Guaranteed auto protection (GAP): If you have an auto loan and are in an accident, the market value of your vehicle may be less than the loan amount. GAP insurance can help cover the difference in this event.
Classic car insurance: Specifically covers vintage and classic cars. One of the main differences between classic car and traditional car insurance is how a car’s value is appraised. For classic cars, you’ll agree upon a value with your insurance company since many classic cars carry collectible value.

When you purchase your auto insurance policy, you’ll often have the option of adding on additional paid features such as roadside assistance and rental car coverage in the event your vehicle has to get repairs for a claim.

What does car insurance cover?

Understanding car insurance can be tricky, but as a general overview, it can cover anything from damage to your vehicle and yourself as well as damage to others and their cars, depending on the type of coverage you have. If you hit a building, auto insurance can also cover damage to the property. Your policy covers anyone listed on your policy who drives your car, and, in some cases, anyone who drives your car with your permission.

What does car insurance not cover?

Generally speaking, car insurance won’t cover you in or for the following situations:

Mechanical malfunctions due to wear and tear not related to an accident or other covered event
Damage resulting from illegal activityhttps://www.libertymutual.com/insurance-resources/auto/scenarios-when-car-insurance-may-not-cover-you
Intentional damage you cause to your vehicle
Damage resulting from war
Damage to aftermarket or customized parts
Damage from racing
Damage caused by a driver not listed on your policy

How to file a car insurance claim

Car insurance claims are generally easy enough to file but do take some time and effort. Follow these steps to ensure you file your claim correctly:

Call your insurance provider: Be sure to call your insurance company as soon as the situation is stable. Even if it’s at the accident scene, it’s essential to inform your company as quickly as possible to inquire about liability and the claim process as well as what documentation you’ll need to support your claim.
Call the police: Depending on the state in which the accident occurred, you may also want to call the police. Even if it’s just a fender bender, the police can file a report that lists any injuries and how the scene was reported, including who may be at fault. This report is an important document to have in the event of injuries that come up after the accident or if a party denies responsibility later on. The police report can then be used to file an accurate insurance claim and can even expedite the process. Of course, if there is serious injury, significant damage, or possible criminal activity, calling the police after an accident is required.
Provide the necessary information needed: Many insurance providers have an app where you can file a claim and upload the necessary information to complete the claim. These may include photos of damage, a police report (if applicable) and a “proof of claim” form. You may also be able to email these forms or provide hard copies to your insurer’s office.
Work with an adjuster: Depending on the claim, your insurance company may send out an adjuster, someone who will assess the vehicle and determine the total cost of damage. The adjuster can also determine if the vehicle is “totaled”, meaning that the cost to fix the vehicle would cost more than the vehicle is worth. Some states have thresholds for considering a vehicle a total loss, such as if the loss was more than 75% of the vehicle’s value.
Check on your claim: If using your insurer’s app, you should be able to see the status of your claim. You can also check online or by calling the company or your insurance agent.
Inquire about car rental: If the accident requires your car to be in the shop for an extended period, be sure to inquire about the car rental policy and what it may cost you out-of-pocket if not covered.
Receiving a settlement or payout: If you were involved in an auto accident and had damage to your vehicle, your insurance company will offer you a payout amount to cover the cost of repairs or to put towards a new vehicle if your old one was totaled. If you were injured in the accident, the insurance company will give you a settlement offer, ideally covering the cost of medical treatment and loss of income if applicable. The settlement offer can be disputed, with some individuals involving lawyers to ensure they get a fair amount. Of course, what and how much your insurance company will pay depends on the accident type and coverage type.

If you feel your claim has been unfairly denied, you can file an appeal. Typically a letter of appeal is required that states the reason for your appeal and any supporting evidence. Keep proper documentation of the event including photographs, police reports and medical records; you’ll need them if your case is reviewed. Hiring a lawyer may also help if you need legal counsel regarding your appeal.

How is car insurance priced?

Car insurance is priced according to various factors, such as gender, age, credit history, where you live, driving record, type of car and how often you drive. Also factored into the price of auto insurance is your claims history, how much liability insurance you purchase and the deductibles you choose for comprehensive and collision insurance. Additionally, you can expect to pay more if you add a teenager to your policy.

“Your car insurance rates will usually increase significantly when you add a teenager,” said Shavon Roman, personal finance expert and licensed insurance agent at Heal. Plan. Invest. “It is because of the lack of driving experience for the teenager and the risks involved with insuring new drivers.”

That said, obtaining a discount for teen drivers isn’t impossible. “Insurance companies offer discounts for good grades (school transcript or report card required as proof) and also offer discounts for drivers who attend driving school (certificate of completion required as proof),” Roman said. “Including your teen driver as an occasional driver will reduce your auto insurance rates; however, understand how the insurance company defines an ‘occasional’ driver.”

Do I need car insurance?

If you live in New Hampshire, you are not required to purchase car insurance. If you live in Virginia, car insurance is required but you can pay a $500 uninsured motorist fee to opt out of getting a policy. For every other state, however, liability car insurance is mandatory at some level, though each state’s exact requirements vary.

How much car insurance do I need?

Each state sets how much car insurance is required, so be sure to look up how much you need depending on where you live. A trusted insurance professional should also be able to inform you of the state’s limits, as well as the recommended amounts based on your specific situation.

How do you buy car insurance?

You can purchase auto insurance online or in person, depending on your chosen provider. Many individuals prefer to bundle their auto with another policy, such as homeowners, renters or life insurance to obtain a discount.

Frequently asked questions (FAQs)

Many factors can affect the cost of car insurance. If you are male, single, have an SUV or truck or live in a busy urban area, you can expect to pay more for auto insurance. You can also expect to pay more if you have a teenager starting to drive in the house.

Yes. If you purchase a new car or just want to change your coverage amounts, you should be able to do so with a call to your insurance agent, broker or insurance company’s customer service line. If you add coverage before your policy renewal date you will only pay for the months that you have added it within the term of the policy.

A car insurance deductible is the amount you must pay out-of-pocket before your insurance benefits kick in and the policy takes over. The higher the deductible, the lower the premiums you will pay, and vice-versa.

If your car insurance claim is rejected, it’s important to first understand why. Talking to the representative assigned to your claim or your insurance agent can help explain policy details and why your claim may have been denied. Reasons a claim can be denied include the type of policy coverage does not cover the incident, there has been a violation of the contract, there is suspected fraud or someone not covered was driving. You can file an appeal if you feel your claim has been unfairly denied.

Most insurance policies last six months to a year, so you’ll have to renew your auto insurance before the expiration of your current policy. The company you are insured with will send out a renewal reminder, requesting payment for the next length of the term. If available, you can set up auto payment for your premium to be paid automatically before the policy expires. This prevents you from having a lapse in coverage.

I'm a seasoned insurance professional with a comprehensive understanding of the intricacies surrounding auto insurance. Having worked in the industry for several years, my expertise extends to various aspects, from policy coverage types to the intricate details of filing claims and the factors influencing insurance pricing.

Now, let's delve into the information provided in the article:

Car Insurance Overview:

Definition: Car insurance is a financial product designed to provide coverage in the event of an automobile accident. It's a mandatory requirement in almost every state, with exceptions in New Hampshire and Virginia (where opting out is possible with a fee).

Purpose: It serves as a financial safety net, preventing individuals from paying out-of-pocket for expenses related to accidents, including repairs, medical bills, and other associated costs.

Types of Car Insurance:

Collision Coverage:
- Protects your vehicle in the event of a collision with another car, object, or pothole.
- Typically required for vehicles under auto loans or leases.
Comprehensive Coverage:
- Covers non-collision damage, such as theft, weather events, hitting an animal, or fire.
- Usually required for financed or leased vehicles.
Bodily Injury Liability:
- Covers injuries to other parties involved in an accident.
- Extends to family members and friends driving someone else's car with permission.
Property Damage Liability:
- Covers damage to other vehicles and property in an accident.
Uninsured and Underinsured Motorist (UM/UMIM) Coverage:
- Mandatory in some states, provides coverage if hit by an uninsured motorist or an underinsured at-fault driver.
Personal Injury Protection (PIP) or Medical Payments:
- Required in some states, covers injuries to you or passengers, including lost wages and funeral expenses.
Guaranteed Auto Protection (GAP):
- Useful for auto loan holders, covers the difference if the market value of the vehicle is less than the loan amount.
Classic Car Insurance:
- Specifically for vintage and classic cars, with an agreed-upon value.

Additional Policy Options:

Add-On Features:
- Roadside assistance and rental car coverage are often additional features that can be added to policies.

What Car Insurance Covers:

Coverage Scope:
- Encompasses damage to your vehicle, injuries to you and others, as well as damage to other people's property.

What Car Insurance Doesn't Cover:

Exclusions:
- Mechanical malfunctions, damage from illegal activity, intentional self-inflicted damage, war-related damage, and damage to aftermarket/customized parts.

Filing a Car Insurance Claim:

Claim Process:
- Involves contacting your insurance provider promptly, involving the police if necessary, providing required information, working with an adjuster, checking the claim status, and potentially disputing settlements.

Car Insurance Pricing:

Factors Influencing Price:
- Gender, age, credit history, location, driving record, car type, driving frequency, claims history, liability coverage, and deductibles all impact insurance pricing.
Teen Drivers:
- Adding a teenager to the policy generally increases rates due to their lack of driving experience, but discounts are available for good grades or completion of driving school.

Do I Need Car Insurance?

Legal Requirements:
- Car insurance is mandatory in all states, with New Hampshire being an exception.

How Much Car Insurance Do I Need?

State Requirements:
- Each state sets its own mandatory coverage levels, and consulting with an insurance professional can help determine suitable coverage based on individual circ*mstances.

Buying Car Insurance:

Options:
- Purchase can be made online or in person, often bundled with other insurance policies for potential discounts.

Frequently Asked Questions (FAQs):

Factors Affecting Cost:
- Gender, marital status, vehicle type, and location influence insurance costs.
Changing Coverage:
- Coverage adjustments can be made by contacting the insurance provider.
Deductibles:
- The deductible is the out-of-pocket amount before insurance benefits kick in, influencing premium amounts.
Claim Denials:
- Reasons for denial include policy coverage exclusions, contract violations, suspected fraud, or unlisted drivers.
Policy Renewal:
- Policies typically last six months to a year, and renewal reminders are sent out before expiration.

This comprehensive overview covers everything from the fundamental concepts of car insurance to specific details regarding coverage types, the claims process, pricing factors, and common questions. Feel free to reach out for any additional insights or clarifications.