Car Insurance: How Does It Work & What Is It?

Car accidents can cost a lot, especially with severe vehicle damage or injuries. Car insurance helps pay these bills and protects you from big financial losses. Let’s see how car insurance solves all problems. 

Key Takeaways 

  • Car insurance offers different coverage types; some are mandatory, others optional, based on your location.
  • Almost every state mandates some car insurance with set minimums.
  • Your insurance cost changes based on coverage types, chosen deductibles, and other aspects.

What Is Car Insurance? 

Car insurance provides financial protection in case of accidents, damages from non-collision events like falling trees, or theft. By paying a premium, the insurer commits to covering your expenses up to a certain limit. The fundamental principle behind auto insurance is to restore you to your original financial position before any mishap. 

What Is Car Insurance? 

So, if you face an accident, your policy can assist with the repair costs, medical bills, and other expenses you might be held responsible for, as long as you have the appropriate coverage. It’s worth noting that most states mandate a certain level of car insurance, though the exact requirements differ from one state to another.

What Does Car Insurance Cover?

Car insurance varies based on whether you’re in a tort state or a no-fault state, so it’s wise to talk with a licensed insurance agent for specifics.

Liability Insurance

When you cause an accident, liability insurance covers the costs. It has two parts:

  • Bodily Injury: Pays for injuries or death of others involved when you’re at fault.
  • Property Damage: Handles the costs if you damage another person’s property with your car.

You usually need a set amount of this coverage to drive legally, and your state’s DMV or an insurance guide can tell you the exact amount.

What Does Car Insurance Cover?

Uninsured Motorist Coverage 

If an uninsured driver injures you or you’re a hit-and-run victim, this coverage steps in. Some places also let it cover property damage. Some states mandate a specific amount of this coverage.

If the driver at fault has insufficient insurance, Underinsured Motorist Coverage can make up the difference. But this works only if your coverage limit is higher than theirs.

Personal Injury Protection (PIP)

No matter who causes an accident, PIP pays for your or your passengers’ medical bills. It might even cover you if you’re hit while walking or cycling. Sometimes, it covers lost wages or other costs like house cleaning. Some states require PIP, while others offer it as an option.

Medical Payments Coverage (MedPay)

This works like PIP but only covers medical bills without extra costs like lost wages. It’s mandatory in certain states but isn’t available everywhere.

Collision Coverage

If you hit another car, building, tree, or even a pothole, collision coverage pays for your car’s repairs.

Comprehensive Coverage

For non-accident damage to your car, like from fire, hail, vandalism, or theft, comprehensive coverage is there for you. If an animal damages your car or something falls on it, this coverage also applies.

Insurance Extras

Auto insurance companies offer various optional add-ons to enhance your coverage:

Insurance Extras
  • Roadside Assistance: This comes to your aid for situations like flat tires, lockouts, or when you need a tow, helping you get back on the road.
  • New Car Replacement: If your new car is totaled, this coverage ensures you get a replacement of the same make and model. It’s generally for newer vehicles, like those less than two years old, but specifics can vary.
  • Mechanical Breakdown Insurance: Should your car malfunction outside the manufacturer’s warranty, this covers the repair costs.
  • Rental Reimbursement: If an insured event puts your car in the repair shop, this takes care of your rental car expenses. It’s not for routine maintenance.
  • Rideshare Insurance: For those driving for ridesharing companies, this covers you during work hours, filling the gaps left by personal auto policies.
  • Gap Insurance: After a total loss, if you owe more on your car than its insured value, this covers the difference.

How Much Does Car Insurance Cost?

On average, car insurance policies cost $1,547 annually, based on our research. However, individual rates can vary. Insurers consider various factors like your age, where you live, your driving history, the kind of car you drive, and your insurance score when setting your premium. 

Additionally, your insurance cost will reflect the amount of coverage you select, as well as your chosen deductible and limits. To secure the best deal that aligns with your requirements, it’s wise to get quotes from at least three different insurance providers and compare them.

Who Does Car Insurance Cover?

Typically, a personal car insurance policy covers the policyholder and any family members listed as drivers. Additionally, if someone not listed on your policy drives your car with your permission, they’re usually covered too.

The Best Cheap Car Insurance Companies

Average Annual Rates:

3+ TIPS To Save Money on Your Auto Insurance

Cutting car insurance costs is easier than you think. Here’s how:

  • Adjust your deductible: Opting for a higher deductible can lead to lower premiums.
  • Explore discounts: Beyond the common bundling deals, you might get discounts for things like setting up autopay, taking a safe driving course, or not having recent claims.
  • Compare providers: Prices can differ across insurers, so get quotes from a few before deciding.
  • Boost your credit: Good credit can score you a better insurance rate.

How Do I File a Car Insurance Claim? 

Navigating the car insurance claim process might seem daunting, but following these steps can simplify it:

  • Reach out to your insurance agent right away. Discuss the incident and get clarity on your coverage and any claim submission deadlines.
  • Collect all necessary details. This might include a police report, photos of damages, contact details of everyone involved, and repair estimates. Your insurance provider will guide you on what’s needed.
  • Submit your claim. Most insurers allow claims through their website, mobile app, or a phone call.
  • If needed, inquire about a rental car. Check if your policy includes it and how to avail it.

Why Are Car Insurance Claims Denied?

Insurance companies might reject claims for several reasons, including:

  • If someone who resides with you and frequently uses your car wasn’t listed on your policy.
  • If you were using your personal car for business activities during the accident.
  • If the car, though insured under your name, is primarily stored and used at a different address.

In addition, claims might be denied if the damage was self-inflicted, such as from off-roading or racing activities. General wear and tear aren’t typically covered either. Importantly, it’s illegal to file a false claim. Altering accident details or dates to get coverage can lead to hefty penalties, potential legal consequences, or even jail time.

Does Car Insurance Cover Theft? Yes. For the Most Part.

Car insurance can cover theft, but you need the right policy. Edward L. Blais, J.D., C.I.C., C.P.I.A., President of Blais Insurance in Lincoln, R.I., explained the nuances of policies that protect against car theft. He stated, “In the context of an auto policy, theft is just that—theft.” So, car insurance can cover theft, but with certain conditions.

In Rhode Island, policies cover theft under the “Other Than Collision” category. This category once went by the name “comprehensive” and even earlier, “Fire and Theft.” Most states continue to label it as “Comprehensive.” The only exception to this coverage is if evidence shows the policyholder participated in the theft, which qualifies as fraud.

Comprehensive insurance typically safeguards against “Missiles, falling objects, theft, larceny, windstorm (sandblast), bird or animal contact, mischief, fire, explosion, earthquake,” as Blais highlighted. These events are often termed “Acts of God.”

Remember, this comprehensive coverage goes beyond the basic liability insurance you might hold.

Frequently asked questions

What car insurance company has the best coverage types and rates?

Car insurance premiums vary based on several factors, such as location, driving history, vehicle type, and sometimes even credit history. Given this complexity, no two policies are identical. To find the best fit, it’s essential to compare quotes from different companies.

Do I need car insurance before buying a vehicle?

Before driving a new car off the lot, you’ll typically need proof of insurance. While purchasing a car can take time, it’s often advisable to have your insurance policy active on the same day. If you already have a policy, it might temporarily cover your new vehicle, but this is limited to your old car’s coverage. Additionally, this temporary coverage usually lasts just 30 days. Hence, experts suggest updating your existing policy or securing a new one on the day you buy your car.

How do I cancel my car insurance policy?

Canceling car insurance can be simple, but the process varies by company. Some insurers may accept a verbal cancellation, while others need a written request. Additionally, certain companies might ask for evidence of new insurance or a canceled vehicle registration. To understand the specific steps, it’s best to speak with your insurance agent.

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