How Does Car Insurance Work - And What Does It Cover? (original) (raw)

Car insurance is a necessity if you own a vehicle. In most states, it's even required by law to have at least a minimum amount of coverage — with New Hampshire being the only exception — though coverage requirements do vary by state.

But there are different types of car insurance policies out there, and even different types of coverage within the same policy. If you're wondering how to get car insurance or what's actually covered, this guide can help.

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At a basic level, car insurance is designed to protect you financially if you get into a car accident or your vehicle gets damaged some other way. Your policy's coverage can take care of the cost of repairs to your vehicle, medical treatment for you and your passengers (and possibly passengers in the other vehicle if you're at fault), damage to other property caused by your vehicle, and more.

In exchange for this protection, you pay a premium — either monthly, quarterly, semi-annually, or annually. The cost of your car insurance premiums can vary based on several different factors, which we'll cover in a minute.

When you purchase a car insurance policy, you can customize several components of your coverage and adjust coverage limits to strike the right balance between what you can afford and what your state requires. Optional coverage you're not required to have can still be a good investment, depending on how, what, and where you drive.

Drivers in most states are required by law to have liability insurance, but collision and comprehensive insurance are typically optional unless you have an auto loan or lease — in which case you're required to have "full coverage," meaning a policy that combines all three types.

10 types of car insurance and what they cover

1. Liability insurance

Liability insurance is designed to cover the costs of damages for accidents where you're found to be at fault, including bodily injuries and property damage. Most states require that you have a minimum amount of liability coverage, which is set by state law. You may want more coverage than the state minimum, however.

Bodily injury liability coverage can help pay for the following costs when you injure another person in an at-fault accident:

• Medical expenses
• Legal fees and counsel if you're sued as a result of the accident
• Loss of income
• Pain and suffering
• Funeral costs

Property damage liability covers damage your vehicle causes to another person's property, including other vehicles, fences, storefronts, and more.

Good to knowWhen states set minimum coverage requirements for car insurance, these generally apply to liability coverage. For example, California requires all drivers to carry at least 30,000inbodilyinjuryliabilityperperson(30,000 in bodily injury liability per person (30,000inbodilyinjuryliabilityperperson(60,000 per accident) and 15,000inpropertydamageliability.Michiganrequiresatleast15,000 in property damage liability. Michigan requires at least 15,000inpropertydamageliability.Michiganrequiresatleast50,000 in bodily injury liability per person ($100,000 per accident) and $10,000 in property damage liability. You can opt to purchase only the minimum liability insurance you need to legally drive, but we recommend looking into other types of coverage to make sure you're sufficiently protected.

2. Medical payments insurance

If you or your passengers get injured in an accident, medical payments insurance can help cover the cost of treating your injuries regardless of fault. This can include:

• Health insurance deductibles and copays
• Doctor or hospital visits
• Surgery
• Ambulance fees
• Funeral expenses

This insurance is required in some states and optional in others.

3. Personal injury protection

Personal injury protection (PIP) works similarly to medical payments insurance, but may also include other expenses, such as child care expenses and lost income. PIP is only available in certain states, but it isn't required in all of those states. Some states — such as Hawaii, which requires $10,000 in PIP coverage — have specific PIP requirements.

4. Collision insurance

If you get in an accident with another vehicle or hit an object, collision insurance will cover the cost of your repairs or even pay to replace your car, regardless of who was at fault. There's typically a deductible, which you'll need to pay before your coverage kicks in.

5. Comprehensive insurance

Comprehensive insurance covers damages to and loss of your vehicle from sources other than a collision. The maximum limit of coverage is the actual cash value of your car. Covered events typically include:

• Hail, fire, and other natural disasters (wind, floods, earthquakes, wildfires)
• Theft and vandalism (including arson and riots)
• Falling objects (such as tree limbs or construction equipment)
• Collisions with animals (such as a deer)
• Civil disturbances
• Broken windshields

Like collision coverage, comprehensive typically requires you to pay a deductible out of pocket. Comprehensive coverage averages around $200 per year, making it a relatively affordable addition to your policy.

6. Uninsured motorist insurance

If you're involved in an accident in which the other party is at fault, and they either don't have insurance or fled the scene of the accident, uninsured motorist coverage will protect you and your car. Coverage may include:

• Medical expenses
• Lost wages
• Disability
• Pain and suffering

7. Underinsured motorist insurance

Similar to uninsured motorist insurance, this coverage kicks in if you're in an accident in which the other driver is at fault but doesn't have enough liability insurance to pay the full cost of your injuries and the damage to your vehicle. Coverage may include:

• Medical expenses
• Lost wages
• Disability
• Pain and suffering

Note: Uninsured and underinsured motorist coverage are often bundled into one combined coverage add-on. Some states also set requirements for this type of coverage.

8. Emergency roadside insurance

This optional coverage can help offset the cost of emergency assistance if you're stranded on the road — for example, if you're out of gas, need a tow, or require help to put on a spare tire. It covers labor costs at the disablement site as well as towing expenses.

9. Rental reimbursement insurance

If your vehicle is in the shop or unavailable because of a covered loss, this insurance will reimburse you for the cost of your rental car or pay for it directly up to your coverage limits.

10. GAP insurance

GAP insurance helps you pay off your car loan if your vehicle is totaled in an accident and you owe more than it's worth. As the name suggests, it helps cover the gap caused by the negative equity in your vehicle.

Other types of coverage

Note that there are also different types of specialized car insurance policies.

For example, if you drive with Lyft or Uber or for an on-demand delivery service such as DoorDash, you'll need a rideshare insurance policy, and if you drive a vehicle strictly for business purposes, a commercial insurance policy will be a better fit than a personal one. Classic cars and luxury vehicles may also require a separate policy.

Finally, if you don't own a car but frequently drive others' vehicles, it may be a good idea to purchase a non-owners insurance policy for liability protection.

Does car insurance cover natural disasters?

Only if you have comprehensive insurance. If your policy doesn't include comprehensive coverage, natural disaster damage isn't covered and you'd be responsible for repair costs out of pocket.

Here's how comprehensive insurance applies to specific types of natural disaster damage:

Wind damage

Storms, hurricanes, and tornadoes can cause smashed glass or dents from fallen trees and debris. Comprehensive insurance will pay to replace your windshield or windows and repair body damage.

Flood and water damage

Water damage from flooding can produce mold, cause parts to rust, wreck electrical systems, and cause wires to deteriorate. Due to the cost of repairs, cars with significant water damage are often totaled. Comprehensive insurance covers the cost of repairs or, if the car isn't repairable, its replacement.

Earthquake damage

Earthquake damage can range from collapsed structures falling on your car to debris and fires. Whether your car is crushed or partially damaged, comprehensive insurance helps cover the cost of getting you back on the road.

Wildfire damage

Wildfires can destroy a car quickly, and even contained fires can cause significant smoke damage. Comprehensive insurance will help repair damaged parts or replace the car entirely.

How to file a natural disaster insurance claim

If your vehicle is damaged in a natural disaster, here are the steps to follow:

1. Get photos or video of the damage. If it's safe, document your vehicle inside and out, including what caused the damage and its severity. This will support your claim.
2. Contact your insurer. Reach out as soon as possible. Some companies allow claims through their website or mobile app; others require a phone call. Your insurer will guide you through the process.
3. Prevent further damage. After speaking with your insurer, take reasonable steps to protect your car from additional harm — for example, covering smashed windows with plastic tarps. Check with your insurer before taking any temporary measures.
4. Wait for an adjuster. Your insurer will send an adjuster to assess the damage. If the car is drivable, you may bring it to a repair shop instead. Try to meet the adjuster in person if possible.
5. Keep good records. Document every interaction with your insurance company and repair shop — date, time, and name of each person you speak with. Good records can help resolve any disputes.
6. Review the settlement. Your insurer will notify you of their decision and the payout amount. If you disagree with the settlement, requesting additional estimates is a wise step.

What isn't covered by car insurance?

Car insurance protects you in many different scenarios, but several situations are typically not covered:

• Theft of personal items: Comprehensive coverage may protect your car if someone breaks into it, but it typically doesn't cover personal property stolen from inside. That's usually covered by renters' or homeowners' insurance instead.
• Regular repairs: Car insurance won't cover repair costs from normal wear and tear or neglect — things like worn-out tires or excessive brake wear.
• Business use: A personal policy covers commuting but may not cover accidents that occur while using your car for business purposes. You'd need commercial auto insurance for that.
• Rideshare driving: Regular car insurance may exclude claims for damage caused while driving for fares. Rideshare insurance can replace your personal policy or be added as an add-on, depending on your insurer.
• Other drivers: Your policy might cover only the people named in it — including, in some cases, family members in your household. Know who is covered before lending your car.
• Damage exceeding your limits: Your insurer is not obligated to pay out more than the limits set for each coverage type, so purchase the maximum coverage you can afford.
• Driving across the U.S. border: Most policies cover you anywhere in the U.S. and often Canada, but won't cover you in Mexico. You'll typically need a supplemental policy for international trips.
• Exotic and performance cars: Many standard insurers exclude exotic and performance vehicles. You'll likely need a specialty insurer for these.

How to find affordable car insurance

Car insurance rates are influenced by several different factors, including but not limited to:

• Where you live
• Your driving record
• How often you drive
• Your age and gender
• The vehicle
• Your credit history
• The type and amount of coverage you choose

Here are some tips to help you find affordable car insurance:

• Shop around. No insurer offers the lowest rates for everybody, so comparing quotes from multiple companies — we suggest at least three — is the single best way to ensure you get the lowest rate. Car insurance comparison sites let you do this in one place, saving time and effort.
• Ask for discounts. Insurance companies typically offer discounts based on your driving, your vehicle, the organizations you're affiliated with, and more. Note that some discounts are temporary, and some insurers may limit the total discount percentage you can get.
• Get less coverage. Most states require a minimum amount of liability coverage, and if you've financed your vehicle, your lender may also require coverage. But in most cases, you won't need the maximum available. Just don't go so low that you'd be stuck paying out of pocket once your policy reaches its limit.
• Request a higher deductible. The higher your deductible, the less the insurance company has to pay — which typically lowers your rates. Just try to avoid going so high that you couldn't afford it if you needed to file a claim.
• Be mindful of what you drive. Vehicles that cost more to repair typically carry higher premiums. A less expensive vehicle can mean lower insurance costs.
• Improve your credit. In most states, car insurance companies are allowed to use a credit-based insurance score to help determine your rate — California, Hawaii, and Massachusetts have banned the practice.

Also consider checking insurance rates every year or two to make sure you're still getting the lowest possible rate.

FAQs

Which car insurance is the best?

Car insurance is regulated on the state level, so prices and features can vary from state to state, even within the same insurance company. As a result, there's no insurer that's best for everyone.

However, you can find information about customer satisfaction in the J.D. Power Auto Insurance Study. Depending on where you live and what's important to you, you can view and compare different national and regional insurers to determine which is the best car insurance for you.

What happens if your car is destroyed in a natural disaster?

If your car is destroyed or totaled in a natural disaster, don't panic. If you have comprehensive insurance, your insurer will cover the damages (or the cost of replacing your car). If your insurance policy does not include comprehensive coverage, then you may be on the hook for repair costs.

What types of car insurance should you buy?

At the very least, you should have the minimum required liability insurance set by your state. However, for the protection of both you and others on the road, it's a good idea to go above and beyond that minimum. Other coverage types, such as PIP or medical payments coverage, may also be required by law in your state.

As far as comprehensive and collision insurance coverage, your lender may require a certain level of coverage if you've financed your vehicle. Even if you own the car free and clear, though, consider purchasing this coverage unless you can self-insure by paying the damages or replacing your car out of pocket.

As far as other optional coverage options, consider the financial impact something like needing a rental car, emergency roadside assistance, or GAP coverage might cost you. Then think about whether you'd rather pay the cost of the insurance or pay for those expenses out of pocket.

Like other forms of insurance, car insurance is a way to manage your risks. So if you're financially stable and fine with taking on more risk, you may choose to purchase less coverage. But if you can't afford to pay for those things from your savings or you want to keep that money for other purposes, it may be worth paying for the insurance.

How much does car insurance cost each month?

According to the insurance comparison website The Zebra, the average cost for car insurance in the U.S. is 774everysixmonths,or774 every six months, or 774everysixmonths,or129 per month.

Keep in mind, though, that many factors go into that figure. For example, the average monthly premium in Maine is 77versus77 versus 77versus258 in Michigan, and rates can vary widely by age, credit range, driving record, coverage options, and more.

As you shop around for car insurance quotes, focus on the cheapest option available that still provides the type of coverage you need.

Bottom line

Car insurance is a necessity if you own and operate a car in most states, and it's a really good idea even if it's not. If you're in an accident — or if a natural disaster strikes — having the right amount of coverage can save you thousands of dollars.

Before you're tempted to only purchase state minimum coverages, make sure you understand what you'd be financially responsible for. There are other ways to save money on car insurance besides dropping comprehensive and collision insurance — and given that comprehensive coverage averages around $200 per year, it's often worth keeping. Take your time, understand your needs and budget, and compare quotes from multiple insurers to find the right policy for you. A good starting point is our list of the best car insurance companies.

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