How Does Car Insurance Work — and What Does It Cover?
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Car insurance is a necessity if you own a vehicle, and it’s sometimes worth considering even if you don’t. In most states, it’s even required by law to have at least a minimum amount of coverage.
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.
In this article
- How does car insurance work?
- The 10 types of car insurance and what they cover
- How to find affordable car insurance
- FAQs about car insurance
- The final word on car insurance
How does car insurance work?
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.
The 10 types of car insurance and what they cover
When you purchase a car insurance policy, you’ll get several different insurance protections within that policy. Although some are optional, others may be required by your state or lender if you have a loan on your vehicle. Here are the different types of car insurance you can get with your policy:
- Collision insurance
- Comprehensive insurance
- Liability insurance
- Medical payments insurance
- Personal injury protection
- Uninsured motorist insurance
- Underinsured motorist insurance
- Emergency roadside insurance
- Rental reimbursement insurance
- Guaranteed Asset Protection (GAP) insurance
Note that there are also different types of car insurance policies, which can help in special circumstances.
For example, if you drive for Uber or Lyft 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.
Regardless of what type of policy you get, many of the types of coverages still apply. Here’s a breakdown of each.
1. Collision insurance
If you get in an accident with another vehicle or hit an object, this insurance will cover the cost of your repairs or even pay to replace your car. There’s typically a deductible, which you’ll need to pay before your coverage kicks in.
2. Comprehensive insurance
This part of your policy covers damages to and loss of your vehicle from other sources, such as hail, fire, theft and vandalism. Like collision coverage, comprehensive insurance typically requires you to pay some money out of pocket as a deductible.
3. Liability insurance
Liability insurance is designed to cover the costs of damages you cause in an accident, including bodily injuries and property damage. Most states require that you have a minimum amount of liability coverage, which is set by state law.
4. 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, which can include hospital visits, X-rays, surgery, and more. This insurance is required in some states and optional in others.
5. 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
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, this coverage will protect you and your car by covering the cost of the damages.
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.
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, this insurance can pay some or all of the expenses associated with it.
9. Rental reimbursement insurance
If your vehicle is in the shop or unavailable because of an accident, this insurance will reimburse you for the cost of your rental car or pay for it directly until you have your own vehicle again.
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.
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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
Of course, there are some factors, such as your age, that you can’t control. But with others, there are other opportunities to score a lower insurance premium. Also, insurers typically offer other ways to get discounts on your coverage. Here are some tips to help you find affordable car insurance for your vehicle:
- Shop around. No insurer offers the lowest rates for everybody, so shopping around is the single best way to ensure you get the lowest rate possible on your car insurance. Companies such as Provide Insurance allow you to compare rates from several insurers based on a little information about yourself and your vehicle.
- Ask for discounts. Insurance companies typically offer discounts based on your driving, your vehicle, the organizations you’re affiliated with, and more. As you search for quotes, look at which discounts the insurers offer to see whether you qualify for even more savings. Note, however, 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 this coverage. But in most cases, you won’t need to get the maximum coverage available. Requesting less coverage can save you money on rates because it reduces what the insurer has to pay out if you file a claim. That said, don’t go too low or you may be stuck paying out of pocket once your policy reaches its limit.
- Request a higher deductible. Certain types of car insurance require a deductible before your coverage kicks in, and the higher your deductible — what you pay out-of-pocket — the less the insurance company has to pay. As a result, higher deductibles typically help lower your rates. Just try to avoid going so high that you can’t afford it if you actually do need to file a claim.
- Be mindful of what you drive: Vehicles that tend to cost more money to repair typically carry higher insurance premiums. Although that may not be a problem if you can afford it, you can typically save money on insurance with a less expensive vehicle.
- Improve your credit: In most states, car insurance companies are allowed to use a credit-based insurance score to help determine your insurance rate — California, Hawaii, and Massachusetts have banned the practice. Insurers typically can’t use this score as the sole reason for increasing your rate, but it can be coupled with other factors to do so. More importantly, it can cause you to leave money on the table in the form of savings.
As you keep these tips in mind, you’ll be in a better position to save money on your car insurance. Also, consider checking insurance rates every year or two to make sure you’re still getting the lowest possible rate.
FAQs about car insurance
As we researched this topic, we came across several common questions from consumers like you. Here are some helpful answers to the questions we found.
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 $774 every six months, or $129 per month.
Keep in mind, though, that many factors go into that figure. For example, the average monthly premium in Maine is $77 versus $258 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.
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.
Does paying your car insurance build credit?
Because your car insurance policy isn’t a credit contract, paying your premiums doesn’t have any impact on your credit history. There are, however, other ways to build your credit, which can have a positive impact on your finances in the future.
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.
The final word on car insurance
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. The likelihood of you getting in an accident and needing your insurance coverage is extremely low, but if it does happen, having the right amount of coverage can save you thousands of dollars.
So take your time when buying a new policy and compare different insurers to find the right one for you based on price and customer satisfaction. And although you may need to cut coverage to make the premiums affordable, don’t cut so much that it could cripple you financially if you end up needing your insurance and it’s not enough.
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