Without car insurance, you’re one accident away from financial catastrophe. A heavy-impact collision with another driver can see you spending a fortune on car repair and medical treatments for all casualties involved.
You’re at risk of dropping to the bottom of your finances when you get behind the wheel. But all that happens if you drive without car insurance.
In this post, we’ll explore what car insurance is and how it works in simple detail.
What is car insurance in simple terms?
Car insurance absorbs the bills you incur from bodily injuries and property damages to you and the other driver when your car gets involved in an accident.
Auto insurance companies offer several types of insurance policies to cater to different kinds of accidents. Some coverage policies foot the property repair and medical costs of the other driver, and some foot yours.
Most states require drivers to have certain car insurance policies as a requirement before driving a car. There are both compulsory and optional auto insurance coverages in every state.
You’re not allowed to drive legally without possessing mandatory car insurance policies. Failure to do so would earn you a fine, lawsuit, or jail time.
Liability coverage, for example, is one type of insurance policy that’s a requirement in almost every state in the United States.
Most auto insurance policies are made up of a combination of mandatory and optional coverages that are suited to the driver’s needs.
How does car insurance work?
Car insurance works by finding an auto insurance company where you strike an agreement to pay a certain premium monthly, bi-annually, or annually in exchange for financial coverage if you get involved in a car accident.
The level of financial coverage or compensation you receive during an auto accident is determined by the amount of premium you pay regularly. Premiums determine the policy limit, and the policy limit is the highest dollar amount your insurance company will spend on you during an accident.
If you want to raise the policy limit on your car insurance, you’ll need to buy more coverage by paying a higher premium.
So, you start by sampling quotes from several insurance companies and choosing one that makes the most financial sense to you.
Then you select the type of car insurance you need and your deductible. Deductibles are amounts you pay when you file a claim for an accident before your insurer starts spending.
A higher deductible will lead to lower premiums on your coverage, and a low deductible means that you’ll pay a higher premium.
When you’ve sorted the insurance types you need and your deductible, your insurer will place you on a premium that you pay monthly, every six months, or once a year.
Now, you’re financially protected in case of an accident.
Whenever you’re involved in an accident, quickly take photos of the damaged cars, vehicle license plates, the contact information of the other driver, and any law enforcement officer on the scene because your insurance company will likely need them.
Then you file a claim with your car insurance mobile app or through their website. Most auto insurance companies have a deadline for filing a claim after an accident. It could be one week, one month, or a year.
After filing a claim, your insurer will send a claims adjuster to assess the extent of the damage and determine how much your insurance company should pay you according to your coverage policy.
If you feel the amount your insurer will pay for the accident is insufficient, you can challenge it and bid for a higher amount.
If you’re okay with the amount your insurance company will pay you for medical expenses and bodily injuries, then you can pay your deductible and receive the settlement offer from your insurer.
Four major types of car insurance
Your car insurance coverage can contain more than one type of insurance policy. Some cover the cost of repairing the other driver’s car and injuries in the event of an accident, and others cover your car repairs, medical treatments, and losses.
The four major types of car insurance policies most people use are liability coverage, collision and comprehensive coverage, personal injury protection, and uninsured and underinsured motorist coverage.
This is a mandatory auto insurance policy in almost every state. It’s a requirement before you can legally drive a car.
Liability coverage doesn’t compensate you for your losses, rather it reimburses the other driver for the property damages such as cars, mailboxes, and bodily injuries when you’re at fault for an accident.
If you’re at fault for hitting a driver, the driver would file a claim using your liability insurance to settle his car repair and property costs, and also his medical treatments.
Collision and comprehensive coverage
Collision coverage is released when you collide with another car or object, irrespective of who is at fault. It covers the repairs of your car.
Comprehensive coverage reimburses you for damage to your cars for non-collision accidents such as theft, vandalism, fire, attacks from wild animals, and natural disasters.
Personal Injury Protection (PIP)
PIP is an extensive auto insurance coverage that not only pays for your medical costs during a car accident no matter who’s at fault, but it also covers lost wages incurred when you’re incapacitated during an accident.
While recovering, if you can no longer handle domestic expenses such as housecleaning costs, your personal injury protection coverage will take care of them.
Uninsured and underinsured motorist coverage
12.6% of drivers move around with no insurance in the United States as of 2019. That’s about one in eight drivers.
Whenever you get into an accident with a driver without car insurance, your uninsured motorist coverage will pay for your property damages and bodily injuries.
Similarly, if you get hit by a driver whose car insurance isn’t enough to cover the cost of repairing your car or footing your medical costs, your underinsured motorist coverage will be released to settle it.
Also Read: Different Types of Car Insurance
3 ways of buying car insurance
Personally request a quote from an auto insurance company
You can contact several car insurance companies directly and ask for a quote. Check what they offer in their policy and decide the best one for you based on customer service and pricing.
Doing this effectively eliminates any associated costs gotten from a middleman such as an insurance agent or broker.
There won’t be any pressure to make hasty decisions and you can sign up for a single or multiple auto insurance coverage at your pace.
Buy car insurance through a captive agent
Captive agents possess in-depth knowledge about the policy options of a particular insurance institution because they work for only one auto insurance company.
In a way, they are a ‘captive’ of that company since they aren’t allowed to introduce drivers to any insurance companies outside the one they work in.
If you’ve selected a certain car insurance company after viewing online comparisons of many, and you need extra support and guidance through the process of getting insurance in this company, then you can use one of their captive agents.
Unique questions that are custom-fitted to your needs might not be found on Google or on the insurance website but can be answered by a captive agent because of their experience and knowledge in this insurance company.
Buy car insurance through an independent broker
Unlike a captive agent, an independent broker works with several insurance companies. They aren’t limited to one insurance company.
An independent broker can provide you with the intricacies and coverage options offered by different car insurance companies across the states.
You’ll have a wider reach of information as opposed to a captive agent.
Getting car insurance through independent brokers might be costlier than others since they make their profit on a commission basis.
What is the purpose of car insurance?
Here are three purposes of car insurance:
- To escape paying for costly car repairs out of pocket
- To provide financial protection for the other driver, you, his passengers, and your passengers
- To satisfy the legal driving requirement of the state
Factors that affect the price of car insurance
Some factors that affect the price of car insurance are:
- Age: Teenagers and young adults witness higher premiums from car insurance companies because of their inexperience and unproven ability to drive safely, compared to drivers in their mid-forties and above.
- Driving history: Drivers with a high auto accident frequency, and traffic violations, and those that are prone to receiving tickets end up getting higher car insurance rates than those with a clean driving record.
- Gender: Men pay more for car insurance because they’re more likely to get into accidents Driving Under the Influence (DUI) than women.
- Vehicle information: Exotic cars and expensive cars generally require higher insurance premiums than cars with a regular make and model.
- Credit history: A recent study has shown that drivers with poor credit history get an increased auto insurance rate of 114%.
What does car insurance cover?
Car insurance uses different types of insurance policies to cover a number of problems resulting from accidents. Let’s take a look at some of the things that car insurance covers:
- Repair costs of the other driver’s car and yours: This can be covered using liability coverage, which is a required car insurance policy in almost every state.
- Property damages of the other driver’s car and yours: A liability coverage covers the repair of damaged properties owned by the other driver or pedestrians from accidents you caused. And comprehensive or collision coverage covers the damage to your properties.
- Your transportation fee and car rentals: While your car is getting repaired during an accident, rental reimbursement coverage covers your transportation or car rental fee.
- Medical treatments of you and the other driver: Personal Injury Protection and medical payments coverage cover the medical costs of you and your passengers, such as emergency treatments, drug prescriptions, surgeries, and others. The medical treatment for the other driver is catered for with your liability coverage.
- Reimbursement of lost wages and domestic expenses: If you’re unable to work due to a car accident, your lost income will be fully given to you through Personal Injury Protection (PIP). PIP also reimburses you for the home expenses you can’t pay for while recovering, such as house cleaning and others.
- Engine failure: Mechanical breakdown insurance is designed to cover the costs of engine failures.
- Towing and mechanic costs: If your car happens to break down in the middle of the road, the cost of towing and mechanic repairs will be settled using towing and labor coverage.
- New car replacement: A new car replacement coverage replaces your damaged car with another car of the same make and model.
- Better car replacement: A better car replacement coverage replaces your damaged car with a car of a newer make and model.
What isn’t included in car insurance?
These things aren’t included in car insurance coverages:
- Regular maintenance of car wear and tears
- Missing personal belongings in the car
- Deliberate damages to your car
- Injuries of pet
- Damages beyond your insurance policy limit
- Accidents that occur from using your car for business purposes
What is the minimum car insurance required?
Every state has a minimum car insurance requirement. For some states, it has a liability coverage of 25/50/25.
The first 25 represents $25,000 and it covers the cost of bodily injuries for one person.
The second 50 represents $50,000 and it’s the cost allocated per accident for all casualties.
The last 25 represents $25,000 and it caters to the property damages arising from an auto accident.
The minimum car insurance requirement varies from state to state.
Be sure to check the requirements in your state and ask your insurance agent for the recommended coverage, because the minimum insurance coverage can’t adequately cover losses from accidents most times.
How to cut costs on car insurance
Some legitimate ways to save money on car insurance policies are as follows.
Utilize the auto insurance discounts you qualify for
Most car insurance companies run several discount programs, and there’s a good chance that you qualify for some of them.
For example, combining your home insurance with car insurance could earn you a discount. There are also discounts for certain professional certifications.
Ask your insurance broker about the available discounts and apply for those you qualify for.
Raise your deductible
If you have a safe driving history, you could raise your deductibles so you can pay lower premiums. Just be sure not to raise the deductible above an amount you can give out during an accident.
Cut down on traffic violations and accidents
A clean driving record lowers your premium, as car insurance companies would be sure that you won’t file claims regularly.
Pay attention to your credit history
Good credit scores translate into cheaper auto insurance premiums. A good credit report attests to your financial ability to pay your premiums and deductibles.
And that’s something that insurance companies would reward you for.
Related: How to Get Lower Car Insurance Rates