Home Insurance How does car insurance work?

How does car insurance work?

How does car insurance work?
Photo / pexels / tomfisk

Car insurance serves as financial protection in the event of an accident. It applies regardless of whether you’re a hit-and-run victim, at fault for a collision, or your car is damaged by a falling tree.

Based on your chosen policy and coverage, your car insurance company can assist with expenses such as car repairs and medical bills resulting from accidents. It also offers liability coverage if you cause injury or property damage to others in an accident.

Before buying a policy, it’s crucial to grasp the fundamentals of how car insurance operates. This will help you comprehend the incidents and expenses that are covered, as well as what to anticipate when filing a claim.

Photo / pexels / tomfisk

What is car insurance?

Car insurance is a contractual agreement with your insurer. It offers financial protection from accident-related losses and lawsuits. Theft or damage to your car from covered issues like extreme weather or vandalism are also included. Your policy and coverage limits determine the extent of coverage and payout after a claim.

Types of car insurance

Drivers have access to various types of coverage. For instance, liability insurance might be mandated by the state. Moreover, insurance companies offer additional coverage options, which enable policyholders to tailor their policies or fulfill a lender’s insurance demands. In accordance with your location, you might require one or multiple types of coverage.

Liability insurance 

Liability insurance covers expenses when you are responsible for an accident leading to injuries or property damage. Additionally, it handles your legal defense and settlements if someone sues you for damages post-accident. The insurance comprises two types of coverage.

Bodily injury (BI)

coverage is designed to pay for the medical expenses and lost wages of individuals who are not at fault in an accident. If you are responsible for the accident, BI coverage will take care of the medical expenses and lost wages of other drivers.

Furthermore, it also covers the medical expenses and lost wages of passengers and pedestrians who were injured in the accident and you were at fault.

Property damage (PD)

Property damage (PD) coverage pays to repair or replace the other driver’s vehicle or other property, such as a fence, that was in the accident. 

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Every state except New Hampshire and Virginia requires drivers to carry a minimum amount of liability insurance, but it’s a good idea to buy more. Purchasing the minimum amount of coverage can leave you financially vulnerable if accident-related expenses exceed your state’s minimum. Consider purchasing enough coverage to cover the assets you could lose in a lawsuit. 

Personal injury protection (PIP)

Sometimes known as no fault insurance, PIP (Personal Injury Protection) covers medical expenses resulting from an accident, regardless of fault. In certain states, PIP is mandatory, while in others, it may be optional or not offered at all.

Apart from medical costs, PIP often includes coverage for lost wages, rehabilitation services, funeral expenses, and survivor benefits. Additionally, it may also assist in covering the expenses of services required when injuries hinder everyday tasks, such as child care.

Medical payments coverage (MedPay)

PIP and MedPay both cover accident-related medical bills for you and your passengers, regardless of fault. MedPay, unlike PIP, has limitations and may not cover lost wages, survivor benefits, or expenses for everyday task assistance.

Expenses related to surgeries, hospital stays, ambulance fees, and doctor visits are typically covered by MedPay after a crash. Some states require MedPay, and it is usually available in small coverage amounts, ranging from $1,000 to $5,000.

Uninsured or underinsured motorist coverage

Not all drivers have car insurance. Some may not have adequate coverage even if they do.

  • Uninsured motorist coverage comes into play when the at-fault driver is not insured. It helps pay for your medical expenses after an accident.
  • In certain states, uninsured motorist coverage extends to covering vehicle repairs in hit-and-run accidents where you are the victim.
  • Underinsured motorist coverage is a separate policy, though some insurers bundle it with uninsured motorist coverage.
  • This coverage works similarly and aids you in case you are injured, and the at-fault driver doesn’t have enough insurance to cover your medical bills.
  • Depending on your location, underinsured motorist coverage might also help with property damage costs if you’re hit by someone without sufficient liability insurance.

Collision coverage

  • Collision coverage provides financial protection for your vehicle in case of damage resulting from a collision with another object.
  • It encompasses damage caused by hitting a stationary or moving vehicle, as well as colliding with objects like trees, fences, or poles.
  • This coverage also extends to damage from rollovers or hit-and-run accidents.
  • In the event of a total loss, the coverage pays you the value of the car at the time of the accident, minus your deductible.
  • If you obtained a loan for your vehicle or have a lease, collision coverage is often mandatory.
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Comprehensive coverage

Comprehensive coverage provides protection against non-crash-related vehicle damages or losses. Examples of these incidents include damage from a falling tree, hail, vandalism, fire, or theft. Additionally, it covers accidents involving animals running onto the road.

In the event that your car is deemed totaled, comprehensive coverage will reimburse you for the actual cash value of the vehicle, minus the deductible.

Similar to collision coverage, comprehensive coverage is usually mandatory when financing your vehicle.

Extra coverage options

Different insurance companies and individual needs may lead to the inclusion of additional options in your car insurance policy. One such option is gap insurance, which comes into play if your car is deemed a total loss or gets stolen while you still have an outstanding auto loan. In such a scenario, gap insurance covers the difference between the loan amount and the car’s actual value. Roadside assistance is another add-on you can consider.

This coverage comes to your aid if you find yourself stranded due to reasons like a flat tire or require towing services. Additionally, rental reimbursement is available as an option, providing coverage for the expenses of a rental car while your own vehicle is being repaired after an accident.

How much car insurance do I need?

You should consider purchasing the minimum amount of car insurance required by your state. However, it is advisable to buy additional coverage. State minimums might not cover damage to your own car or theft. Moreover, if you cause an accident without sufficient liability insurance, you could be vulnerable to lawsuits that deplete your savings.

Brian P. Boak, a property and casualty risk manager at Boaks Advisors, suggests buying as much liability coverage as you can afford. This coverage protects your personal assets if you are found at fault in an accident. With ample liability coverage, you are less likely to pay for damages out of pocket and are covered in case of lawsuits.

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For more extensive protection of your assets, consider purchasing umbrella insurance. It provides excess liability coverage, starting at $1 million, in addition to your car insurance liability coverage.

Additional coverage may be necessary if you lease or finance a car. Lenders often require comprehensive and collision coverage if you have an auto loan or a lease. These coverage types, though optional, can be worthwhile even if not mandated.

“Comprehensive coverage usefulness depends on the car’s value, coverage costs, and your financial position,” says Boak. “It may be wise to pay for comprehensive and collision coverage unless you can comfortably afford to replace or repair the car yourself.”

Evaluate your risks and ability to pay for costs out of pocket after an accident, regardless of fault. If you rely on your vehicle for work, consider extra coverage for rental reimbursement. This coverage ensures you won’t pay out of pocket to rent a car while yours is being repaired. Additionally, if you have a vehicle loan, gap insurance might be sensible. It can help pay off your loan if your vehicle is totaled while you are still making payments.

How much will I pay for car insurance?

The average cost of car insurance for a good driver is $2,150 a year for full coverage. This coverage includes liability, collision, and comprehensive coverage.

Several factors influence how much you pay for car insurance:

  1. Your driving history.
  2. Your claims history.
  3. Your age.
  4. Your ZIP code.
  5. Your vehicle’s make and model.
  6. The number of miles you drive each year.
  7. The insurance company you choose.
  8. The types and amount of coverage you buy.
  9. The deductible amount you choose.
  10. Your credit history (banned in California, Hawaii, Massachusetts, and Michigan).
  11. Your gender (banned in California, Hawaii, Massachusetts, Michigan, North Carolina, and Pennsylvania).

To ensure you get the best deal for the coverage you need, it’s a good idea to compare car insurance rates from several insurance companies.