How does car insurance work?

Key points

• Car insurance works to protect you financially if you get into an accident or your vehicle is damaged or stolen.
• Your auto insurance policy may pay for car repairs, medical bills and other accident-related expenses, and provide liability coverage if you cause an accident that results in injury or property damage to others.
• Most states have guidelines for the minimum amount and type of car insurance coverage you need to purchase.

What is car insurance?

Car insurance is an agreement between you and your insurer that can provide financial protection from accident-related losses and lawsuits. It can also protect you if your car is stolen or damaged by covered issues, such as extreme weather or vandalism. 

Exactly what’s covered and how much your insurer will pay out after a claim depends on your policy and coverage limits. 

The six most common types of car insurance are:

• Liability
• Personal injury protection (PIP)
• Medical payments
• Uninsured/underinsured
• Collision
• Comprehensive

Types of car insurance coverage

There are several types of coverage available to drivers. Some, like liability insurance, may be required by your state. Insurers also sell other types of coverage that allow you to customize your policy or meet a lender’s insurance requirements. 

Depending on where you live, you may need one or more of the following types of coverage. 

Liability insurance 

Liability insurance pays others if you’re at fault for an accident that results in injuries or property damage. It can also pay for your legal defense and settlements if you’re sued for damages after the accident.
Liability insurance is comprised of two types of coverage.

Bodily injury (BI) coverage pays for the medical expenses and lost wages of other drivers, their passengers and pedestrians if they’re injured in an accident and you’re at fault.

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. 

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 referred to as no fault insurance, PIP pays for medical costs if you or your passengers are injured as a result of an accident, no matter who is at fault. It is required in some states and optional or unavailable in others.

PIP will also typically cover lost wages, rehabilitation services, funeral expenses, survivor benefits and the cost of services you may need if your injuries prevent you from carrying out regular tasks, like child care. 

Medical payments coverage (MedPay)

Like PIP, MedPay covers accident-related medical bills for you and your passengers, regardless of who is at fault. 

MedPay will cover medical expenses related to a crash, such as surgeries, hospital stays, ambulance fees and doctor visits, but it is not as comprehensive as PIP.  It won’t cover lost wages, survivor benefits or expenses related to any services to assist with everyday tasks. 

MedPay is required in some states and generally sold in small amounts, from $1,000 to $5,000.  

Uninsured or underinsured motorist coverage

Not all drivers have car insurance, and even those who do may not have adequate coverage. 

Uninsured motorist coverage will pay for your medical expenses if you’re in an accident and the at-fault driver isn’t insured. In some states, uninsured motorist coverage will also cover vehicle repairs if you’re the victim of a hit-and-run accident. 

Underinsured motorist coverage is a separate policy, though many insurers bundle it with an uninsured motorist policy. It operates similarly and will help cover you if you’re injured in an accident and the at-fault driver doesn’t have enough insurance to cover your medical bills. Depending on where you live, it may also cover property damage costs if you’re hit by someone without enough liability insurance. 

Collision coverage

Collision coverage financially protects your vehicle if it’s damaged after colliding with another object. 

Coverage includes damage from hitting another vehicle (moving or stationary) or from colliding with another object like a tree, fence or pole. It also usually covers damage from a roll-over or hit-and-run accident. 

If your car is totaled, this coverage pays you the value of the car at the time of the accident minus your deductible. 

This coverage is often required if you took a loan out for your vehicle or have a lease. 

Comprehensive coverage

Comprehensive coverage protects you against the expense of vehicle damages or losses that aren’t a result of crashes. This could include damage caused by a falling tree, hail, vandalism, fire or theft. It also covers damage from accidentally hitting an animal that runs into the road.  

If your car is considered totaled, comprehensive coverage pays you the actual cash value of your vehicle minus your deductible. 

Compare: Comprehensive vs. collision auto insurance

Extra car insurance coverage options

Depending on your insurance company and your needs, you can add more options to your car insurance policy, such as:

• Gap insurance. If your car is totaled or stolen and you still owe money on an auto loan, gap insurance pays the difference between what you owe and how much the car is worth.
• Roadside assistance. If you’re stranded for reasons such as a flat tire or need your car towed, this coverage can help. 
• Rental reimbursement. This covers the cost of a rental car if your vehicle needs to be repaired following an accident. 

How much car insurance do I need?

You should buy at least the minimum amount of car insurance required by your state, but it’s recommended you buy more. State minimums generally won’t help pay for damage to your own car if you get in an accident, or help if your car is stolen. And if you cause an accident without enough liability insurance, you could be vulnerable to lawsuits that may wipe out your savings. 

Brian P. Boak, a property and casualty risk manager at Boaks Advisors, recommends buying as much liability coverage as you can afford, as this is what will protect your personal assets in case you’re found at fault in an accident. 

Having ample liability coverage means you’re less likely to pay out of pocket to pay for damages. It will also cover you if you’re sued for causing an accident. 

If you want considerable protection for your assets, you may consider buying umbrella insurance. Umbrella insurance provides excess liability coverage, in addition to your car insurance liability coverage, starting at $1 million. 

You may also need to purchase additional coverage if you lease or finance a car. In most cases, lenders require you to purchase comprehensive and collision coverage if you have an auto loan or a lease. These optional coverage types are typically sold together and may make sense even if you’re not required to buy them. 

“Comprehensive coverage is useful depending on the value of the car, cost of coverage and your financial position,” Boak says. “It may be a good idea to pay for comprehensive and collision coverage unless you can comfortably afford replacing or repairing the car yourself.”

In general, you’ll want to think about your risks and whether you can afford to pay for costs out of pocket if you’re in an accident, even if you’re not at fault. 

If you rely on your vehicle for work, for instance, it may make sense to purchase extra coverage for rental reimbursement so you’re not paying out of pocket to rent a car if your car is being repaired. Or, if you have a loan on your vehicle, it may make sense to purchase gap insurance, which can help pay off your loan if your vehicle is totaled and you’re still making payments. 

How much does car insurance cost?

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

How much you pay for car insurance will depend on several factors, including:

• Your driving history.
• Your claims history.
• Your age.
• Your ZIP code.
• Your vehicle’s make and model.
• How many miles you drive each year.
• Insurance company you choose.
• Types and amount of coverage you buy.
• Deductible amount you choose.
• Your credit history (banned in California, Hawaii, Massachusetts and Michigan).
• Your gender (banned in California, Hawaii, Massachusetts, Michigan, North Carolina and Pennsylvania).

The best cheap car insurance companies: Find cheap car insurance

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