How does car insurance work?

Car insurance works by protecting you from the financial responsibility of damages and injuries after a car accident. How does a car insurance deductible work? Once you meet your deductible, your car insurance works to cover all of your bills after an accident. The average rates for full coverage are $80 per month, but a higher deductible can lower your rates. Start comparing car insurance rates now with our free comparison tool below.

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Zaneta Wood, Ed.S. has over 15 years of experience in research and technical writing bringing a keen understanding of data analysis and information synthesis to reach a wide variety of audiences. She studied adult education and instructional technology at Appalachian State University as well as technical and professional communication at East Carolina University. Zaneta has prepared technical p...

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jul 22, 2021

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Here's what you need to know...

  • In exchange for your monthly premiums, your car insurance company carries the risk of carrying the financial load if you cause an accident
  • You choose your policy limits and deductible
  • Many factors will affect your premiums

Car insurance is essentially an exchange of risk for money. The owner of a vehicle pays an insurance company a fixed premium for the insurer to take the risk that the driver will not cause injury to another person or damage to property.

Typically premiums are set and paid for a policy that lasts a year, although shorter policies are also available. After this time, the policy is reviewed and the rate may or may not change.

Car insurance or some form of proof of financial responsibility is required in every state in this country. Even in the states that just require proof of financial responsibility, for most people this will translate to auto insurance coverage.

Understanding how it works is valuable knowledge for anyone with a vehicle.

To compare free car insurance quotes online from competing car insurance companies, enter your zip in above to get a free car insurance comparison today!

The Transfer of Risk

Your liability insurance coverage is in place so that if you are at fault in a car accident and you cause damage to another’s car or property, your insurance will pay the cost to repair or replace it.

If you cause bodily injury or death, your insurance coverage will pay for the necessary medical care or a death benefit. Such costs are covered up to the limit of the liability insurance paid.

Each state has its own required minimum levels of liability insurance that must be carried.

These levels however are typically insufficient and most insurers throughout the country will suggest carrying at least 100,000 bodily injury liability coverage per person; $300,000 per accident; and $100,000 property damage liability.

If you carry other types of auto insurance, various other types of risk are transferred.

  • Comprehensive and collision coverage allow the insurer to take the risk of damage to your own vehicle, whether it is from theft, vandalism, storm damage or an at-fault accident.
  • Uninsured and/or underinsured motorist coverage protects you from loss caused by someone with insufficient or no insurance coverage.
  • Medical payments or personal injury protection will pay you, others in your car or even pedestrians who have been hit by your vehicle, in the case of personal injury. This type of coverage often covers things that your own health insurance does not.

Free Car Insurance Comparison

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Free Car Insurance Comparison

Enter your ZIP code below to view companies that have cheap car insurance rates.

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What Happens When a Car Insurance Claim Is Filed

When a loss occurs and a claim is filed the insurance company will typically investigate the claim and if it is legitimate, it will pay. This payment is minus the deductible which is standard with automobile policies.

The deductible is simply a set amount, usually from $50 to $1000 depending on the type of coverage and the choices you have made, which is your responsibility to pay before the insurance pays any claims.

The maximum that is paid in case of a loss is the limit of the coverage that was carried. You choose your policy limits when you purchase your car insurance.

Without Car Insurance, Problems Ensue

Apart from the fact that in practically all states if you own a car and do not carry auto insurance you are breaking the law, many other problems are caused by not carrying car insurance.

You can and will be held personally responsible for any loss caused by the use of your vehicle. Anyone who suffers property damage or personal injury due to your actions can choose to sue you.

In fact, in many cases, the other person’s insurance may cover the loss and the insurance company will then sue you to recuperate their payments.

Car insurance is based on statistics and the likelihood that you will or will not have an accident or other type of loss.

Insurers offer lower rates to those drivers who:

  • have good driving records
  • live in areas with less crime
  • own vehicles that are less likely to be stolen
  • are of a certain age

These and many other factors are considered by underwriters who set the rates for car insurance.

If you are less likely to incur losses, you will get lower rates than someone who is more high-risk. In fact, high-risk insurance exists in order to provide coverage for those who are ineligible according to most companies’ guidelines.

Because auto insurance is mandatory, the option must be open to everyone, but those who are high-risk have to pay very high prices.

Getting a Car Insurance Comparison

Car insurance is not just a good financial product. It is required coverage that can save you from financial disaster if you were to be deemed responsible in a serious accident.

When you understand how car insurance works you are ready to shop around for the best car insurance policy to meet your needs. Get started now by doing a car insurance quote comparison with our free search box below!

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Average Monthly Car Insurance Rates by State