How Car Insurance Works: What’s Included in Your Policy and How to Use It
Purchasing car insurance is a requirement to drive in almost every state in the country. But do you know how car insurance works and how it protects you and your family? Figuring out how your policy functions, what coverages you have and what they cover should be done well before you’re involved in an auto accident. Learn what each coverage does, how to use your auto insurance policy and how to make a car insurance claim so you can make the best decision for your needs.
What Does Car Insurance Cover?
Car insurance provides financial protection to other drivers if the insured is at fault in an accident, and sometimes also to the insured and their vehicle if they choose to purchase more coverage than a liability-only plan provides. Auto insurance is usually sold as a package, which includes liability protection as basic coverage, and can also include an expanded bundle of benefits to include medical payments, damages to the insured driver’s vehicle and even gap insurance to pay off the loan if it’s totaled in an accident.
Most drivers need more than basic liability-only coverage to protect their income and assets in the event of a large auto claim. According to the Insurance Information Institute, 78% of insured drivers purchase comprehensive coverage in addition to liability coverage, and 74% also purchase collision coverage.
The more financial risk you have, the better auto insurance policy you should have to protect yourself and your family. Understanding how auto insurance works can help you find the best car insurance quotes.
Statistics reveal, for drivers who are already insured, 78% also purchase comprehensive coverage with their liability coverage, and 74% also purchase collision coverage.
Minimum Liability Coverage
Each state has its own minimum amount of liability coverage you’re required to carry to legally drive a vehicle. If you’re involved in an accident and deemed responsible (at fault), then your car insurance will pay up to a specified amount for the other person’s property damage and injuries. This coverage pays for:
- Bodily injury to the other driver and their passenger(s).
- Damage to their car(s).
- Damage to property (mailbox, house, guardrail, utility pole, etc.).
- Lawsuit fees and costs incurred if you are sued because of the accident.
This optional coverage will pay for damages caused that are not considered a collision, including:
- Theft of the car.
- Vandalism, including damage caused by fire or explosions.
- Windshield and glass damage.
- Accidents involving animals.
- Falling objects (rocks, tree limbs, etc.).
- Weather damage (hail, flood, earthquake, lightning, wind, etc.).
You can use this optional coverage when involved in an accident with another vehicle, regardless of fault. Instances where collision coverage would be used include:
- Auto damage from a collision with another vehicle caused by you or another driver.
- Damage to your car from an object on wheels (golf cart, shopping cart, trailer, etc.).
- Overturned vehicle.
- Damage from a pothole or debris in the road.
Uninsured and Underinsured Motorist Coverage
This coverage protects you if you are injured and/or your vehicle is damaged by another driver with little or no liability coverage. Uninsured and underinsured motorist coverage can pay for lost wages, pain, suffering and medical payments. Here are some instances where uninsured or underinsured motorist coverage would kick in:
- Another driver totals your $50,000 vehicle but only has $25,000 in coverage (underinsured).
- Another driver injures you, causing $20,000 in lost wages and medical bills, but only has $15,000 in bodily injury coverage (underinsured).
- Another driver causes an accident which damages your car but they don’t have any insurance at all (uninsured).
- A hit-and-run accident.
Personal Injury Protection
This coverage is not offered in all states and is broader than medical payments coverage. Personal injury protection, also called PIP or no-fault medical, includes:
- Costs for injuries sustained in a car accident, regardless of fault (hospitalizations, copays, etc.).
- Lost wages due to injury.
- Rehabilitation costs (surgery, physical therapy, etc.).
- Funeral costs (if you or your passenger were to die as a result of the accident).
Not all states and companies offer this coverage. Gap insurance, also called loan/lease payoff, will pay for the "gap" created when a vehicle is totaled and the book value is less than the remaining auto loan:
- You owe $10,000 on your car but when it’s totaled, the insurance company only offers $6,000. The gap insurance will pay the remaining $4,000.
- You lease a vehicle and still have $25,000 to pay before the car is returned. The vehicle is totaled in an accident with a book value of $17,000. The gap insurance will pay the remaining $8,000 to cancel the lease agreement.
Medical Payments Insurance
This coverage will pay for your injuries as well as passenger injuries up to the policy limit if you are involved in an accident. If injuries are involved, this coverage pays for:
- Medical bills for injuries to you or your passengers when you are the driver in an accident, no matter who is at fault.
- Injuries causing medical bills to you as a passenger in an auto accident, regardless of fault.
- Medical bills caused by injury when you are walking or riding a bike and are hit by a vehicle.
Provides coverage if the vehicle breaks down or other covered causes, including:
- Key lockout
- Battery jumpstart
- Fuel delivery (you have to pay the cost of fuel)
- Towing to the nearest service facility
- Winching your vehicle when it’s stuck in mud, snow, sand or water
- Changing a tire
How Your Coverage Works in Different Scenarios
Each scenario involving your auto insurance will cause different coverages to come into play. To illustrate this, we’ve come up with five common car insurance claim scenarios to show how the three most common car insurance coverages would work.
If You Are Responsible for an Accident
Best coverages for this scenario: liability, collision, medical payments/PIP or roadside assistance
Though no one wants to be at fault in an auto accident, having the right insurance coverage in place will make the situation easier. If there are injuries in your car or theirs, call the police to the location and an ambulance if needed. Exchange information with the other driver, including your car insurance policy number so you can file a claim once you’re home.
- Liability: Liability coverage will pay up to the policy limits for damage to the other person’s car, as well as for bodily injuries to them and their passengers.
- Comprehensive: Not applicable.
- Collision: Collision coverage will pay for your car damages or the book value of the vehicle if it’s totaled, whichever is greater, less your deductible (usually between $250 and $1,000).
If Your Car Is Hit by Another Driver
Best coverages for this scenario: collision, medical payments/PIP or uninsured/underinsured motorist
If your car is hit by another driver, most likely they will be deemed at fault in the accident. If they have auto insurance, their liability coverage will pay for your injuries and car damage. You could also collect for medical payments under your own policy. Uninsured/underinsured motorists coverage would be used if the other person was not insured or did not have policy limits high enough to pay for your damages and/or injuries.
- Liability: Not applicable.
- Comprehensive: Not applicable.
- Collision: In some instances, you may use your collision coverage to get your car fixed if there were delays with the other person’s auto insurance. If you use this coverage, the deductible may still apply.
If Your Car Is Damaged by a Storm or Other Natural Cause
Best coverage for this scenario: comprehensive
Damage caused by a storm is covered under comprehensive coverage. Hopefully, you were not in the car when it happened but if you were, you could also use the medical payments or PIP coverage.
- Liability: Not applicable.
- Comprehensive: Comprehensive coverage would pay to fix the car or total it for the book value, less the deductible on the policy (between $0 and $1,000).
- Collision: Not applicable.
If You Are Hit by an Uninsured Motorist
Best coverages for this scenario: uninsured motorist, medical payments/PIP or roadside assistance
Including uninsured and underinsured motorist coverage on your auto policy is a great idea for scenarios like this. When someone hits your car and doesn’t have insurance, you should call the police to file a report. Get as much information from the other driver as possible, including driver’s license number, name and address. Deductibles vary on this coverage and are usually mandated by the state, where required.
- Liability: Not applicable.
- Comprehensive: Not applicable.
- Collision: This coverage does not apply unless you lack uninsured motorist coverage. If you don’t have uninsured motorist coverage, but you do have collision coverage, your insurance company may fix the vehicle (less your deductible) and then sue the other person for the costs incurred.
If You Are Severely Injured in an Accident
Best coverages for this scenario: medical payments/PIP, liability, collision or uninsured/underinsured motorist
Being severely injured in an accident is one of the worst-case scenarios, but it is an unfortunate reality for many people. Data from the CDC shows medical costs and productivity loss due to auto accidents cost more than $75 billion per year. Some costs can be paid with medical payments/PIP coverage. Uninsured and underinsured motorist coverage might also come into play if someone else was at fault.
- Liability: This coverage does not apply unless you’re deemed at fault and cause injuries or property damage to another person.
- Comprehensive: Not applicable.
- Collision: This coverage may apply if you were at fault and your car needs to be fixed or totaled.
How Do Car Insurance Payments Work?
Most car insurance companies offer a six-month policy, though some offer an annual auto policy. If you pay the auto insurance premium in full, you will save the most money. Companies usually add on installment fees if you choose to pay the premium monthly, costing you more money in the long run.
Here is a breakdown to show you how you can save more money on an annual car insurance policy by paying it in full.
- Annual premium: $1,000
- Installment fees: $5
- Paying the premium in full: $1,000
- Paying the premium semi-annually: $1,005
- Paying the premium monthly: $1,060 (12 x $5 = $60)
How Much Does Car Insurance Cover?
The amount that your car insurance policy will cover when you’re involved in an accident is dependent on your policy limits. The higher your policy limits, the greater your upfront costs, but your insurer provides more coverage. Having a higher deductible will lower your premium, but you will have to pay more out-of-pocket if you file a claim.
It’s always a good idea to review your auto insurance policy coverages, limits and deductibles at each renewal. This way, you can make any adjustments if your personal situation changes.
To understand how much car insurance covers, review the scenario below when a vehicle gets $6,000 in damage.
- Deductible: $500
- Damage to Your Car: $6,000
- Insurance Claim Payment: $5,500
You pay $500 out of pocket to repair the damage, while the car insurance company contributes the remaining $5,500.
What’s Included in Your Auto Policy?
A car insurance policy is more than just coverages. There are terms to be aware of, as well as key components that make up the typical auto insurance policy.
Knowing what’s included in your policy can help you make the best choice when shopping for car insurance. You’ll also be able to more easily compare quotes to determine what coverages are best for you and your family.
Declarations Page: Also called a dec page, this is the main page of your car insurance policy that states what’s included or excluded in your policy, including:
- Premium: This is the amount you have to pay for the coverage on your auto policy. Some companies offer annual car insurance policies, while others offer six-month policies that can be paid in full, quarterly or monthly.
- Discounts: These lower the overall cost of your car insurance premium. Discounts can include professional organizations or affiliations, student discounts, multi-car, multi-policy and accident-free, among others.
- Coverages: The type of coverage you should have varies by household. There are different limits for coverages like liability, comprehensive, collision, medical payments and uninsured motorists. The higher your limits, the more the premium will cost, but the more protection you have if you are at fault in an auto accident.
- Deductibles: Not all coverage options have deductibles. Most often, comprehensive and collision coverage come with a deductible, as illustrated in the previous section. The higher the deductible, the lower the premium, but the more you have to pay if you make a claim. Make sure you can afford the deductible amount.
Insuring Agreement: This is the broad document that shows the auto insurance policy is a legally binding contract between you and the insurance company. It includes a breakdown of what’s covered and what’s not, as well as explaining your responsibilities and those of the insurer based on what’s included in the policy.
- Exclusions: This part of the insuring agreement will show what’s not covered in your policy, which could include excluded drivers. Another example is the maintenance exclusion, stating that the insurance company likely will not pay for damage caused by normal wear and tear or for vehicle maintenance.
- Conditions: Your auto policy should also include conditions you need to meet before the insurance company will honor its responsibility. This includes outlining provisions for them to approve a claim for payment. You can find step-by-step instructions in the next section on how to make a car insurance claim.
How to Use Your Coverage and Make a Claim
Being involved in an accident, no matter how minor, can be stressful. In these situations, it can be difficult to remember how to use your car insurance properly and what steps are involved in making a claim.
Each scenario is different and may not follow these exact steps, however, this step-by-step process can help with most claims scenarios:
- Step 1: Assess yourself and any passengers for injuries.
- Step 2: Move the car from the roadway if possible. If the car is not driveable, get out of the vehicle and move to the shoulder or away from traffic.
- Step 3: Call the police, especially if there are injuries or the other vehicle left the scene. They can assist with getting an ambulance and tow truck if needed. They will also take down all the details of the scene, including date, time and location of where it occurred, and information on all passengers and vehicles.
- Step 4: If you’re able to, take pictures at the scene. Include at least one photo of all vehicles involved, as well as any other property damage and the location where the accident occurred.
- Step 5: Call your insurance company’s claims department. Most car insurance companies offer online and phone claims 24/7. You’ll be assigned a claim number and adjuster, who will walk you through how to submit any needed documentation, including photos from the scene or medical bills.
- Step 6: Keep in contact with the claims adjuster, and be sure to keep notes as you progress through the claim. Note the person you speak to, the date and time of the interaction and what was said by everyone on the call. Keep emails and any documents you receive from the other person, their insurance company, the doctor’s office, hospital and anyone else involved.
Learn How Car Insurance Works in Your State
Every state has its own set of rules and regulations when it comes to car insurance. Almost every state, with the exception of New Hampshire, requires you to have a minimum amount of coverage for liability, and most require uninsured and underinsured motorist coverage as well. Optional coverages like full coverage car insurance may be required if you have a loan or lease on the covered vehicle.
To learn how car insurance works in your state and what’s required or optional, check out the search tool below.
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About the Author
- Centers for Disease Control and Prevention. "Cost Data and Prevention Policies." Accessed August 24, 2020.
- Forbes. "What You Need to Know About Uninsured Motorist Coverage." Accessed August 24, 2020.
- Insurance Information Institute. "Facts + Statistics: Auto Insurance." Accessed August 24, 2020.