What Is Auto Insurance & How Does it Work?

Auto insurance is one of many different types of insurance policies. It’s essential to understand the definition of car insurance since it provides financial protection in several situations. For example, it can pay for expenses if you get involved in an accident. Depending on your policy, it can also help cover repair costs if your vehicle sustains damage, and it might even offer financial protection if someone steals your car.

An auto insurance policy includes several types of coverage. Liability insurance is the most common. However, you can also add comprehensive and collision coverage to your plan, which adds protection for your vehicle. You can also set your policy up to cover medical payments and incidents involving uninsured motorists.

Most states require some form of car insurance policy. However, each state has a different minimum requirement for auto insurance (these refer to coverages and their respective limits). Purchasing an auto insurance policy requires you to pay a premium. Although it adds an expense to your household budget, it is more cost-effective than spending out-of-pocket for injuries or vehicle damages.

Car insurance provides financial protection if the insured is at fault in an accident. Purchasing more coverage than a liability-only plan provides can also cover the insured and their vehicle.

Auto insurance is usually sold as a package, which includes liability-only protection as basic coverage. Add–ons can expand 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.

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.

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.

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, 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.

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.

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.

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.