How Does Car Insurance Work?

Quick Answer

Car insurance works by paying for costs resulting from a collision, theft, natural events and other incidents. As long as you pay your premiums on time, the insurer is obligated to cover repairs, medical bills, liability claims and other eligible expenses according to your policy terms.

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Car insurance protects you financially if you get in a car accident by helping to pay for accident-related injuries and repairs. Nearly all states require drivers to carry car insurance, as do lenders when you finance a vehicle.

But you have many types of insurance coverage, limits and deductibles to choose from, so it helps to understand your options. Here's what you need to know about how car insurance works to get the coverage you need at the best price.

What Does Car Insurance Cover?

Car insurance covers damage to your vehicle from collisions and non-collision events like natural disasters, theft and vandalism. It also pays for property damage and injuries you cause to others while behind the wheel.

Car insurance policies offer many types of coverage, which most commonly fall into the following categories.

Type of Insurance What It Covers Is It Required?
Comprehensive Damage to your car from non-collisions, like theft, falling objects and natural disasters Yes, if you finance or lease
Collision Damage to your car from an accident with another car, animal or object Yes, if you finance or lease
Liability Bodily injury or property damage Yes, in nearly all states
Personal injury protection (PIP) Medical bills, lost wages and other losses Maybe, depending on your state
Uninsured or underinsured motorist bodily injury Injuries and damages if you're in an accident with a driver without insurance or with insufficient coverage Maybe, depending on your state


Comprehensive insurance is sometimes referred to as "other than collision" insurance because that's what it covers—damage to your vehicle other than car accidents. For example, damage from a fire, theft or a falling tree would all be covered under a comprehensive policy.

Lenders typically require comprehensive insurance when you finance or lease a car, but it's optional if you own your car outright. If your car is too expensive to replace out of pocket or you don't have enough savings to cover non-collision damage, adding comprehensive coverage could be a smart move.


Collision insurance covers damage to your car from an accident with another car, animal or object like a fence or tree. Like comprehensive insurance, collision insurance isn't mandated by law, but lenders usually require you to carry enough coverage to protect the vehicle until you pay it off.

If you get in a car accident, you can file a claim to help you pay for repairs or replacement to your car if you're involved in an accident—no matter who is at fault.


Liability insurance pays for costs stemming from an auto accident you cause. Liability insurance generally covers two types of expenses.

  • Bodily injury: This coverage handles the costs of accident-related injuries or death caused by you or another driver operating your car.
  • Property damage: This coverage pays for damage you cause to another person's car or property.

Most states require you to carry a minimum amount of both types of liability coverage. Keep in mind, your state's minimum coverage requirements may be considerably less than what an accident could cost—something to consider when choosing your policy's coverage amounts.

Personal Injury Protection (PIP)

If you live in a no-fault car insurance state, you must include personal injury protection (PIP) in your policy. This coverage pays for medical bills, lost wages and other losses incurred from an accident, regardless of fault.

Even if your state doesn't require you to carry PIP insurance, you might consider adding it to your policy since you don't have to wait for the insurance companies to determine which party is at fault before being paid.

Uninsured or Underinsured Motorist Bodily Injury Insurance

Your state may require you to carry uninsured or underinsured motorist coverage—about half do—to pay for injuries and damages if you're in an accident with a driver without insurance or with insufficient coverage.

Even though nearly every state requires drivers to carry a certain level of liability insurance, about 1 in 7 drivers (14%) don't have it, according to a 2023 Insurance Research Council (IRC) report. Your uninsured or underinsured motorist coverage could pay for damages caused by uninsured drivers, including hit-and-run drivers, who are considered uninsured motorists.

What Car Insurance Options Are Available?

As noted, many of the above coverages are required by states or lending companies. Car insurance companies also offer optional coverages to round out your policy or provide valuable perks.

  • Rental reimbursement insurance covers the cost of renting a car while your vehicle is in the shop for repairs.
  • Guaranteed asset protection insurance, or gap insurance, covers the difference between your car's value and the loan balance if your car is totaled. This coverage can be valuable if you owe more than the car is worth. Without it, you'd have to cover the difference out of pocket.
  • Roadside assistance provides emergency help when your car runs out of gas, has a flat tire or breaks down. This coverage can be a lifesaver if your car breaks down in a remote area, during bad weather or late at night.

Learn more >> How Much Car Insurance Do I Need?

What Doesn't Car Insurance Cover?

While car insurance can save you thousands of dollars in expenses resulting from covered events, it doesn't cover everything. For example, a standard auto insurance policy doesn't cover:

  • Losses over your coverage amount
  • Damage or theft to personal belongings
  • Mechanical failures not caused by an accident
  • Wear and tear to your vehicle
  • Driving in service of a rideshare company (you may need a rideshare add-on to your policy for that)

Drivers who live in your household and others who regularly use your car must be listed on your policy or risk not being covered.

Do You Need Car Insurance?

If you drive a vehicle on public roads, you'll need to carry some level of auto insurance, depending on your state requirements. Minimums vary by state, but nearly every state requires you to have liability insurance, including bodily injury and property damage liability coverage. This coverage helps you pay for damage and injuries to others if you cause an accident. Additionally, many states mandate drivers to carry uninsured motorist coverage and medical payments or personal injury protection coverage.

If You're Financing Your Vehicle

If you're financing your vehicle with a loan or lease, your lender likely has their own insurance requirements to protect their investment. Typically, lenders want you to carry full coverage auto insurance, including collision and comprehensive coverage. Otherwise, these coverages are optional.

If You Own Your Car Outright

If you own your car outright, you may want to carry collision and comprehensive coverages to protect yourself financially if the cost of repair or replacement would be significant. On the other hand, you might drop them if you own an older vehicle worth less than a few thousand dollars. In that case, the cost of ongoing premiums may not be worth a claim payout, especially after factoring in your deductible.

How Much Does Car Insurance Cost?

According to a 2023 AAA report, car insurance costs an average of $1,756 annually. Of course, your insurance costs may be higher or lower depending on your age, vehicle type, driving history and a whole host of other factors insurers consider.

The amount you pay for car insurance also depends on your policy options, coverage amounts and deductibles. To find the best balance of coverage and price, the Insurance Information Institute recommends getting quotes from at least three insurance companies. It's essential to use the same coverages and limits when obtaining quotes to make sure you're making apples-to-apples comparisons.

How to Save Money on Car Insurance

It's always wise to regularly compare what you're paying for car insurance rates versus the competition. Switching to a new carrier could ensure you're not paying more than you need to for car insurance. Along those lines, there are also a number of methods you can turn to to save on car insurance, such as:

1. Increase Your Deductible

Generally, higher deductibles tend to come with lower monthly premiums and vice-versa. If your premiums are too high, consider raising your deductible to lower your rate. Just be sure not to raise your deductible so high you would struggle to pay it if you ever need to file a claim.

2. Reduce or Drop Coverage

Comprehensive and collision insurance can be expensive. If you have an older car with a lower value, you might consider dropping this coverage to save money on your premiums. Talk to your agent about other coverage options you're paying for that you might be able to do without. Just remember that you'll be on the hook for repair or replacement costs if you have an event that is no longer covered.

3. Take Advantage of Discounts

Insurance companies offer many auto insurance discounts that could lower your premiums, including:

  • Safe driving discounts are available for maintaining a clean driving record or taking a driving safety course.
  • Good student discounts reward young drivers with premium discounts ranging from 4% to 20% for earning good grades—usually a 3.0 grade point average or better.
  • Affiliation discounts for serving in the military, working for the federal government or belonging to a specific organization are offered by some insurance providers.
  • Multi-car insurance discounts allow you to save up to 25% by insuring more than one car with your policy.
  • Bundling discounts for insuring both your home and auto insurance can deliver savings between 5% and 25%.

Learn more >> Top Car Insurance Discounts

How Does a Car Insurance Deductible Work?

A car insurance deductible is the out-of-pocket money you must pay on a claim before your insurance coverage kicks in to pay for the rest. You'll select your deductible amount when you purchase your policy, which could be between $250 to $2,000.

For example, if you file an insurance claim worth $3,500 and your policy has a $500 deductible, you would need to pay $500 on the claim and your insurer would cover the remaining $3,000. Remember, your deductible amount is usually a factor in your premium rates. You could secure lower premiums by opting for a higher deductible, although you'd need to come up with more money upfront if you need to file a claim.

Typical Car Insurance Deductibles
Type of Coverage Deductible
Collision and comprehensive $0 to over $2,000
Liability None
Uninsured or underinsured motorist $100 to $1,000; varies by state
Personal injury protection (PIP) You may or may not have to pay a deductible, depending on where you live

Learn more >> Is a High Deductible Better Than a Low Deductible?

How to File a Car Insurance Claim

Being involved in a car accident can be a stressful and traumatic experience. On top of that, the process to repair your vehicle or recover from injuries can be a long one. Auto insurers usually process claims within 30 days, so it's essential to file yours as soon as you can. Here's how to file a car insurance claim:

  1. Gather the vital accident details. Before you contact your auto insurer, have the details handy such as the date and location of the accident and the other driver's name, contact information and insurance details. Also be prepared to submit supporting documents such as a copy of the police report, accident photos and accident-related expenses you've incurred.
  2. Contact your auto insurer. Most insurance companies allow you to file a claim on their website, app or over the phone. You'll need to give the agent a full account of what happened and submit the supporting documents you've gathered. Your agent should detail how your policy covers the incident, if you'll need to cover any costs out of pocket, such as a deductible, whether you'll have access to a rental car during repairs and so on.
  3. Work with the claims adjuster. Within a few days of filing your claims, your insurance company's claims adjuster should contact you to arrange an inspection. The adjuster may review police reports, talk to accident witnesses and perform other tasks to determine how much the insurer will pay for damage to your car and any injuries you sustain.
  4. Repair or replace your car. If the cost to repair your car exceeds its value, the insurance adjuster will total the car. In that case, your insurer will either pay you or your lender the value of the vehicle, after subtracting the deductible. If your car is fixable and damages are less than its value, you can repair your car at a repair shop your insurer works with or with your preferred mechanic, up to the adjuster's claim limit.

Frequently Asked Questions

  • Several factors influence your car insurance rates, including your age, the car you drive and more. Here's a quick look at common factors auto insurers consider when setting your premiums:

    • Age: Statistically, younger drivers tend to drive more aggressively and get in more accidents than older drivers. The Insurance Institute for Highway Safety reports that the fatal crash rate for 16- to 19-year-olds is almost three times higher than for drivers 20 and older. Consequently, premiums for younger drivers are usually higher and decrease as they grow older.
    • Location: Where you live also factors into your premiums. Since there are more opportunities for accidents, theft and vandalism in highly populated areas, you may pay more for car insurance in an urban area than drivers in rural areas. How much you pay could also depend on what state you live in, as requirements for liability insurance and other coverages vary by state.
    • Vehicle type: The make and model of your car can also impact your insurance premiums since newer and more expensive cars cost more to replace than older, cheaper ones. Insurers also consider a car's safety features, theft rate and other factors which could affect your rate.
    • Driving history: Not surprisingly, you'll pay less for car insurance if you have a good or clean driving record. Conversely, accidents and tickets can kick up your premiums.
    • Vehicle usage: It stands to reason the more miles you drive, the higher your risk of getting into a car accident. You may pay more for insurance if you drive more than 12,000 miles per year—the default mileage many insurers use when quoting rates.
    • Coverage types and amounts: Your state and finance company may require you to carry certain types and amounts of coverage. Beyond that, your policy can be as limited or comprehensive as you like. You may want to carry higher coverage amounts than your state's minimums or add extra perks like emergency road assistance and rental car coverage to limit your expenses if you are in an accident or other covered event.
    • Insurance deductible: You might lower your car insurance premiums by raising your deductible, but avoid raising it beyond what you could reasonably afford on a claim.
  • The Insurance Information Institute states insurers will generally raise your rates if you file a claim for an accident you cause. Typically, the claim amount must exceed a threshold set by your insurer, and rate hikes usually remain for three years.

    How much your rate jumps depends on your insurer and the details of the accident. Ask your insurance carrier if they offer an accident forgiveness program for minor accidents or your first accident.

  • You generally need car insurance before purchasing a vehicle since state laws and lenders usually require it. Still, some insurers grant you up to 30 days to add the new car to your current policy. Similarly, car dealerships often give you a temporary insurance policy to cover you when you drive off the lot. However, be aware that this temporary coverage is just that—coverage terms range from a week to a month.

  • You may not need car insurance if you won't be driving your car for a while. However, you may not be able to drop all of your coverage, depending on these factors:

    • State laws: Nearly every state has minimum insurance requirements for drivers, whether your car is on the road or parked.
    • Auto lender requirements: Lenders commonly require you to carry collision and comprehensive insurance to protect their investment, even if the car is temporarily off the road.
    • Insurer's terms: Your lender may prohibit pausing insurance or may place conditions on it, like requiring a minimum pause of 60 days.
  • It may sound foolish to carry car insurance if you don't have a car, but there are scenarios where it might make sense: In these cases, a non-owner car insurance policy may benefit you.

    • If you want to avoid an interruption in car insurance coverage: A break in auto insurance coverage could make it harder to obtain a policy later on, and result in higher rates.
    • If you borrow someone else's car often: If you get in a wreck while driving another person's car, their liability insurance will pay out first, but your non-owner insurance would cover any remaining liability.
    • If you rent cars frequently: Non-owner auto insurance doesn't include comprehensive or collision coverage, but it does offer liability coverage to pay for damages or injuries if you cause an accident with your rental car.

Your Credit May Affect Car Insurance Rates

Many states allow auto insurers to consider credit-based insurance scores when calculating your premium. Just another reason why maintaining good credit could help you save money—in this case, on your auto insurance. If your credit score is less than you'd like it to be, consider checking your credit report and score for free with Experian. You'll be able to see what shape your credit is in and, if necessary, take steps to improve your credit.