Knowing the ins and outs of auto insurance will help you make the most of your policy.
If you’re new to car ownership, you may be wondering: How does car insurance work?
We’ve spent the past few months reviewing the best auto insurance providers, and in this guide, we’re going to give you the lowdown on how car insurance works, from getting a quote to filing a claim.
In this article:
- What Is Car Insurance?
- How Do I Get Car Insurance?
- Types Of Car Insurance
- Full Coverage Vs Minimum Coverage
- How Much Does Car Insurance Cost?
- What Happens When You Get Into An Accident?
- Our Top Provider Recommendations
What Is Car Insurance?
Car insurance is a type of insurance that protects you financially if you’re injured, your vehicle is damaged, or you injure someone or damage someone else’s vehicle in an accident. A typical car insurance policy is comprised of a mix of several different types of insurance ranging from liability coverage to uninsured motorist coverage.
When you purchase an auto insurance policy, what you’re really purchasing is a contract between you and the provider stating that if one of the events covered by your policy occurs, your provider will cover the costs.
In this way, an auto insurance policy protects you against large, unexpected expenses that you may not be able to cover on your own. Without auto insurance, you’d need to pay the equivalent cost of a car out of pocket if you totaled someone’s car in an accident. However, with a car insurance policy that provides liability coverage in hand, your insurance provider will cover that cost, saving you from having to drum up $30,000 at the drop of a hat.
How Do I Get Car Insurance?
If you’ve ever seen a Geico commercial before, you know how to get a quote. For the most part, you can take out a new car insurance policy by finding a provider, navigating to its website, requesting a quote, and then purchasing a policy if you like the quote you received.
Alternatively, you can call your chosen provider or schedule an in-person meeting with one of its agents. However, these days, getting a quote online is a very popular route, due to the increased convenience and how easy it is to compare rates.
When you request a quote, you’ll input some information about yourself and your vehicle, such as its VIN number. Most insurance providers will ask you what make, model, and year your car is, as well as some personal information about yourself and anyone else who drives your car. This may include your age, whether you’ve been in an accident, how long you’ve been driving, and more.
After you’ve compared some quotes and settled on one that you like, you can usually pay online immediately to begin your coverage. Of course, you can also talk with an agent or representative on the phone or in person to take out coverage. The agent will walk you through all your different options to help you construct a policy that fits your needs. Once you’ve settled on a policy, they’ll tell you how to purchase it.
Types Of Car Insurance
Although a car insurance policy sounds like a singular product, a typical auto insurance policy is actually made up of several different types of insurances that are wrapped up together into one policy that you know as your auto insurance policy.
The six standard types of insurance are:
- Liability insurance: Covers the cost of damage and injury to third-parties, as well as your legal fees, should someone leverage an auto-related lawsuit against you
- Collision insurance: Covers the cost of damage and injury to yourself and your passengers should you be involved in a collision with another car or object
- Comprehensive insurance: Covers the cost of damage to your car from theft, vandalism, natural disasters, civil disturbances, and other non-collision events
- Medical payments insurance: Covers the cost of you and your passengers’ accident-related medical bills
- Personal injury protection: Covers the cost of you and your passengers’ accident-related medical treatment and also reimburses you for lost wages due to an accident-related injury
- Un-insured/Under-insured motorist insurance: Covers you if you get into an accident with a driver who doesn’t have insurance and consequently can’t pay for damages to your vehicle or treatment for any injuries you might sustain
Additional Coverage Options
In addition to these six standard coverage options, many insurance providers also offer additional types of insurance, such as:
- Gap insurance: Covers the difference between the actual value of your car and how much you still owe on it if you significantly damage or total a financed or leased car before your financing term is over.
- Rental car reimbursement: Covers the cost of a rental car if your car becomes undrivable for an extended period of time.
- Rideshare insurance: Covers motorists driving for ridesharing companies like Lyft, Uber, etc.
- Mechanical breakdown insurance: Covers the costs of repairs due to mechanical breakdowns, similar to an extended auto warranty.
It’s important to note that each of these coverages also comes with a coverage maximum. A coverage maximum is the maximum amount that your insurance will cover.
For example, your liability insurance may have a coverage maximum of $30,000. If you get into an accident and cause $45,000 worth of damage, your insurance would cover the first $30,000, but you’d need to pay the remaining $15,000 out of pocket.
Most auto insurance policies also come with deductibles: an amount of money you have to pay out of pocket each term (usually six or twelve months) before your insurance kicks in.
For example, your collision car insurance coverage may have a $1,000 deductible. This means that if you get into a collision and sustain $5,000 worth of damages, you’d need to pay the first $1,000 out of pocket, and then your provider would cover the remaining $4,000. If you got into another accident within the same term and sustained yet another $5,000 worth of damages, this time your insurance would cover the entire $5,000, as you already met your deductible for the term.
In general, a lower deductible brings with it a higher premium and vice versa.
Full Coverage Vs Minimum Coverage
When purchasing a car insurance policy, you’ll often be deciding between a full coverage and minimum coverage policy. Although there is no universally agreed-upon definition for “full coverage,” the term generally refers to a policy that covers:
- Collision insurance
- Liability insurance
- Comprehensive insurance
A minimum coverage policy, on the other hand, will only offer the bare minimum coverage required by your state. In many cases, that’s just liability insurance, so if you end up getting in an accident, your own damages and injuries won’t be covered. That means that, although you’ll pay a lower premium for a minimum coverage policy, you also won’t have the same level of protection. If you’re not prepared, you could end up in financial ruin following a serious accident.
For this reason, many experts recommend purchasing a full coverage policy to ensure that you have sufficient coverage.
How Much Does Car Insurance Cost?
According to TheZebra, the average yearly cost of auto insurance in the United States is $1,470. However, your actual car insurance rates will depend on:
- What car you have
- Where you live
- Your driving history
- Your age
Let’s take a closer look at each of these factors.
Your car will affect your car insurance premium based largely on two factors: how safe it is and how expensive it is.
For the most part, the safer your car is, the lower its premium will be, as safer cars are less likely to get into accidents. If an accident does occur, the driver and passengers are less likely to be injured. Either way, that means less chance of an expensive insurance claim for your provider.
Similarly, expensive cars run a higher risk than inexpensive cars for insurance companies. If you total your Ford Fiesta, your car insurance company will have to pay a whole lot less than if you totaled a new Lamborghini. To account for that extra risk, your insurance policy will typically be at a higher rate if you have an expensive car.
Where You Live
Each state sets its own minimum insurance requirements, and that means that the average cost of minimum insurance rises and falls from state to state depending on how much insurance drivers legally need to take out – states with more requirements will have a higher minimum than states with fewer requirements. Additionally, each state has its own unique average driver profile, which can raise or lower the risk of being on the road.
Your Driving History
When an insurance provider offers you a policy, it’s taking on a huge risk: car accidents are frequent, and if you get into one, your provider will need to cover you. To compensate for that risk, your provider will adjust your premium based on your driving history. If you have a driving record free of accidents and traffic violations, expect a lower premium. However, if your history is rife with crashes and speeding tickets, you can plan to pay a pretty penny for your insurance. In fact, a single car accident can significantly raise your premium.
If you’re under 25, your premium is, unfortunately, going to be sky-high. After 25, it will start to lower, reaching its lowest point when you’re in your 50s and 60s. Once you enter your senior years, your rates will start to rise again.
The reason for such high rates for young drivers is two-fold: For one, statistics from the Center for Disease Control and Prevention show that drivers between the ages of 16 and 19 are more likely to get into a car accident than any other age group. Secondly, young drivers have a shorter driving history, which means insurance providers have less to go on when determining how safe of a driver they are.
Rates begin to increase when drivers enter their older years, as it’s more likely for senior drivers to suffer from Alzheimer’s, dementia, vision problems, and a number of other health issues that can make driving more dangerous.
What Happens When You Get Into an Accident?
If you get into an accident, the first thing you’ll need to do is call the police so they can document the incident.
Then, you’ll need to decide whether you want to file a claim with your provider. When you file a claim, it means you believe the damage or injuries sustained in the accident are covered under your policy, and you’re requesting that your provider cover the costs.
Most insurance providers offer a few different ways to file a claim, including:
- In person
- Through a mobile app
- By telephone
In all cases, you will need to describe the incident to your provider, who will then assign an investigator or adjuster to the case. The adjuster will investigate the incident and determine whether it’s covered under your policy – and if it is, how much your insurance will cover.
Our Top Provider Recommendations
In our research, we gave USAA and Geico the highest marks for customer service, financial strength, price, and coverage. Here’s a closer look at each.
Out of every company we reviewed, USAA car insurance took the top spot. The company has an A++ financial strength rating from AM Best and ranked number one in J.D. Power’s 2019 Auto Claims Satisfaction Study. Together, this indicates that USAA has the financial strength to fulfill claims, and its customers are typically satisfied with how it does so.
Furthermore, we found that USAA has the lowest average annual premium in the entire insurance industry, proving that you don’t need to pay exorbitantly high premiums for superb service.
Unfortunately, USAA is only available to military members and their families, so civilians will need to look elsewhere. But for those who qualify, USAA is a great bet.
Best for Military Families
Our best overall pick: Offers great customer service to military members and their families.
Although USAA took home the gold, Geico was a close second and our first choice for consumers overall. The brand’s focus on integrating technology makes for a quick and convenient quote and claim filing process via its website or mobile app. However, customers who prefer to file their claims in person or on the phone have those options available to them as well.
We found that Geico has an A++ financial strength rating from AM Best and performed well in J.D Power’s 2019 Auto Claims Satisfaction Study, both of which bode well for the ease with which customers can get their claims fulfilled.
Geico’s average annual premiums were higher than USAA’s, but they were still quite reasonable and cheaper than most other car insurance providers.
All in all, we believe Geico is the best choice for non-military members seeking car insurance.
Best Company Overall
Best for those ineligible for USAA: Offers competitive pricing and great coverage.
What will car insurance pay for?
Different car insurance policies will pay for different things. Liability insurance, for example, will pay for any damages or injuries you cause to a third party in an accident, while comprehensive insurance will pay for non-collision-related damages to your vehicle. When purchasing an insurance policy, you will have to decide for yourself what level of coverage you want.
How does car insurance work when you get in an accident?
When you get in an accident, you will need to decide if you want to file a claim with your provider. You can do so either by telephone, in person, online, or via a mobile app, depending on what options your provider offers. Once you’ve provided information about the incident, an adjuster will begin an investigation. If they decide that the costs are covered under your policy, they will fulfill the claim and cover the costs.
Can someone else drive my car if I have insurance?
According to Jean Salvatore of the Insurance Information Institute, letting someone drive or borrow your car from time to time is not a problem.
However, drivers may run into trouble if the person they are lending their car to should really be listed as an additional driver on their insurance policy. This may be the case if the person driving your car lives in your household, is a regular caretaker, or has another relationship to you that would require them to drive your car on a normal basis, even if only for a short period of time – say to pick up your kids from school once a week, for example. To be safe, you should always contact your insurance provider to clarify.