How Does Car Insurance Work — and What Does It Cover?

Car insurance is a necessity if you own a vehicle, and it’s sometimes worth considering even if you don’t. In most states, it’s even required by law to have at least a minimum amount of coverage.

But there are different types of car insurance policies out there, and even different types of coverage within the same policy. If you’re wondering how to get car insurance or what’s actually covered, this guide can help.

How does car insurance work?

At a basic level, car insurance is designed to protect you financially if you get into a car accident or your vehicle gets damaged some other way. Your policy’s coverage can take care of the cost of repairs to your vehicle, medical treatment for you and your passengers (and possibly passengers in the other vehicle if you’re at fault), damage to other property caused by your vehicle, and more.

In exchange for this protection, you pay a premium — either monthly, quarterly, semi-annually or annually. The cost of your car insurance premiums can vary based on several different factors, which we’ll cover in a minute.

The 10 types of car insurance and what they cover

When you purchase a car insurance policy, you’ll get several different insurance protections within that policy. Although some are optional, others may be required by your state or lender if you have a loan on your vehicle. Here are the different types of car insurance you can get with your policy:

• Collision insurance
• Comprehensive insurance
• Liability insurance
• Medical payments insurance
• Personal injury protection
• Uninsured motorist insurance
• Underinsured motorist insurance
• Emergency roadside insurance
• Rental reimbursement insurance
• Guaranteed Asset Protection (GAP) insurance

Note that there are also different types of car insurance policies, which can help in special circumstances.

For example, if you drive with Lyft or Uber or for an on-demand delivery service such as DoorDash, you’ll need a rideshare insurance policy, and if you drive a vehicle strictly for business purposes, a commercial insurance policy will be a better fit than a personal one. Classic cars and luxury vehicles may also require a separate policy.

Finally, if you don’t own a car but frequently drive others’ vehicles, it may be a good idea to purchase a non-owners insurance policy for liability protection.

Regardless of what type of policy you get, many of the types of coverage still apply. Here’s a breakdown of each.

1. Collision insurance

If you get in an accident with another vehicle or hit an object, this insurance will cover the cost of your repairs or even pay to replace your car. There’s typically a deductible, which you’ll need to pay before your coverage kicks in.

2. Comprehensive insurance

This part of your policy covers damages to and loss of your vehicle from other sources, such as hail, fire, theft and vandalism. Like collision coverage, comprehensive insurance typically requires you to pay some money out of pocket as a deductible.

3. Liability insurance

Liability insurance is designed to cover the costs of damages you cause in an accident, including bodily injuries and property damage. Most states require that you have a minimum amount of liability coverage, which is set by state law.

4. Medical payments insurance

If you or your passengers get injured in an accident, medical payments insurance can help cover the cost of treating your injuries, which can include hospital visits, X-rays, surgery, and more. This insurance is required in some states and optional in others.

5. Personal injury protection

Personal injury protection (PIP) works similarly to medical payments insurance, but may also include other expenses, such as child care expenses and lost income. PIP is only available in certain states, but it isn’t required in all of those states

6. Uninsured motorist insurance

If you’re involved in an accident in which the other party is at fault, and they either don’t have insurance or fled the scene of the accident, this coverage will protect you and your car by covering the cost of the damages.

7. Underinsured motorist insurance

Similar to uninsured motorist insurance, this coverage kicks in if you’re in an accident in which the other driver is at fault but doesn’t have enough liability insurance to pay the full cost of your injuries and the damage to your vehicle.

8. Emergency roadside insurance

This optional coverage can help offset the cost of emergency assistance if you’re stranded on the road. For example, if you’re out of gas, need a tow, or require help to put on a spare tire, this insurance can pay some or all of the expenses associated with it.

9. Rental reimbursement insurance

If your vehicle is in the shop or unavailable because of an accident, this insurance will reimburse you for the cost of your rental car or pay for it directly until you have your own vehicle again.

10. GAP insurance

GAP insurance helps you pay off your car loan if your vehicle is totaled in an accident and you owe more than it’s worth. As the name suggests, it helps cover the gap caused by the negative equity in your vehicle.

How to find affordable car insurance

Car insurance rates are influenced by several different factors, including but not limited to:

• Where you live
• Your driving record
• How often you drive
• Your age and gender
• The vehicle
• Your credit history
• The type and amount of coverage you choose

Of course, there are some factors, such as your age, that you can’t control. But with others, there are other opportunities to score a lower insurance premium. Also, insurers typically offer other ways to get discounts on your coverage. Here are some tips to help you find affordable car insurance for your vehicle:

• Shop around. No insurer offers the lowest rates for everybody, so shopping around is the single best way to ensure you get the lowest rate possible on your car insurance. Companies such as Provide Insurance allow you to compare rates from several insurers based on a little information about yourself and your vehicle.
• Ask for discounts. Insurance companies typically offer discounts based on your driving, your vehicle, the organizations you’re affiliated with, and more. As you search for quotes, look at which discounts the insurers offer to see whether you qualify for even more savings. Note, however, that some discounts are temporary, and some insurers may limit the total discount percentage you can get.
• Get less coverage. Most states require a minimum amount of liability coverage, and if you’ve financed your vehicle, your lender may also require this coverage. But in most cases, you won’t need to get the maximum coverage available. Requesting less coverage can save you money on rates because it reduces what the insurer has to pay out if you file a claim. That said, don’t go too low or you may be stuck paying out of pocket once your policy reaches its limit.
• Request a higher deductible. Certain types of car insurance require a deductible before your coverage kicks in, and the higher your deductible — what you pay out-of-pocket — the less the insurance company has to pay. As a result, higher deductibles typically help lower your rates. Just try to avoid going so high that you can’t afford it if you actually do need to file a claim.
• Be mindful of what you drive: Vehicles that tend to cost more money to repair typically carry higher insurance premiums. Although that may not be a problem if you can afford it, you can typically save money on insurance with a less expensive vehicle.
• Improve your credit: In most states, car insurance companies are allowed to use a credit-based insurance score to help determine your insurance rate — California, Hawaii, and Massachusetts have banned the practice. Insurers typically can’t use this score as the sole reason for increasing your rate, but it can be coupled with other factors to do so. More importantly, it can cause you to leave money on the table in the form of savings.

As you keep these tips in mind, you’ll be in a better position to save money on your car insurance. Also, consider checking insurance rates every year or two to make sure you’re still getting the lowest possible rate.

FAQs about car insurance

As we researched this topic, we came across several common questions from consumers like you. Here are some helpful answers to the questions we found.

The final word on car insurance

Car insurance is a necessity if you own and operate a car in most states, and it’s a really good idea even if it’s not. The likelihood of you getting in an accident and needing your insurance coverage is extremely low, but if it does happen, having the right amount of coverage can save you thousands of dollars.

So take your time when buying a new policy and compare different insurers to find the right one for you based on price and customer satisfaction. And although you may need to cut coverage to make the premiums affordable, don’t cut so much that it could cripple you financially if you end up needing your insurance and it’s not enough.