What Is Car Insurance?

by COUNTRY Financial

You know you need car insurance, but do you know how it protects you? If you’ve ever wondered, ‘What is car insurance?’, you’re not alone. It’s a broad topic, and with so many different coverage options, buying it can get confusing.

In this article, we’ll explain how car insurance works, explore differences between the many types of car insurance coverage  and help you decide what’s right for you and your family.

Car insurance: What it is, what it does

Simply put, car insurance is a contract between a car owner (you) and an insurance company. That contract—referred to as a “policy”—outlines your auto insurance coverage; it legally defines exactly what types of incidents the insurance company will cover, how much they’ll pay for those incidents (policy limits), and how much you, the policy owner, will pay in premiums.

The main purpose of auto insurance is to protect you from financial hardship if you’re in an accident. It helps pay for repair costs, legal fees, medical expenses and more after an accident, preventing you from paying entirely out of pocket.

What does car insurance cover? 

The short answer is, it depends on what type of coverage you purchase. A car insurance policy is a collection of various coverage types; some are included in a “standard” policy, and others you can buy as add-ons.

As for what comes in a “standard” or “basic” policy, that depends on where you live. All 50 U.S. states require certain types of coverage at minimum, and each state has different requirements.

Here are the main types of car insurance coverage:

• Collision coverage: Helps pay for car repairs if it’s damaged in any type of collision. This includes accidents with other drivers but extends to solo accidents—if you hit a tree or mailbox, for example.
• Comprehensive coverage: Covers car repairs for damage caused by events other than collisions, such as theft, vandalism, weather and natural disasters, etc.
• Medical payments coverage (MedPay): Helps pay for medical costs if you or your passengers are injured in an accident, regardless of which driver is at fault.
• Personal injury protection (PIP): Offers the same coverage as MedPay but is more comprehensive; PIP also helps reimburse lost wages, physical rehab and more following an accident.
• Underinsured motorist protection: Covers physical and property damage resulting from an accident with another driver who has some car insurance, but not enough to cover the costs of the accident.
• Uninsured motorist protection: Covers physical and property damage resulting from an accident with another driver who has no car insurance.
• Liability coverage: Protects you financially if you’re determined to be legally responsible for injuring another person or damaging their property. It helps cover the damages you caused, like another person’s medical bills, the cost of repairing their property, etc.
  
  If an accident is serious enough (and you’re at fault), you could be sued by the injured party. Talk to your insurance agent about umbrella insurance to help protect from that.

Additional auto insurance coverage 

These car insurance coverage types are never required by states and are only available to purchase separately. They cover unusual and emergency situations—you won’t need them often, but if you ever do, you’ll be glad you have the car insurance coverage.

• Roadside assistance coverage: Reimburses the cost of emergency aid should you become stranded on the road. It covers things like towing, locksmith fees, flat repairs and more.
• Auto glass and windshield repair or replacement: Covers damage to headlights, taillights, and car windows.
• Rental car coverage: Most car insurance policies offer sufficient protection for rental cars, but this additional coverage can add another layer of security.
• Coverage for ridesharing: If you use your car as a source of income, you’ll likely need a commercial or business insurance policy to cover your insurance while ridesharing. Some states require insurance companies to offer options for this situation. If you use your personal vehicle as a rideshare car, discuss options with your insurance agent.

What’s not covered by auto insurance?

While car insurance is an important part of your protection plan, it won’t cover all the costs you may have as a car owner. 

Here are a few things car insurance does not cover:

• General car maintenance: Tune-ups, replacement of worn parts and other repair costs won’t be covered by car insurance. They’re considered general maintenance and are simply part of the cost of owning a car.
• Mechanical breakdowns: Breaking down on the road won’t be covered by your insurance. That said, purchasing emergency roadside assistance coverage could help reimburse costs of towing, flat-tire replacement and more.
• Property inside your car: If anything is stolen from within your car, your car insurance won’t cover the costs to replace it. However, if you have home insurance, you may be covered by personal property coverage. Again, this is part of home insurance, so check your home policy if you have one.

How does car insurance work?

Here’s a quick overview of how car insurance works:

1. Pay your premium
   An insurance premium is the amount you pay your insurance company—usually monthly—to keep coverage active. When people refer to “paying their car insurance bill,” they’re talking about a premium. The amount is agreed upon when you sign your contract and depends on how much coverage you have.
2. File a claim
   If you’re in an accident or your car is otherwise damaged, vandalized or stolen, the first thing to do is file a claim with your insurance. This can be done by calling your agent, going online or using your mobile app, if applicable.
3. Pay your deductible
   A deductible is an amount you pay out-of-pocket before insurance coverage kicks in. As with premiums, the deductible amount is agreed to when purchasing the policy. Unlike premiums, however, deductibles vary depending on the applicable coverage.
4. Repair the damage
   The claims team will review your claim and arrange to inspect the damage to your vehicle. Most insurers offer several appraisal options, and your representative will guide you through the process.

Do I need car insurance?

All states require car insurance, but the level and types of insurance vary by state. Most state requirements relate to liability insurance that protects others and their property if you cause an accident. But some states require uninsured motorist coverage to protect you from drivers who don’t carry liability insurance. Your insurance agent will be able to guide you through your state’s requirements.

How much does auto insurance cost?

What you pay for car insurance depends on you and the decisions you make. Personal details about yourself, how much coverage you buy—all of these can affect your premium. 

Here are some factors that determine how much auto insurance could cost:

• The car you drive: Some cars are more expensive than others to insure. Convertibles cost more to insure than sedans. And typically, more expensive cars and cars that are often stolen have higher car insurance rates.
• Where you live: Living in a high-density area generally means your car insurance will be higher than if you live somewhere rural or less urban. There are simply more cars in large cities, which means the chance of an accident is higher.
• Your driving history: Have a clean driving record with few accidents or tickets? You’ll likely pay less for insurance. If not, you’ll pay more. Many insurance companies offer car insurance discounts for good drivers and for avoiding claims.
• Types of coverage you purchased: As mentioned earlier, all 50 U.S. states require minimum levels of certain coverage types. You’ll pay less if you stick with those, but you also won’t be fully protected. Buying additional coverage gives you more protection, but at a higher cost.
• Coverage limits: If you purchase additional coverage types, you’ll also select coverage limits for them. Again, higher limits provide more protection but cost more.
• Your deductible: Deductibles work differently than coverage limits: The lower your deductible, the higher your insurance premium. But remember, a higher deductible means you’ll pay more out-of-pocket when filing a claim.

Keep car insurance up to date

Meet with your insurance agent regularly to review your car insurance and to make sure you and your family have the protection you need. Your agent will also help ensure you’re getting any available auto insurance discounts. Most insurers offer discounts for having more than one type of insurance with one company, as we do with our Multi-Policy Discount.

When you know how auto insurance works and what it does, you can rest assured knowing you’ve got the protection you need without overpaying.