How Does Car Insurance Work?

If you want to own and/or drive an automobile you need to buy insurance at least for the damages and injuries you may cause to third parties. Every state in the US sets basic liability requirements. The laws for causing traffic related injuries and damages are generally very simple. Either you buy coverage to pay for these losses you caused or you pay them out of your pocket and face the consequences of driving uninsured.

There are many other parts of a policy that provide protection for the vehicle owner, driver and family members. Many people go far beyond the minimum requirements set by their states and buy the best protection within their budget. Every motorist should look at own situation, budget and risk preference and choose a sufficiently comprehensive plan. Generally, you insure against any responsibilities to third parties, receive compensation for your own vehicle related losses and provide protection for family members.


It is a contract between a policyholder and vehicle insurer. The latter promises to pay for damages and injuries incurred or caused by a listed driver in the event of a road accident, theft, fire damage, weather related losses and other perils listed. In turn, the customer pays the agreed fee (the premium) in the fashion and time determined at the start. An important point to note is that non-payment is generally taken as cancelation. In such cases, you must contact the carrier to reinstate and clear the arrears.


   – Liability: Its function is to provide compensation for the citizens’ injuries and property damages in case they are involved in a traffic accident which wasn’t their fault. It also takes away the burden of paying for them and passes it onto carriers. Anyone can own and/or drive a vehicle and most people can pay for reasonable premiums charged. On the other hand, most drivers aren’t equipped financially to pay for injures and damages they may cause. That is why states sets minimums.

   – Full Coverage: Once a customer pays up he/she insures his/her own damages and injuries suffered as a result of listed perils like collision, theft, fire, storms, falling objects and other accidental losses. In other words, motorists transfer risks of suffering financial losses as a result of owning and driving a motor vehicle to insurers. They choose to pay premiums instead of living with the uncertainty of not knowing when and how much damages they may face one of those days.

Car insurance acts as a stop loss for policyholders since maximum they can lose is the deductible amount in each incident once the premium is paid.

   – Paying Claims: It makes sure people cope with damages they suffer as a result of listed perils. It also pays for liability claims against them up to limits. A very important point is that it is there to compensate by giving them back what they have lost. And it is never there to make people financially better off than before. If they were made better off carriers wouldn’t be able to deal with serious moral hazard.

   – Vehicle Insurance as a Social System: It is also a social system in which vehicle owners come together to pay for vehicle related damages and claims suffered by few of them each year. Collecting premiums is a way of pooling money for the said purpose. Insurers’ function is to manage this system efficiently. They must be good at deciding how much each individual should pay to join the pool, who gets paid for damages and injuries suffered, how breaking rules gets dealt with and even who gets kicked out of the pool in order to make a profit. There has to be such a system to relieve drivers off financial burden, governments off responsibility, courts off having to deliver justice too many times and citizens off worry that their injuries and damages won’t be paid.


Liability Automobile Insurance: refers to bodily injuries and damages to property caused by the driver. It is typically sold with certain limits like $25,000/$50,000/$25,000 (bodily injury per person/bodily injury per accident/property damages). This means the carrier will pay only up to those limits, any excess amount will have to be paid by the policyholder or the at fault driver.

Full Coverage Car Insurance: this refers to liability AND protection for the insured automobile, meaning the provider will pay for the repair and/or replacement of the vehicle in case of a loss. It is limited by the value of the car. Also, there is usually a deductible amount which must be paid first; the company will shoulder the rest of the losses in line with the contract.

Other types include Personal Injury Protection for the driver and his family, specific policies for rental cars, roadside assistance, and protection against uninsured drivers. Take note that the more comprehensive is the plan, the better financial protection there is for the driver and the vehicle. It also means a higher premium.


The exact details varies and clearly specified in the documents. Typically, the cause of the damage determines what section is applicable:

* Liability Coverage; this policy pays for damages and injuries to others and their properties, when the driver is determined to be at fault.

* Collision Coverage; this pays for any damages received by the car if it collides with another vehicle, a person, an animal or fixed properties, including parked cars.

* Comprehensive Coverage; insurance against vandalism, theft, fire, weather related damages or any other non-collision damage.

* Personal Injury Protection; provides for payment of medical bills and procedures for injuries sustained by the driver and family members in a car accident.

* Uninsured Driver; pays for damages caused by a motorist who has no or insufficient liability provision.

* Rental Reimbursement; provides for car rental costs while the your car is being repaired following a damage.

Knowing these basic provisions is the first step in selecting the best. This will serve as your guide when looking at quotes.


There are many different plans that to think of a single ballpark figure is almost impossible. Most policies are flexible enough to be tailored to specific needs of an individual driver. It can go as cheap or as costly depending on the requirements.

The actual cost of any auto policy will depend upon a lot of factors. These include, but are not limited to, (1) the driver’s age; (2) gender; (3) driving history; (4) home address; (5) occupation; (6) education; (7) credit score; (8) mileage driven, (9) listed automobile and (10) drivers. Premiums can also greatly vary from state to state and among different companies.

As a general rule, the more coverage there is, the higher the costs. Certain individuals classified as high-risk (i.e. those with a history of traffic violations, claims, a poor credit rating, living in a high crime area or city center) will need to pay more.

However, many companies offer discounts for qualified drivers. This includes special prices for those with a good traffic record (safe driver discounts), student rates, discounts for multiple-policy purchases, and other programs. Always ask for these savings to find the perfect package for your circumstances at a discounted price.


Nowadays the internet makes it a lot quicker to get cheap online quotes and many people choose this method.  You can compare and choose among different offers from many carriers. Alternatively, you can seek out a good independent broker to do your bidding. Brokers will do all the searching and let you know their findings. They will also be able to advise you on the levels, terms, provisions and which company to go with.

Just remember that in order to get the quotes that are applicable to you, you must follow this rule of computer logic: GIGO (garbage in, garbage out). This means that the relevance and the price you are going to get will depend on the accuracy of the information you provide in the quote form.

Be sure to give accurate information about your car, address, and perhaps even the driving history of all persons who will be using the car. As in all policies, the devil is in the details, and this is the way to make sure your needs are met.

Make sure you only pay for the things you really need and you don’t have it twice. You can strike out the redundant parts and stick to what you need.


After these steps, you are now ready to choose the best provider. You may choose to rely on an agent to help you out and offer you advice on various options. It is best to ask all the questions you can think of at this stage, rather than learning too late that you  don’t have enough protection this and that type of damages.

Motorists choose carriers for various reasons. Some of them may have nothing to do with the quality of customer service, dependability of the firm or the claim payment record. Studies suggest that TV commercials play an important role in many people’s decisions. However, this would mean that you limit your choices to handful of companies advertising heavily.

Usually, the size of the company, recognized brand name and personal perception play key roles. Some people may feel secure in the knowledge that they are covered by one of the giants in the industry. Others may prefer a local firm or have to go to a specialist. You have to make your mind based on your own observations and views.

Knowing details of your vehicle insurance will save you from uncertainty in the event of an accident. Always know in advance how much and what for you will pay. After all, you buy it to better deal with unexpected losses and have peace of mind.

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