What is Auto Insurance and How Does it Work?

Almost every state in the union requires that you have car insurance, but understanding the policies is not something they teach in your high school economics class.

Before getting your first set of auto insurance quotes, take a few minutes and learn how the policies work.

What is Auto Insurance?

Car insurance helps to protect one of your most valuable assets –your car. It will pay out if you’re in an accident, or if your vehicle is lost, stolen, or destroyed. Depending on your level of coverage, it may also pay for repairs to the other party’s car in an accident that you caused.

In exchange for this auto insurance, you’ll have to pay a monthly premium. The rate that you pay will be determined by the car you drive, your driving record, and a range of other things.

That is what auto insurance is in a nutshell. Your next question is likely to be, “How does car insurance work?” The answer to that question involves a little background on insurance, including:

Components

There are several different types of policies, each containing a diverse mix of components. The more comprehensive the cover you enjoy, the more you should expect to pay. It’s important to understand these components so that you know what your ideal policy should include.

Liability insurance

Liability insurance is used in the event you cause injury to someone else or their property with your car. So, if you bump a pedestrian accidentally, this is what you’ll need. This would also come into play if you drove over your neighbor’s bicycle by accident.

Personal Injury Protection

Personal injury protection comes into play when you or your passengers are hurt while in your car. This is no-fault coverage. In other words, it doesn’t matter who the driver was. You’ll have limits imposed but can claim for medical bills and wages lost as well.

Collision Insurance

Collision insurance will pay for damages to your car if it’s in an accident. Collision coverage is usually an optional extra. Personal injury protection and liability coverage typically are the only legally-mandated components required, though if your car is financed, your lender may require it.

Comprehensive insurance

Comprehensive insurance will protect you against loss for reasons other than a car wreck. This might include issues such as door dings in parking lots, vandalism, theft, and more. If it didn’t involve you hitting someone or something, or someone hitting you, it falls to comprehensive coverage.

If your car is going to be parked for a while, you can get away with just having comprehensive insurance.

Under- or Uninsured Coverage

In the insurance world, the driver who caused the accident, or their insurer, is liable to pay all the damages. What happens if the other driver is uninsured, or if their basic coverage won’t cover the damages though? That’s when under- or uninsured coverage insurance comes in.

Gap Insurance

Gap insurance is most well-known for its use in medical policies. It is just as applicable here though. The insurance that you have covers you for the cash value of your car. This can quite easily be lower than the amount still outstanding on your credit agreement. Gap cover will pick up the difference.

Determining Coverage

In most states, you need at least basic liability insurance and personal injury protection coverage. If you don’t have these, you’ll be driving illegally. Even if your state does not insist on this, having some form of car insurance is still a good idea.

Should you cause an accident, you’ll be liable to pay the damages whether you have the money or not. If the other person is insured, their insurance will pay out. That doesn’t let you off the hook, though, in many cases, the insurance company will come after you for the money.

Even if you’re driving a rust bucket that’s not worth much, it still makes sense to at least get liability insurance. What happens if you accidentally rear end an expensive Mercedes, for example?

Before you head out and get the cheapest policy you can find, do find out what your coverage will be. Most basic policy limits top out at $50,000 at most. If your actions cause you to total another car, that would be easily exhausted.

If you’re worried about the premiums for a policy with a higher limit, you can reduce them by opting to pay a higher deductible. The deductible is the amount that you’re responsible for paying before your insurance pays anything.

Say that your deductible is $500, and the repairs cost $2,500, for instance. The insurance will pay out $2,000, and you’ll have to find the rest. Make sure that you choose a deductible that you can easily afford to pay.

On the subject of comprehensive insurance, it’s also a good idea to consider the amount of crime in your area. How high are the chances of your car being vandalized or stolen? If they’re high, you’ll want better coverage. You might also want to get some gap coverage if your vehicle is still under financing.

Getting a Quote

You’ll need to do your homework and see which company will offer you the best deal. There are a lot of different factors that are taken into consideration when determining your premium. That makes it difficult for you to figure out what you’ll pay up front on your own.

The insurer will look at your details, such as your credit history, driving record, age, and so on to see what kind of risk you pose. They’ll also take into account where you live, whether the car is kept in a secure location, what anti-theft measures it has, and so on.

There are some factors that you can’t change. There are some that you can. Here are some ideas to reduce your premiums:

• Increase the deductible: This shows the company that you won’t be claiming for the odd bump and scrape. It can decrease your premiums substantially.
• Location: If you live in a high-crime area when you take out the policy, and then move to a better area, contact the company. Alternatively, see what extra security measures you can take to protect your car. A car in a locked garage is safer than one on the street.
• Your credit history: This one doesn’t seem fair but look at it from the insurance company’s point of view. If you don’t maintain a good payment history with credit accounts, how reliable will you be here? Work on improving your credit rating and then get a new quote.
• Your driving record: How many violations do you have? How many accidents have you had? That all makes a difference to your premium. If you can get a ticket dismissed, such as by taking a driving class, this can be one way to improve your record.

Top Companies

Auto insurance is regulated at the state level so there may be different top companies available in your area.  These are three of the best auto insurance companies available across most of the country:

• Liberty Mutual – One of the largest on oldest insurance companies, Liberty Mutual is a top company across the country.
• Metromile – One of the most innovative insurance companies, Metromile allows you to pay for insurance based on how much you drive.
• Esurance – An innovator of online car insurance quotes, Esurance is now one of the most recognized name in auto insurance.

Auto Insurance Quotes Bottom Line

Car insurance is a major piece to securing your finances for any drive. Make sure you get multiple quotes from various companies with the exact same specification, so you can get the best rates.

By making sure your coverage makes sense and more than meets the requirements of your state, you can be sure that you have a policy that works for you.