How Does Car Insurance Work?

Based on the policy you choose, car insurance can provide financial protection in the event your car is damaged or stolen, you are injured in an accident, or you are responsible for an accident that causes physical injury or property damage. Car insurance can also help you meet the minimum coverage requirements required by the state or required by the lender.

On this page, we'll cover some of the most common types of car insurance and offer some tips for deciding how much coverage you need and finding the most affordable car insurance available to you.

What Is Car Insurance?

Car insurance provides financial protection if you are involved in a car accident, your vehicle is damaged in a non-collision event (for example, a fallen tree, hail, etc.), or your car is stolen. In return for the premium - the amount of money you pay for your policy - the insurance company will pay the costs covered. Depending on the type of policy you choose, this could include property damage or physical injury to you or another driver or passenger.

Each policy is based on a limit, or maximum amount that the insurance company will pay in a claim. Some types of coverage also have deductions, or the amount you have to pay before the insurance company will cover the remaining costs.

There are several types of car insurance available, and you can customize the policy to get the insurance coverage you need.

Types of car insurance coverage

Liability Insurance

Liability coverage pays the costs associated with an accident for which you are otherwise legally responsible. Liability insurance generally includes two types of coverage:

Physical injury: this covers costs related to the injury or death of another person (for example, another driver, their passenger, or a pedestrian) when you are responsible.

Property damage: it covers the cost of repairing or replacing someone else's property (for example, a fence, a house, etc.) that are damaged while you are driving your vehicle.

Most states require drivers to have a minimum amount of liability coverage before they can register and operate a vehicle in the state. You can find out how much liability coverage you need by visiting your state's Department of motor vehicles (DMV) or by visiting our state by State Auto Insurance guide.

Learn more about how car liability insurance works.

Driver Coverage Without Insurance

Uninsured driver coverage provides financial protection if you are injured in an accident and another driver does not have car insurance. Depending on where you live, this coverage may also cover property damage. Driver coverage without insurance also pays if you are the victim of a hit and run.

Your state may require you to have a minimum amount of driver coverage without insurance. You may also want to consider underinsured driver coverage, which typically pays the difference between your costs and the policy limit of the offending driver. However, in some states, underinsured driver coverage does not apply unless your underinsured driver limit is greater than the other driver's limit of liability.

Learn more about driver coverage without insurance.

Personal Injury Protection (PIP)

Also known as "innocent" coverage, this insurance pays for medical expenses for you or your passengers if you are injured in an accident, regardless of who is at fault. PIP can also apply if you are riding a bicycle and are hit by a vehicle. In some cases, PIP coverage can also reimburse for lost paychecks and expenses for tasks you can't do during recovery, such as cleaning the House.

PIP is generally optional, and is not available in every state. However, some states, such as New York and Texas, require drivers to have PIP coverage. As always, check with your state DMV to determine if PIP is available in your state and if you are required to have one.

Learn more about how PIP insurance works.

Medical Payment Coverage (MedPay)

Like Personal Injury Protection, MedPay pays your and your passengers ' medical bills for injuries sustained in a car accident, regardless of who is at fault. However, in contrast to PIP coverage, MedPay does not cover additional or associated costs, such as lost wages. MedPay is only required in Maine and Wisconsin. Elsewhere, MedPay is optional coverage that you can purchase alongside your standard car insurance policy. However, it is not available in all states.

Road assistance: if you have a flat tire, need a tow, or are locked out of your car, this coverage will reimburse you for the service so you can continue your journey.

New car replacement: this type of protection will pay to replace the total vehicle with a new one of the same make and model. Coverage is usually limited to relatively new vehicles - for example, two years - but the time limit varies depending on the insurer.

Engine damage insurance: if your car breaks down and your manufacturer's warranty doesn't cover repairs, this coverage will cover it.

Rental car replacement: this supplement will cover the cost of the rental car while your car is being repaired.

Rideshare insurance: if you work for a ridesharing company, this insurance provides additional coverage if you have an accident while working.

GAP insurance: if your car is considered a" total loss " after an accident and you still have debts that are higher than the amount the insurance company will pay, gap insurance will pay the difference.

Road assistance: if you have a flat tire, need a tow, or are locked out of your car, this coverage will reimburse you for the service so you can continue your journey.

Engine damage insurance: if your car breaks down and your manufacturer's warranty doesn't cover repairs, this coverage will cover it.

Rental car replacement: this supplement will cover the cost of the rental car while your car is being repaired.

Rideshare insurance: if you work for a ridesharing company, this insurance provides additional coverage if you have an accident while working.

How much Car Insurance Do I need?

To determine how much car insurance you need, start by looking at your state's requirements. Most states require drivers to have legal liability insurance, but some states require additional types of coverage, such as uninsured driver insurance or PIP insurance. Similarly, if you finance or lease your vehicle, it's best to check with your lender or lessor to find out what type and amount of protection is required as part of your loan or lease agreement.

Keep in mind that this is just a starting point and insurance coverage needs may vary. If you feel unable to pay legal, medical, or legal liability costs after an accident, it's a good idea to consider purchasing a policy that will protect your assets.

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