How does car insurance work?

how does car insurance work
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By Sarah Young  |   Last updated on January 27th, 2023 at 3:27 pm

4 Minute Read

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Insurance coverage is something that everyone needs but that few people feel they fully understand. Doing your own research can provide you with an abundance of information but no real guidance. Unfortunately, even turning to the experts (the insurance companies) more often than not, is extremely confusing. Too many companies prioritize sales over individualized solutions and customer understanding, which can leave you feeling overwhelmed and more than a little confused.

At Elephant Insurance, we do things differently. We want you to be an active partner in your insurance planning, and we aim to foster your understanding and involvement every step of the way. With our helpful representatives, free quote-finder tool, simple car insurance explanations, and informative articles (like this one!), we make sure you’re never in the dark.

What is car insurance?

Car insurance works as a safeguard for your financial well-being and your vehicle in case of accidents, theft, or other incidents beyond your control. Car insurance can protect you from a financial loss by paying for vehicle repairs, medical expenses, and damages or injuries you cause to another driver.

An auto insurance policy is a contract between you and your insurance carrier. In exchange for your paying a premium, your insurance company agrees to pay your losses as outlined in your policy.

What does car insurance cover?

What is covered depends on your coverage. The first thing to do when trying to get a clearer understanding of what your insurance policy covers is to identify what type of coverage you have. There are six main types of car insurance, depending on the state:

  • Liability: Liability insurance protects you if you’re liable for the damage to another driver’s vehicle in an accident. This type of coverage is required in almost every state.
  • Collision: Collision covers the repair or replacement of your vehicle, less your chosen deductible, no matter who is at fault in an accident. Most lienholders require owners purchase collision insurance if you lease or finance your vehicle.
  • Comprehensive: Comprehensive insurance covers damage to your vehicle, less your chosen deductible, that was not caused by an accident. Examples include: rodent damage, fallen limb coverage, and more.
  • Personal injury protection: This type of coverage pays for direct and indirect medical bills if you’re involved in an accident.
  • Uninsured/underinsured motorist: Covers vehicle damage and medical bills after an accident with an uninsured/underinsured driver. This type of insurance is required in 20 states.
  • Medical payments: This pays for your medical expenses after an accident.

What does car insurance not cover?

 You definitely want to double-check your policy to make sure you have all the coverage you need (with no surprising gaps). Finding out you weren’t covered for something essential after an accident is not a fun position to be in.

While each carrier and policy is different, below are some common situations that typically are not covered by a standard auto policy:

  • Personal items left behind in your vehicle (theft of those belongings): If your computer, purse, or other valuable item is stolen from your vehicle, you may have to turn to homeowners or renters insurance to have those items replaced.
  • A person who lives with you but isn’t on your policy: Letting your roommate drive your car? If that’s a common occurrence, you may want to add them to your policy. Otherwise, you won’t be covered if they cause an accident while driving your vehicle.
  • Making deliveries (and ridesharing – business use): If you work for Lyft, Grubhub, or any other company that requires you to drive your own vehicle, you need a commercial auto policy in order to be covered. Your regular policy will not cover anything that happens to you or your vehicle when driving for business purposes.
  • Using the wrong fuel: Not paying attention while filling up your gas tank? Using the wrong kind of fuel could damage your vehicle, and your policy won’t cover the repairs.
  • Condensation in your gas tank: Condensation in your gas tank can cause corrosion, which is expensive to reverse. Unfortunately, your policy probably does not cover this type of damage, unless you can prove that it happened due to vandalism.
  • Routine car maintenance/wear and tear: Most of us know that if your car starts making a funny sound after driving it for a couple years and you have to get a part replaced, that’s not covered by insurance. The same goes for routine maintenance like getting your oil changed, or having the tires rotated.
  • Driving outside of the US: Check with your insurance carrier to see what your auto insurance will and won’t cover before you go on an international trip in which you plan to drive. Most policies do not cover you if you are driving outside of the US.

What is the difference between my premium and my deductible?

 Insurance Premium

An insurance premium is the amount you pay for an insurance policy. Simply put, premiums are what you pay insurance companies in exchange for coverage. When you hear “insurance premium,” think “insurance price.”

You typically pay premiums monthly, semiannually, or annually, depending on the policy. Insurers sometimes offer a small discount for bundling your policies or paying your premium annually. The price of your premium depends on the type of insurance you buy.

Insurance Deductible

When you make a claim, your insurance deductible is the amount you are responsible for before your insurance company will chip in. With car insurance policies, you’ll pay a separate deductible for each individual claim. Typically, your deductible is due to the shop at the time the repairs are complete

With collision and comprehensive coverage, you are usually able to choose your own deductible amount. Insurance deductible amounts are typically written into your policy in one of two ways:

  • As a specific dollar amount.
  • As a percentage of the policy’s total insurance amount.

Regardless of how the deductible is applied, your insurance will start to contribute once you reach your deductible. If your damages are found to be less than your deductible, your insurance carrier will not be able to issue any payments.

Do I have to have car insurance?

While nearly all states require liability coverage to register and drive a car, all states have financial responsibility laws. In states where liability insurance is not a requirement, you need to have proof of sufficient assets to pay damages, medical bills, and more if you cause an accident.

In many states, driving without insurance can lead to legal penalties like a suspended drivers license, and your vehicle being impounded. Worse, if there is an accident, you could be financially responsible for the damages, destroying your financial future.

You’ll want to protect yourself and your assets with car insurance. The insurance industry and consumer groups generally recommend a minimum of $100,000 of bodily injury protection per person and $300,000 per accident, since accidents may cost far more than the minimum limits mandated by most states.

In short: liability coverage covers the costs of an accident that you caused. These may include the other driver’s vehicle repair costs, as well as lost wages and medical expenses for them, their passengers, and any pedestrians or bystanders who were involved in the accident.

Full coverage combines a variety of different policy types, including options like collision coverage, comprehensive coverage, and liability insurance. There are additional coverage options as well, which can take care of things like rental reimbursement costs and towing expenses.

If you’re ready to sign up for a car insurance policy, give us a call! Or, if you still need more information before you make your decision, try out our coverage wizard.

Get a quote today and know that you and your vehicle are protected.

Related: Does Car Insurance Cover Catalytic Converter Theft?

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