How Car Insurance Works: Everything You Need to Know Before You Hit the Road
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Written byJ.J. Starr
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J.J. Starr is an insurance and personal finance expert who has been writing for Compare.com since 2022. Her work has been published across the web, appearing on sites such as Insurify.
Prior to writing for Compare.com, J.J. was a registered banker and life insurance consultant, holding a Series 6, FINRA, and life insurance license. She also earned a master’s degree in writing from New York University.
J.J. has a passion for helping people save money by explaining complex topics like car insurance in a way that is simple and easy to understand.
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Edited byNick Versaw
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Nick Versaw leads Compare.com's editorial department, where he and his team specialize in crafting helpful, easy-to-understand content about car insurance and other related topics. With nearly a decade of experience writing and editing insurance and personal finance articles, his work has helped readers discover substantial savings on necessary expenses, including insurance, transportation, health care, and more. As an award-winning writer, Nick has seen his work published in countless renowned publications, such as the Washington Post, Los Angeles Times, and U.S. News & World Report. He graduated with Latin honors from Virginia Commonwealth University, where he earned his Bachelor's Degree in Digital Journalism.
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In This Article
The average bodily injury car insurance claim was more than $26,501, and the average property damage claim was $6,551 in 2023 (the most recent year for which data was available), according to the Insurance Information Institute (Triple-I).[1] And those figures don’t even account for repair costs for your vehicle if you cause an accident.
These dollar amounts highlight the importance of purchasing car insurance. After all, auto insurance coverage protects you from devastating financial losses if you cause an accident or if someone without coverage hits you. Plus, it’s legally required to drive on public roads in most U.S. states.
In this article, we’ll go over everything you need to know about car insurance. By the end, you’ll have a better understanding of what’s covered, how it influences cost, and whether you need it.
Auto Insurance: The Basics
Car insurance is complex, so it’s important to understand how it works before you purchase a policy. After all, if you know how car insurance works and what it covers, you’re more likely to purchase the right coverage and avoid paying for things you don’t need.
You’ll also reduce the chances of headaches and confusion when the unexpected happens.
While many aspects of auto insurance are complicated, the overall process is relatively straightforward. Generally speaking, you pay your auto insurer a premium so it will cover any claims you file.
With that in mind, let’s go over the various components of your auto insurance policy and what each one means.
Premiums: What you pay to have coverage
A car insurance premium is the amount of money you pay to your insurance company — usually on a monthly, semiannual, or annual basis — in exchange for coverage. In other words, it’s your car insurance bill.
Premiums are how insurance companies ensure they can pay claims. They’re also how insurers make money. Insurers analyze a variety of factors when determining premiums, including your age, vehicle, and driving record. Insurers will also consider local risks, like weather patterns and accident rates.
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Learn more: Car Insurance Premiums Explained
What your premiums help cover
Auto insurance covers a range of “losses” — things like replacing your vehicle after it’s stolen or other people’s injuries and repairs if you cause a collision. Different types of coverage pay for different types of losses, and you must purchase the proper coverage to get adequate protection.
Your policy will outline coverages, limits, and rules within your policy documents. Be sure to review your documents carefully.
We’ll go over the most common coverage options and rules a little later in this article.
But first, let’s take a look at some of the most common car insurance premiums.
Claims: What the insurance company pays for repairs
A car insurance claim is a formal request to an insurance company to cover the cost of an incident, such as a car accident. The amount you pay for your premium goes into a big pool that the insurance company uses to pay for claims.
Your car insurance rate is largely based on how likely you are to file a claim. Insurers use your driver profile — which includes things like your age, location, driving record, and more — to determine how risky you are to insure. The more likely an insurance company thinks you are to file a claim, the higher your premium.
Let’s take a look at common scenarios where you’d file a claim with your insurance company.
When should you file a claim?
If you cause an accident or damage someone’s property, you should file a claim to cover any damages. If someone hits you, you should notify your insurer and file a claim with the at-fault driver’s insurance company. Filing a claim if you’re the victim of a hit-and-run can vary by insurer, but you typically need collision or uninsured motorist coverage.
If you only cause damage to your own property, you should file a claim when the cost of repairs or damages exceeds your deductible.
Filing a claim increases your rates, so it’s up to you to decide if the claim is worth it.
How to file a claim with your insurance company
To file a claim, contact your insurance company and provide details of the incident, like the date, location, and parties involved. Every insurer is different, but most allow you to file claims over the phone, online, or with a mobile app. You’ll usually need supporting documentation, such as photos or police reports, to get the process started.
The process varies depending on who’s at fault, too. If you’re at fault, you’ll report the accident to your insurance company, and it will handle the claim. If the other driver is at fault, you’ll file a claim with their insurance company. If you have collision coverage, you may also be able to file a claim with your insurer.
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Learn more: What to Expect When You File a Car Insurance Claim
Deductibles: What you (sometimes) pay after an accident
Deductibles are the final piece of the car insurance puzzle that can influence your costs. They represent the amount you pay out of pocket when you file a claim.
These deductibles are in place to lessen the chance you file a claim since you have a financial stake in the claim alongside your insurance company. The deductible amount you choose affects the cost of your premiums. Lower deductibles lead to higher premiums because your insurer takes on more risk (in the form of a higher possible payout). Higher deductibles bring down the cost of your policy.
Deductibles typically apply to the following coverages:
Comprehensive coverage
Collision coverage
Uninsured motorist coverage (in some states)
Personal injury protection (PIP)
How to choose the right deductible
Deductible options vary by insurance company, but most range between $250 and $2,000. Some insurers let you set higher deductibles, but this is rare. The most common deductible for collision and comprehensive coverage is $500 per occurrence.
If you want a cheaper policy and are willing to take on more financial risk, choose a higher deductible. But be sure you have enough money to cover your deductible amount in case of a claim.
On the other hand, if you want to minimize the amount you’ll pay to file a claim, choose a lower deductible amount.
Some companies even offer “vanishing” or “diminishing” deductibles that can lower your deductible amount every year you’re claim-free, but this typically costs extra.
Types of Car Insurance Coverage
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You have many types of car insurance coverage to choose from when you purchase a policy — and every insurer will offer its own unique mix of options. With so many variables, it’s important to understand what these options are so you can decide whether you need them.
Let’s take a closer look at some of the most common coverage types.
Liability coverage
Liability coverage is fundamental auto insurance coverage that protects you financially if you cause an accident. It consists of two parts: bodily injury (BI) and property damage (PD).
Bodily injury liability protection covers medical expenses, lost wages, and legal fees for injured parties, including passengers in other vehicles and pedestrians. Coverage limits are per person and per accident.
Property damage liability protection covers the cost of repairing or replacing other people’s damaged property, such as vehicles, fences, or buildings. Coverage limits are per accident.
Both components help shield you from potentially devastating financial liabilities due to accidents you cause. That’s why it’s mandatory in nearly every state.
Collision coverage
Collision coverage is an optional component of auto insurance that covers damage to your vehicle resulting from collisions with other vehicles or objects, regardless of who’s at fault. It’s required for leased or financed vehicles as part of the loan or lease agreement.
This coverage pays for repairs or replacement of your car, minus your deductible. While the other driver’s liability coverage typically pays if they’re at fault, collision coverage ensures your vehicle is repaired even if you cause the accident.
Comprehensive coverage
Comprehensive coverage protects your vehicle against non-collision events, such as theft, vandalism, fire, animal damage, and weather damage. Some natural disasters are automatically covered depending on the insurer, but you may need an additional “rider” to cover flooding, for example (check with your insurance company to be sure).
Like collision coverage, comprehensive is required for vehicles under a loan or lease agreement. Examples of covered damage include broken windows, hail damage, vehicle theft, and damage from falling objects.
Uninsured/underinsured motorist coverage
Uninsured/underinsured motorist protection covers you if an uninsured or underinsured driver hits you or you end up the victim of a hit-and-run. Uninsured motorist coverage pays for damages if you get hit by someone without insurance or are the victim of a hit-and-run.
Underinsured motorist protection covers the difference between the at-fault driver’s coverage limits and the total cost of you and your passengers' medical expenses that result from the accident the other driver caused.
Coverage limits typically mirror your liability coverage limits. Your state may require both uninsured and underinsured motorist coverage.
Personal injury protection (PIP)
Personal injury protection (PIP) covers injury-related costs for you and your passengers, like medical bills and lost wages, no matter who’s at fault for the accident.
This coverage is usually required in “no-fault” states. In these states, you cover your own medical costs in most cases, no matter how the accident occurs or who causes it. The intention of this system is to limit the number of lawsuits and lighten the load on the state’s judicial system.
Medical payments coverage (MedPay)
MedPay covers medical costs from a car accident, including doctor’s visits, X-rays, surgery, hospital stays, and more. It can also extend beyond your vehicle and cover you when you’re a pedestrian or a passenger in someone else’s car.
MedPay pays for costs related to an accident until you reach your coverage limit. Then, your health insurance kicks in.
MedPay is usually optional but often a great idea if your insurer offers it.
Other coverage types
Depending on the insurer, you’ll have access to additional coverage options. Here are some of the most popular:
Accident forgiveness: Prevents rate increases after your first at-fault accident.
Full glass: Covers repair or replacement of damaged vehicle windows or windshield.
Gap insurance: Covers the difference between loan/lease balance and your car’s value if it’s totaled.
New car replacement: Pays for the value of a new car if yours is totaled within the initial ownership period.
Pet injury protection: Covers vet bills if your pet is injured in a car accident.
Rental car reimbursement: Pays for a rental vehicle while your car is being repaired during a covered claim.
Rideshare insurance: Covers drivers who work with services like Uber or Lyft.
Roadside assistance: Helps with common car issues, like towing or flat tires.
Umbrella insurance: Provides extra coverage if you hit your liability limits
Vanishing deductibles: Reduces your deductible for going without a claim or traffic violation
How to Choose the Right Coverage
You have lots of things to consider when deciding your coverage options and limits — especially if it’s your first time purchasing car insurance. Here’s some general guidance to help you decide what you need to get adequately protected.
State laws and requirements
Every state has its own rules regarding minimum coverage. Even states that border each other can have radically different requirements. For example, the three states below — Maine, New Hampshire, and Vermont — are all neighbors, but each state’s requirements are vastly different.
State | Coverage Requirements |
|---|---|
| Maine | ● 50/100/25 liability coverage ● 50/100 uninsured motorist coverage ● $2,000 medical payments coverage |
| New Hampshire | Car insurance is optional |
| Vermont | ● 25/50/10 liability coverage ● 50/100/10 uninsured & underinsured motorist coverage per person |
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Learn more: Car Insurance Requirements in All 50 States
Lender requirements
Lenders and leasing companies usually require you to buy comprehensive and collision coverage. They may also require you to have gap insurance or uninsured/underinsured motorist (UM/UIM) coverage.
Let’s take a closer look at each.
Collision coverage: This coverage pays for vehicle damage if you cause a collision.
Comprehensive coverage: This coverage pays for damages from things like animals, fire, weather, vandalism, and theft.
Gap coverage: If you total your car, gap coverage pays the difference between your loan balance and your car’s value.
Uninsured/underinsured motorist coverage: UM/UIM covers damages if a driver without enough insurance hits you.
Your vehicle
The maximum payout for collision and comprehensive coverage is your car’s actual cash value (ACV), minus your deductible (unless you have a less common "agreed value" policy).
If you own your car and can afford to replace it, you might consider dropping collision and comprehensive coverage. Depending on your deductible, they may not be worth the additional insurance cost — $1,092 per year, on average, according to Triple-I.
You may find it more useful to save that money for future repairs or to buy your next vehicle.
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Learn more: Car Insurance Rates by Vehicle Make and Model
Your budget
How much you can reasonably afford for car insurance may affect your coverage options and limits. Some vehicles are more expensive to insure, and higher-value vehicles might need higher coverage limits. You’ll also need to have emergency savings to cover the cost of your deductibles.
Our advice: Downsize your vehicle, not your insurance coverage. It’s better to be fully protected against financial loss than vulnerable to expensive lawsuits.
How Costs, Coverage, and Customer Service Vary Between Insurers
Insurers often have their own rate calculations, coverage options, and customer service records. Comparing these factors can help you determine which insurer might be right for you.
 |  |  |  |  |
|---|---|---|---|---|
Average Premium Prices based on average across state-minimum and full coverage car insurance $83/mo* | Average Premium Prices based on average across state-minimum and full coverage car insurance $137/mo* | Average Premium Prices based on average across state-minimum and full coverage car insurance $116/mo* | Average Premium Prices based on average across state-minimum and full coverage car insurance $105/mo* | Average Premium Prices based on average across state-minimum and full coverage car insurance $75/mo* |
Overall Rating 3.9 | Overall Rating 3.2 | Overall Rating 4.0 | Overall Rating 3.5 | Overall Rating 4.3 |
Value 4.1/5 | Value 3.3/5 | Value 4.2/5 | Value 3.8/5 | Value 4.9/5 |
Customer Service 4.4/5 | Customer Service 3.6/5 | Customer Service 4.3/5 | Customer Service 4.1/5 | Customer Service 4.4/5 |
Claims Handling 3.9/5 | Claims Handling 3.3/5 | Claims Handling 3.9/5 | Claims Handling 3.5/5 | Claims Handling 4.1/5 |
Special Highlight N/AAI-generated from 292 user reviews | Special Highlight N/AAI-generated from 267 user reviews | Special Highlight N/AAI-generated from 239 user reviews | Special Highlight N/AAI-generated from 160 user reviews | Special Highlight N/AAI-generated from 64 user reviews |
We sourced the data in this table from Compare.com users who indicated they're existing customers of the insurers you see here.
What You Can Expect to Pay for Car Insurance
The average American pays $139 per month for car insurance, according to Compare.com data. Car insurance companies use a variety of factors to determine your rate, including your age, location, driving record, and vehicle. You may pay more or less than average, depending on your unique situation.
The table below highlights how average costs change based on some of those factors.
Coverage Type or Driver Profile  | Average Monthly Premium |
|---|---|
| State-minimum liability insurance | $102 |
| Full-coverage insurance | $177 |
| Teen drivers | $266 |
| Senior drivers | $119 |
| Drivers with a clean record | $139 |
| Drivers with a recent accident | $182 |
| Drivers with a recent ticket | $175 |
| Drivers with a DUI | $202 |
Disclaimer: Table data sourced from real-time quotes from Compare.com's 50-plus partner insurance providers and quote estimates from Quadrant Information Services. Actual quotes may vary based on the policy buyer's unique driver profile.
Overall, rates can vary widely depending on your unique situation.
State-minimum policies are cheaper than full coverage, and teen drivers pay much higher rates than older drivers. Single drivers pay slightly more than married ones. And drivers with clean records see markedly lower premiums than those with tickets, accidents, or driving under the influence (DUI) convictions.What’s the cheapest car insurance?
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Learn more: Compare Car Insurance Rates by Age, Location, Driving Record, and More
How to Save on Car Insurance
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The good news is that you can save money on car insurance in lots of ways. Here are some of our favorites.
Use discounts: Car insurance discounts can save anywhere from 2% to 40% off your monthly premium. The most valuable include the safe driver, bundling, and telematics discounts. Stack them to get an even lower rate.
Raise deductibles: Most policies default to $500 deductibles. Raising the deductible to $1,000 or more will decrease your monthly payment.
Remove unnecessary coverage: Gap, collision, and comprehensive coverage become less important as your car gets older. For example, if you owe less than your car is worth, you don’t need gap coverage.
Compare quotes often: Comparing quotes is the best way to tell if you’re getting the best deal. Compare rates at least every six months to ensure you never miss a chance to save.
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FAQs About How Car Insurance Works
With so many moving parts, car insurance is bound to leave you with questions. Here are the answers to the ones most often asked about how car insurance works.
How does insurance work for a car?
You pay monthly premiums to an insurance company, and it’ll cover any damages if you cause an accident (up to your policy limits). Your policy protects you financially from expensive repairs, medical bills, and potential lawsuits. Exactly what your policy covers largely depends on the types and amounts of coverage you choose.
Do you really need car insurance?
Yes. Every state except New Hampshire legally requires all drivers to have car insurance. And even if car insurance wasn’t mandatory, you’d need it to protect yourself from potentially devastating costs if you cause an accident.
What does 250/500/100 mean?
These numbers represent your coverage limits in thousands of dollars. In this example, you’d have $250,000 per person to cover injuries, $500,000 total per accident for injuries, and $100,000 for any property damage you cause.
How do you know how much car insurance you need?
Start with your state’s and your lender’s minimum requirements, then consider your assets and budget. If you have significant savings or property to protect, you’ll want higher liability limits than the bare minimum.
Insurance experts recommend at least 100/300/100 coverage, as accidents often cost more than state minimums.[2] You should also consider collision and comprehensive coverage if you can afford it.
How does insurance work when buying your first car?
You’ll need to get coverage before driving your new car off the lot. Most dealerships require proof of insurance at the time of purchase. And if you’re financing, your lender will require comprehensive and collision coverage.
What’s the cheapest car insurance?
The cheapest companies vary by location and driver profile, but nationally, rates start at around $38 per month for minimum coverage, according to Compare.com data. COUNTRY Financial, Auto-Owners, and USAA consistently rank among the most affordable options nationwide.
Methodology
Data scientists at Compare.com analyzed more than 50 million real-time auto insurance quotes from more than 75 partner insurers in order to compile the rates and statistics seen in this article. Compare.com’s auto insurance data includes coverage analysis and details on drivers’ vehicles, driving records, insurance histories, and demographic information.
All the rates listed in this article have been collected from a combination of real Compare.com quotes and external insurance rate data gathered in collaboration with Quadrant Information Services. Compare.com uses these observations to provide readers with insights into how auto insurance companies determine their premiums.
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Sources
- Insurance Information Institute. "Facts + Statistics: Auto insurance."
- Insurance Information Institute. "How much auto coverage do I need?."
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J.J. StarrInsurance Writer
J.J. Starr is an insurance and personal finance expert who has been writing for Compare.com since 2022. Her work has been published across the web, appearing on sites such as Insurify.
Prior to writing for Compare.com, J.J. was a registered banker and life insurance consultant, holding a Series 6, FINRA, and life insurance license. She also earned a master’s degree in writing from New York University.
J.J. has a passion for helping people save money by explaining complex topics like car insurance in a way that is simple and easy to understand.
Nick Versaw leads Compare.com's editorial department, where he and his team specialize in crafting helpful, easy-to-understand content about car insurance and other related topics. With nearly a decade of experience writing and editing insurance and personal finance articles, his work has helped readers discover substantial savings on necessary expenses, including insurance, transportation, health care, and more. As an award-winning writer, Nick has seen his work published in countless renowned publications, such as the Washington Post, Los Angeles Times, and U.S. News & World Report. He graduated with Latin honors from Virginia Commonwealth University, where he earned his Bachelor's Degree in Digital Journalism.