How does car insurance work
Auto insurance helps pay for damage, injuries, and other costs after a car accident. In exchange for a monthly or annual payment, your insurance company agrees to cover certain expenses outlined in your policy.
Here’s what to know about how car insurance works, including the types of auto insurance available, how to file a claim, what insurance covers, and more.
What is auto insurance?
Car insurance is a contract between you and an insurance company. You agree to pay a premium, and in return, the insurer agrees to cover specific financial losses related to your vehicle based on your plan, such as:
- Damage from accidents
- Damage from theft or weather
- Injuries to other drivers or passengers
- Legal costs if you’re sued after a crash
Most states require drivers to carry at least liability insurance, which pays for damage or injuries that you cause to other people. Other types of coverage, like collision and comprehensive insurance, are optional but are often required by lenders if you have a car loan.
How does auto insurance work?
At a basic level, car insurance works by sharing risk. You and thousands of other drivers pay premiums into the insurance company. When someone has an accident or loss covered by their policy, the insurer then uses that pool of money to pay the claim.
But how car insurance works for you specifically depends on the following four things:
Car insurance premiums
Your premium is what you pay for your car insurance policy and can be billed monthly, semiannually (every six months), or annually. Insurance companies calculate your premium based on risk. The higher the risk, the higher the price.
Common factors that affect your premium include:
- Age
- Gender
- Driving record
- Location
- Type of vehicle
- Mileage
- Coverage limits and deductibles
- Your credit-based insurance score (in most states)
Certain risk factors will raise your premiums. For example, if you have multiple accidents or speeding tickets on your record, it could inflate the cost of your car insurance. Also, if you tend to drive a vehicle that’s newer, more expensive, or considered dangerous, it could also increase your premiums.
How to: Lower your car insurance costs
Types of auto insurance
Car insurance isn’t one single coverage. It’s a bundle of protections, and each one covers something different.
Here are the most common types of car insurance and what they typically cover:
| Coverage type | What it covers | Is it required? |
|---|---|---|
| Liability (bodily injury and property damage) | Injuries and damage you cause to others | Required in almost all states |
| Collision | Damage to your car after an accident, regardless of fault | Optional (often required by auto loan lenders) |
| Comprehensive | Damage not caused by a collision, such as theft, weather (like a tornado or wind), fire, vandalism, and animal collisions (like hitting a deer) | Optional (often required by auto loan lenders) |
| Personal injury protection (PIP) | Medical expenses, lost earnings, and other expenses after an accident for you and your passengers, no matter who is at fault | Required in no-fault states |
| Medical payments (MedPay) | Medical and funeral bills for you or passengers | Required in some states |
| Uninsured/underinsured motorist | Your costs if a driver causes an accident and doesn’t have enough insurance (includes hit-and-run accidents) | Required in some states |
Each of these coverage types has a limit, which is the maximum amount your insurer will pay for a claim. For example, a policy might include limits of $50,000 per person and $100,000 per accident in bodily injury liability. If you hit these limits, you’ll then pay out of pocket for anything left over.
Deductibles
A deductible is the amount you pay out of pocket before your insurance coverage begins. Deductibles usually apply to collision and comprehensive coverage. Common deductible amounts include $250, $500, and $1,000.
For example, say you have a $500 deductible and your car suffers $3,000 in damage after an accident. You pay the first $500, then your insurer pays the remaining $2,500, up to your policy’s limits. If the damage is only $400 and your deductible is $500, you would pay the full amount yourself.
Filing a claim
If you’re in an accident or your car is damaged, you’ll need to file an auto insurance claim with your insurance company. Here’s a brief overview of the steps to follow for filing a claim:
- Report the accident to your insurer. In most cases, you’ll start by reporting what happened either by phone or through the insurer’s app or website.
- Wait for your insurer to review. After you’ve reported the accident, a claims adjuster will review the details — which can include a request for photos or a vehicle inspection — and confirm what your policy covers. They’ll then determine fault, if necessary, and calculate the payout.
- Receive payment (if applicable). If the insurer approves repairs for your vehicle, payment is sent either to you or directly to the repair shop, minus your deductible. If your car was totaled (meaning it’s too damaged to be repaired), your insurer will send you funds that cover the vehicle’s value, minus your deductible.
What does car insurance cover?
What car insurance covers depends on the types of coverage you choose. But in general, it can help pay for:
Damage you cause to others
The liability insurance part of your policy usually covers damage you cause to others. This includes:
- Repairs to another person’s vehicle
- Damage to property (like fences, buildings, or mailboxes)
- Medical bills for other drivers or passengers
- Legal fees if you’re sued after an accident
Damage to your own vehicle
The collision and comprehensive coverage parts of your policy typically pay for damage to your own car. This could include damage from:
- A crash (collision coverage)
- Theft (comprehensive coverage)
- Fire (comprehensive coverage)
- Hail, floods, or falling tree branches (comprehensive coverage)
- Hitting an animal (comprehensive coverage)
Medical expenses
Depending on your state and policy, the PIP or MedPay part of your insurance might also cover:
- Your hospital bills
- Passenger injuries
- Lost wages
- Funeral expenses
Protection from uninsured drivers
If another driver causes an accident and doesn’t have enough insurance, uninsured/underinsured motorist coverage can help cover:
- Medical bills
- Vehicle repairs
This can also apply to hit-and-run accidents.
What does car insurance NOT cover?
Car insurance has limits and won’t pay for everything. Here are some common expenses it typically doesn’t cover:
- Routine maintenance (such as oil changes, brake pads, and tire replacement)
- Normal wear and tear
- Intentional damage
- Using your vehicle for business purposes (unless you have proper coverage under a commercial policy).
- Driving without a valid license
Average car insurance cost
As of February 2026, the average cost of car insurance is $183 per month for full coverage and $97 per month for liability-only coverage, according to Insurify data. However, how much you’ll pay can vary depending on your location, driving history, and coverage levels.
How to get car insurance
Getting car insurance usually boils down to these five steps:
- Decide what coverage you need. Start by checking your state’s minimum insurance requirements. If you have a loan or lease, your lender will likely require collision and comprehensive coverage. You might also want higher liability limits for more financial protection in the case of serious accidents.
- Gather your information. As you get insurance quotes, companies will ask for basic details like your driver’s license number, vehicle identification number (VIN), current mileage, address, and driving history. Having this information ready can help reduce the time you spend getting quotes.
- Compare quotes from multiple insurers. Rates can vary quite a bit between car insurance companies, even for the same coverage. That’s why most experts recommend getting at least three quotes. That way, you can compare premiums, deductibles, coverage limits, and available discounts.
- Choose your limits and deductible. Generally speaking, choosing higher coverage limits or a lower deductible amount will increase your premiums, while choosing lower limits and a higher deductible will reduce them. You can adjust these levers to find the right mix of coverage at the right price for you.
- Purchase your policy and get proof of insurance. Once you choose a company and have customized a policy to your liking, you can usually buy coverage online, over the phone, or through an agent.
Car insurance FAQ
In almost every state, yes. Most states require drivers to carry at least liability insurance. If you’re caught driving without it, you could face fines, license suspension, or even vehicle impoundment.
Even in states like New Hampshire where insurance isn’t legally required, it is highly recommended to have insurance. Otherwise, the full financial burden of an accident and any damages you cause to others will be fully on you. Even serious accidents can create costs that exceed what many people could comfortably pay out of pocket.
At minimum, you must meet your state’s liability requirements. But minimum coverage might not be enough. If you cause a serious accident, costs can easily exceed your state’s minimum limits.
This is why many drivers choose higher liability limits that reflect their current financial situations, and they add collision and comprehensive coverage for more well-rounded protection. The right amount depends on your financial situation, vehicle value, and risk tolerance.
Usually yes, but it depends on the policy. Most policies insure the car, not the driver. If the vehicle owner allows you to drive, their insurance might cover you. However, this can vary by insurance company and situation. When in doubt, get added to the policy for any vehicle you drive regularly.
In many cases, yes, they’re covered if you gave them permission to drive your car. But if someone regularly drives your vehicle and isn’t listed on the policy, your insurer could deny a claim. So always err on the side of caution and list your partner, children, or roommates if you share a vehicle to avoid coverage issues.
There isn’t a minimum credit score required to buy car insurance. However, in many states, insurers use what’s called a credit-based insurance score when setting premiums. If you have decent credit, you might pay a lower rate.
Currently, California, Hawaii, Massachusetts, and Michigan are the only states that don’t allow insurance companies to use your credit-based insurance score to price policies.
Should you miss a payment, your insurer will usually send a notice and give you a short grace period. If the bill isn’t paid within that window, your policy can lapse, meaning you won’t have active insurance coverage. Driving without insurance can lead to fines, license suspension, and higher future premiums.
If you’re struggling to make a payment, contact your insurer as soon as possible. They might offer options to avoid cancellation.
