Driving and car insurance are inseparable. If you own and operate a car, you need to have an auto insurance policy, both mandatory and optional. But what goes behind the scenes? How does this complex industry of car insurance work?
The car insurance industry is a complicated one, with a plethora of different factors affecting all aspects of it; from the price to the risk assessment, everything is dynamic in the auto insurance industry.
So here is the complete and most comprehensive guide to everything you need to know about car insurance; how it works, what it covers, and the things to do and avoid to save money and get the best coverage. Let’s get started.
What Car Insurance Covers
Before we look at the process of how car insurance works, we need to know the different types of car insurance out there and what they cover. A single-car insurance policy does not cover all the damages to your car or all the injuries the driver may sustain.
The different types of car insurance policies you can buy are:
- Liability insurance
- Comprehensive insurance
- Collision insurance
- Uninsured Motorist Coverage
- Personal Injury Protection plan
There are a few more such as rideshare insurance, GAP insurance, etc. But those insurance policies have a particular use case and are only for some drivers. Let’s take a look at what significant insurance policies cover.
Liability Insurance
Liability insurance is the most important car insurance policy. 49 out of 50 States require drivers to have a liability insurance policy to drive a car legally. Driving or even owning a car without this policy is a felony.
So what makes this policy so important? Liability insurance covers the cost of an accident for the other driver in a car accident caused due to your fault. This policy covers the cost of car repairs (and other property damages) and medical treatments for the injured driver.
Liability insurance does not cover the cost of repairs or medical treatments needed by the policyholder. This policy ensures that the road accident victim gets the necessary medical treatments and car repairs.
Comprehensive insurance
Comprehensive insurance is optional, meaning that drivers can either choose to buy it or skip it as it is not mandatory by the government. Comprehensive insurance covers the damages a car may sustain while being parked. This is the reason why it is also called “Parked Car Insurance”.
Comprehensive insurance covers damages due to natural disasters, including earthquakes, fires, hurricanes, floods, animal attacks, etc. It also covers projectile damages, damages due to riots and vandalism, and even theft.
Collision insurance
Collision insurance is another optional coverage, but it is as popular as liability insurance. Collision insurance covers the cost of repairs needed for your car after a collision accident. It is also just as expensive as liability insurance.
It does not matter whose fault the accident was. As long as there was a collision and the accident was unintentional, collision coverage will pay for the entire cost of repairs.
Uninsured Motorist Coverage
Even though it is illegal to drive a car without liability coverage, there are almost 32 million drivers in the US who are uninsured. Who will pay for the accident if someone gets in an accident with these drivers, and it is their fault?
Drivers can claim uninsured motorist coverage in such situations, and the insurance company will reimburse the policyholder for all the costs of the accidents, including medical and repair bills.
Personal Injury Protection plan
Personal injury protection is a “semi-mandatory” plan meaning that twelve states require drivers to have it while the other states have made it an optional policy.
A personal injury protection plan covers the cost of medical treatments the policyholder needs after a car accident. It also reimburses the policyholder for the lost wages.
Now that the basics of what different car insurance policies cover have been cleared, let’s look at the process of how auto insurance works.
How Auto Insurance Works
Car insurance companies are state-specific; they have different pricing for different states. This is because each state has its own rules and regulations, and the rate of accidents, cost of repairs, labor cost, etc., vary by state.
The Pricing
For example, if you are a resident of Illinois and searching for cheap car insurance in Illinois, the auto insurers will look at all the details about you needed to assess the risk of a car accident associated with you.
Auto insurers look at your driving record, past insurance claims, age, gender, locality, make and model of the car, etc., to determine the rates of insurance. If you carry a higher risk of a car accident (and insurance claim), you will be charged more.
The Purchase
After you have paid the quoted price, you will have to keep paying an insurance premium every six months or one year to renew the policy. Insurance premiums will change based on the factors cited above.
You also need to decide on a deductible amount. This deductible amount is the money policyholders need to pay after making an insurance claim. Only after paying the deductible the insurance company pays the rest of the claim amount.
The Plan
Here’s how car insurance works. Let’s say that you have collision insurance and get in a car accident with someone, and it is your fault. You inform your insurance company, and after examining the accident as “genuine”, they process your claim.
You pay the deductible, and the insurance company either pays you a check for the amount needed for the repairs or directly pays the garage where your car is getting fixed.
Coverage Limit: Another essential thing to know about auto insurance is the coverage limit. A coverage limit is the maximum amount of money your auto insurer will reimburse in an insurance claim.
For example, if the cost of repairs is around $10,000, but the coverage limit of your insurance policy is $8,000, you will have to pay the remaining $2,000 from your pocket.
Deductibles: If the cost of the repairs is lower than your insurance deductible, you cannot make a claim.
Conclusion
While we have presented the skeletal structure of how car insurance works, the actual process is far more complicated. If you want to lower your auto insurance rates, make sure your driving record is clean, and you do not make unnecessary insurance claims.
Safe drive and on-time insurance renewal will ensure that you pay lower insurance premium rates and stay insured.