How Car Insurance Works

How Car Insurance Works - The ABC's of Car Insurance

Most states have laws that make buying car insurance mandatory before you can start driving. So if you own a car, you have probably heard about car insurance. But do you understand exactly how it works?

The purpose of car insurance is to pay for the bodily and property damages incurred after an accident. The law requires all registered vehicles to be insured whether they are driven regularly or not.

The mandatory minimum insurance as per state law is known as “liability insurance”. It varies from state to state. Liability insurance covers any injury or damage to the other person or his vehicle if you are responsible for the accident.

For instance, if your state policy requires you to have a 25/50/10 plan, it means that $25,000 is for bodily injury suffered by the other driver, $50,000 covers medical expenses for bodily injuries suffered by everyone in the accident and $10,000 pays for property damages.

Some states follow a tort system. Under this system, one of the parties involved in the accident is believed to be responsible for it. The guilty party and his insurance company have to pay for all the damages caused by the accident.

Some states also require a “No Fault Insurance”. This coverage pays for damages regardless of who was at fault in an accident. All the money collected through this insurance is put in a common fund by the insurance provider, which is paid to other entities such hospitals for providing you with treatment or a garage for repairing your car.

Beware of companies that offer low auto insurance rates, but charge exorbitant amounts as No Fault deductibles.

Some states require you to buy uninsured and underinsured motorist coverage. This is to help protect you against damages caused by uninsured drivers.

A Personal Injury Protection Coverage (compulsory in some states and optional in others) pays for medical expenses of the insured driver irrespective of whose fault it is. This is especially beneficial for drivers residing in states that follow a tort system.

A comprehensive coverage pays for damage to the vehicle that occurs due to reasons other than an accident. This includes damage due to vandalism, theft or natural causes such as an earthquake, storm or flood.

Some other important types of coverage that must be kept in mind are Collision coverage, medical coverage and rental reimbursement.

There is no fixed premium that everyone pays for car insurance. It varies for everyone and depends on a number of factors such as your age, driving history, gender, type and make of your car, deductible, coverage type and the state you reside in.

Before you buy a car insurance, don't forget to go through the mandatory state requirements.