How Does Car Insurance Work?
You pay an insurance premium regularly, and in exchange, your car insurance company protects you financially if you file a claim, like an accident or theft, that your policy covers. Your policy outlines the limits of your protection. For example, your insurance provider might cover property damage in the event of an accident, with a limit of $50,000 per accident.
But if you lack comprehensive coverage and your car is stolen, that won’t be covered and you’ll have to purchase another car out of pocket. That’s why the amount of coverage matters. If you don’t have full coverage, things like medical expenses may not be covered in at-fault accidents.
What Auto Insurance Covers
States have different minimum requirements for auto insurance. You might add coverages beyond the minimum, depending on your budget and desired level of protection. The following types of coverage are common:
- Liability: If you’re at fault in an accident, liability coverage pays for the damage. This includes damage to other vehicles and objects, injuries to other drivers and passengers, and lawsuits if another party sues you. Keep in mind that liability coverage does not pay for damages to your own vehicle; that’s collision coverage, detailed below.
- Collision: Unlike liability coverage, collision coverage protects your own vehicle in the event of an accident. This coverage kicks in if your vehicle collides with another vehicle or with a stationary object, or if your vehicle overturns.
- Comprehensive: Comprehensive coverage protects you if your car sustains damage due to events other than collisions. This includes things like theft (the car itself or a part like a catalytic converter), vandalism, falling trees, and flooding.
- Medical payments/personal injury protection (PIP): Both medical payments and PIP cover medical bills for you and your passengers in a car accident, regardless of who’s at fault. Medical payments coverage is available in most states, while PIP is available only in states where laws require it. Though the coverages overlap, PIP is more comprehensive.
Fourteen states and Puerto Rico require medical payments, PIP, or similar coverage: Delaware, Florida, Hawaii, Kansas, Maine, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania, and Utah. In Arkansas, D.C., Kentucky, Maryland, South Dakota, Texas, Virginia, and Washington, providers must offer PIP, but it’s not required.
- Uninsured/underinsured motorist coverage: If an uninsured or underinsured driver hits your vehicle, this covers injuries to you and your passengers, as well as damage to your vehicle.
- Other optional coverages: You can customize your policy to your needs by adding additional coverages, like gap insurance, new car replacement, rental car reimbursement, and more.1
What Auto Insurance Doesn’t Cover
Auto insurance does not cover wear and tear to your vehicle, so make sure you’re keeping up with regular maintenance such as oil changes. It also doesn’t cover driving for commercial purposes, like food delivery or ridesharing, unless you add rideshare coverage to your policy.2