How Does Car Insurance Work? (Best Coverage Options In 2021)

By forcing me to have insurance, we protect whoever I might owe money to.

Car insurance is a contract between you and the insurance company. 

It protects you financially if you cause damage to other cars or people.

It can also pay for medical bills if you or your passengers are injured in an accident caused by a driver who is uninsured.

As long as you pay the premiums, the insurance company provides the agreed-upon coverage if you’re involved in an accident.

Do you need car insurance?

In 48 states, all car owners are required to buy insurance. 

The only two states don’t require drivers to have car insurance are New Hampshire and Virginia.

But even in those states, you could be responsible for damages from car accidents.

So, how much car insurance do you need?

It starts with understanding your state’s requirements.

If you live anywhere other than New Hampshire or Virginia, you’ll likely still need to purchase liability insurance.

Liability insurance covers the costs if:

In many areas, this is an acceptable minimum amount of coverage. 

You can buy additional insurance, but it varies by carrier and state.

For Example:

In Michigan, they require everyone to have Personal Injury Protection Insurance.

If you live in Michigan, you probably already know about it.  

Your car insurance is going to pay for your medical bills if you are in a wreck.

This limits the amount of liability insurance people have to carry.

It also requires everyone to be responsible for their own car insurance.

Something Else to Keep In Mind:

Every auto insurance policy has limits and different coverage options. 

Your policy might differ from what your friends or family members have, so it’s important to consider the policy options you need.

And if an uninsured or underinsured driver hits you?

It can protect you then, too.

How Car Insurance Rates Are Set (The Bowl of Fruit Metaphor)

Each car insurance policy is made up of different coverage types. 

Think of a car insurance policy like a basket and the different coverage types like pieces of fruit.

A piece of fruit might be:

• Liability coverage
• Comprehensive coverage
• Towing or Renters insurance
• or Uninsured motorist coverage

You can fill your basket with whatever different types of fruit you think you will need.

Each piece of fruit costs a different amount.  

In the world of car insurance, each coverage type will cost a different amount too!

Introducing the Fruit Salesman

The prices are set by people called underwriters.  They work for the car insurance company. 

For the purpose of this story, we will refer to our underwriters as “fruit salesmen”.

And we will call the car insurance company “the fruit stand owner”.

You are a customer.  Your basket is empty and you want to fill it with fruit.

Much like you want to buy car insurance for a good price, you want your fruit at a good price.

When you show up at the fruit stand, the fruit stand salesmen will judge you to try and decide if you are a good customer or a bad one.

They will ask you questions about your fruit buying history.

If you want to buy fruit, you have to answer these questions.

Being in the fruit sales business, the fruit stand owner knows that certain types of fruit are more popular than others.

So they charge more for these types of fruit because of their popularity.  

The fruit salesmen know that some people are good customers, so they give them a better deal on the price of fruit.

In the world of car insurance, these good customers are known as “good drivers”.

The fruit salesmen also know that some people are bad customers and actually can end up causing the fruit stand owner to lose money.

So the fruit salesmen will go to great lengths to keep these bad customers from buying their fruit. 

Or, they will charge them double or triple the amount that they would charge a good customer.

These bad fruit buyers in the car insurance world are known as “bad drivers”.

The fruit salesmen want to keep their jobs, so they make the fruit stand an unwelcoming place to be for the bad customer.

They secretly hope the bad buyers will find another fruit stand down the road and take their unwanted business there instead.

These bad fruit buyers usually end up buying bruised and banged up fruit from a dirty fruit stand for twice the price as the preferred fruit buyer.

The moral of this story is that you want to make sure to be a good driver so you can continue to buy your fruit (aka car insurance) for the lowest possible price for a long time. 

5 common types of car insurance coverage

You might have heard about “full coverage.”

And you might be shocked to know there’s no such thing as full coverage!

While full coverage refers to a combination of policy options often required by lenders, it's not an actual coverage type.

Here are the most common car insurance options you need to know:

Other optional insurance coverages to consider

The options available for your auto insurance vary from one insurer to another. 

You might not need all coverage types available…

But here are three optional insurance coverage types that many auto insurance carriers offer:

Do you owe him one? Yes.

 But, no matter what the law does to you, you simply do not have any money to give him, and he's hosed.

 If the law requires me to have insurance, then regardless of if you have money, your insurance plan will cover his jeep (or at least, some of it).

What about deductibles and premiums?

Two standard terms you'll hear with car insurance are deductible and premium. 

They’re very different, so pay close attention to both when signing up for new car insurance.

The deductible is the amount you’re responsible to pay before the insurance company will kick in to cover the expenses.

Here’s what I mean…

Let’s say you have a $1,000 deductible and you're in a car accident that requires bodywork to repair the damage.

You must pay the first $1,000 of the total bill. 

If the repair bill is more than $1,000, your insurance will pick up the rest of the cost.

Premiums are the monthly payments you make to carry the insurance. 

If you don’t make your payments, you lose your insurance coverage.

But here’s the kicker:

Deductibles and insurance premiums are directly related.

Higher deductibles generally mean lower premiums.

But lower deductibles can increase how much you pay for your policy.

What happens if you get into an accident?

That depends on the situation.  Was anyone hurt?  Did you cause a lot of damage?

If someone was hurt or if you caused a lot of damage, then you need to file a claim right away.

The police may become involved to collect evidence and details about what happened.

And your insurance company may require a copy of the police report when you file a claim.

If you barely scraped someone’s bumper and the repairs are going to cost $500, then you can probably avoid filing a claim.

To file a claim, call your auto insurance company and give the insurer as much detail as possible.

The company will assign a claims adjuster to handle your case.

They’ll check your car to assess the damage and can also direct you to a body shop or company for repairs.

Even if your policy is paid and active, the company could limit the amount paid out through your policy.

The bottom line

Car insurance protects you financially after an accident.

It can cover the cost of repairs and medical bills, but it depends on the coverage you have.

But remember:

Not all car insurance is created equally.

First, consider the coverage you need. Then shop around to compare rates to get an affordable car insurance policy.