How Does Car Insurance Work and What Does It Cover?

how does car insurance work

If you own a car, you probably know about car insurance as most states have laws requiring drivers to hold auto insurance coverage. Essentially, the goal of auto insurance is to safeguard you from the dangers and losses that come with regular car use.

In addition, a car is a great investment you want to protect. Car insurance safeguards you from the inconvenience and monetary losses that may result from unexpected accidents.

Given the significance of auto insurance, you should have a thorough understanding of how it works and what it covers. If you’re not familiar with the intricacies of car insurance, you run the risk of failing to benefit from it and having it assist you in the event of an accident or other unplanned event involving your vehicle.

To help you understand and have a clearer picture of what car insurance is, this article will provide important information on how it functions and what it covers.


What Is Car Insurance?

Car insurance is an insurance policy for cars, trucks, motorcycles, and other road vehicles. The coverage of the insurance will depend on what type of car insurance policy you have.

Basically, car insurance is a legal agreement between you and the insurance provider which outlines the risks that you want to be covered and, in turn, outlines the cost for each type of coverage you want to use. Its goal is to protect you against monetary loss and financial damages in the event of an accident or theft.

Car accidents can be costly, particularly if your car is seriously damaged or if someone is hurt. In case of accidents, car insurance can protect you financially if you are held responsible for another party's injuries or property losses, and cover damage to the vehicle.

Car insurance shields your finances so that you will not have to pay for collision-related damages out of pocket. In other words, the insurance company will pay for any losses you have in exchange for a premium payment.


Is Car Insurance Required?

In order to legally drive in any state, you must be able to prove that you have the means to pay for any accident-related expenses or legal liability. As a result, car insurance is required as evidence of this obligation.

The U.S. Department of State requires all vehicles owned and operated by foreign mission members in the U.S. to have liability insurance at all times.

In addition, when applying to register a motor vehicle, insurance documentation is necessary. Insurance documentation is also needed when the insurance policy is renewed annually or semi-annually.

When registering a vehicle in the United States, you must provide the following documents:

  • A certificate of insurance
  • The policy declaration page
  • Proof of liability insurance, which can be a copy of an insurance company's binder that is valid for at least 30 days after the date of application.

We’re all aware that driving without a license is not allowed. However, driving without insurance may also result in a fine, a suspension of your license, or even jail time.

Laws requiring auto insurance in the U.S. help protect not only you but also people involved in accidents that were not their fault.


What Does Car Insurance Cover?

Depending on the type of car insurance policy you have, car insurance can protect you from a range of accidents that may happen on or off the road.

Here are the typical coverages for the majority of car insurance policies:

  • Loss and damage: This protects your car from theft and damage caused by your negligence or the negligence of others. If your car is found to have been stolen, the insurance policy will have a compensation amount to cover your loss, and if it is damaged in an accident, insurance will cover the cost to repair it.
  • Bodily injury liability: This pays for the costs associated with injuries or fatalities to others, such as another driver, their passengers, or a pedestrian, up to the limits on your policy when you cause an accident.
  • Property damage liability: This covers the costs of replacing or repairing other people's property that you damage while driving your car. Property examples include a fence, a house, a lamp post, or another vehicle.
  • Personal injury protection (PIP): This provides coverage for medical costs associated with injuries that you or your passengers may have sustained in an accident while driving your car. No matter who was at fault for the accident, medical expenses are covered by this insurance.
  • Comprehensive coverage: Compensates for your vehicle's damages resulting from a circumstance other than a collision or a vehicle accident. A few examples are hail damage or harm from falling objects, a broken or cracked windshield, vandalism, and damages caused by animals.
  • Uninsured motorist coverage: Protects you from other drivers who have insufficient insurance or no insurance at all. This kind of insurance covers accident-related costs like medical bills, pain, and suffering, vehicle damage, and even lost wages and funeral costs.


What Does Car Insurance Not Cover?

While car insurance primarily covers damages and monetary losses in the event of accidents and other occurrences in which you, your passengers, and your vehicle are involved, there are still some things that it does not.

Here are some of the things that car insurance does not cover:

  • If your vehicle was driven by someone else who got into an accident.
  • Stolen personal items from the car.
  • Regular car repairs and general car maintenance.
  • Car accessories such as rims, customized sound systems, and aftermarket add-ons.
  • Normal wear and tear-related damages.
  • Damages while being rented or being used commercially (Uber, Lyft).


How Is Car Insurance Priced?

There are numerous, widely varying factors that will affect how much car insurance costs.

Although not all car insurance providers use the same factors, here is a list of what typically affects your car insurance price:


Driving Record

Your car insurance premium will be less expensive the better your driving record is.

Given that you do not frequently get into accidents while driving, the insurance provider can confidently offer a lower car insurance premium.


Credit Record

The same as your credit score, your credit-based insurance score is a measurement that forecasts the chances that you will make a claim and estimate the cost of claims.

Insurance companies may offer higher premium costs if you have a bad credit-based insurance score.



The cost of car insurance may vary depending on where you live and where you park your car.

An area where theft, vandalism, and accidents are common may cause your car insurance to cost more.


Value and Condition of Car

Your car's value has a significant impact on how much insurance will cost. The probability of theft, the price of repairs, the condition of the engine, and the car's overall safety record are additional considerations. Cars with top-notch safety features may be eligible for a cheaper premium.


How Much Does Car Insurance Cost?

According to Bankrate's 2022 analysis of typically quoted premiums from Quadrant Information Services, full coverage car insurance costs around $1,771 annually, or roughly $148 per month.

The average annual cost of minimum coverage is $545. However, because there are more than a dozen different factors that go into determining auto insurance premiums, each driver's actual cost will vary.


Does Car Insurance Cover Maintenance?

Car insurance's primary function is to pay for damage or repairs if you are in an accident. However, car insurance does not provide coverage for routine maintenance, mechanical issues, or general wear and tear on your car.

In other words, the insurance company will not give you any financial support if you decide to have your car checked for regular maintenance and repair. Only repairs that are under your insurance policy will be paid by the insurance company for the repair of your car.


How Much Car Insurance Coverage Do I Need?

Your needs will determine how much car insurance coverage you require. However, the bare minimum of car insurance required to meet your needs depends on several variables, including:

  • The location in which you reside
  • The value and condition of your car
  • The amount of insurance you can afford

Every state has different minimum coverage requirements, but almost all of them require liability-only auto insurance because it is less expensive.

Based on your needs, you can then add additional coverage to your auto insurance to give you peace of mind that you and your car are completely covered at a price you can afford.


How to Shop For Car Insurance

Shopping around for auto insurance and weighing your options is the best way to find better car insurance coverage. To establish a baseline, you must first identify the minimum requirements for your state.

One of the easiest ways to shop for car insurance is to go online and choose at least three car insurance providers for you to compare. Before you compare, ensure you provide all the details that will affect the pricing of your insurance policy and always ask for discounts.

If you have good credit and a driving record, do not be afraid to ask for discounts. Many insurance providers would love to have a client with good credit and driving record and would offer discounts.

More importantly, you should determine your coverage needs; once you are aware of your needs and the types of coverage that can satisfy them, shopping for car insurance will be faster and easier.


Importance of Annual Car Insurance Review

Your car insurance company will commonly renew your insurance each year. That is why it is crucial that you review your car insurance before renewal to ensure that everything from the previous year is still accurate and that you are getting the best car insurance coverage at the lowest cost.

Reviewing car insurance yearly can guarantee policies are up-to-date and that all necessary extra coverage has been added. In most cases, you will have to apply for a new policy and then buy it if you decide to add more coverage.

An annual car insurance review can help determine if your policy is meeting your changing needs and requirements. An annual car insurance review will provide you with an overview of your insurance, along with options that will better meet your needs, such as downgrading or upgrading your policy.


Choose a Trusted Insurance Partner

Given how important and necessary auto insurance is, you should work with a reputable and reliable insurance provider. 121 Financial Credit Union, Jacksonville's top credit union, provides tailored financial services to our members and the community.

121 Financial Credit Union is proud to partner with 925 Partners Insurance Agency, a Florida-based company that takes pride in providing genuine, individualized service and providing our members with a range of reasonably priced, specially designed car, home, and life insurance plans.

925 Partners Insurance Agency is run by a group of seasoned insurance professionals that can help you get car insurance to cover all of your needs at the most reasonable price. Learn more about our partner, and start shopping for car insurance that fits your needs today.


Back to Blog

Related Articles

What's Gap Insurance and Why You Should Get It

Getting an auto insurance policy is a cost-effective investment because it protects car owners...

What Is An Insurance Score: Everything you Need to Know

What Is An Insurance Score: Everything You Need to Know Investing in insurance coverage is the...

Types of Life Insurance: Which One Is Best For You?

Life insurance is one of the most important parts of our financial plan, yet it is something we...