What is car insurance and how does it work?

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Car insurance isn’t optional — all U.S. states require you to have auto insurance in one form or another. But if you’re new to automobile insurance, you’re probably wondering “how does car insurance work?” and what, exactly, your insurance policy should look like.

Read on to learn everything you need to know to find the right auto insurance policy.

What is car insurance?

Car insurance is a type of coverage that protects you financially if you’re in an accident. If you haven’t been in a crash before, they can be expensive — the average cost of a car insurance claim is $15,785 in bodily injury or medical bills and $3,841 in property damage. Car insurance will pay so you don’t have to.

How does car insurance work?

Car insurance is simple. You choose an insurance policy that gives you coverage for certain events, such as third-party property damage and injuries. Your policy will have a deductible amount which is the amount you’ll pay after an accident or claim, before the insurance company steps in to pay the rest. As long as your insurance premiums are paid on time, you’re covered.

How to file a claim

If you get in an accident, the process for filing claims is similar across car insurance companies:

  1. Call your insurance company as soon as possible after the accident. They will direct you on next steps.
  2. Gather the documentation needed to file your claim. Your insurance professional will provide you with this information, but it generally includes a “proof of claim” report and a copy of the police report.
  3. Monitor your claim progress through the insurance company and speak with your claim specialist.

What goes into insurance rates

The average annual cost for auto insurance is $935.80, according to a 2018 report from the National Association of Insurance Commissioners, or NAIC. The average varies wildly by state. New Jersey drivers pay an annual average of $1,309.29 in 2016, the highest among U.S. states, according to a 2018 report from the NAIC. That’s well above the national average of $935.80. Louisiana, New York, Michigan and Florida round out the top five most expensive states for auto insurance, all with annual average costs of $1,250 or more.

Drivers in Idaho pay the least, spending an average of just $599.77 per year. Iowa, North Dakota, South Dakota and Maine round out the five least-expensive states for auto insurance, all with annual average costs of $650 or less.

There’s a long list of options and coverages for purchasing car insurance today, but auto insurance rates also vary by insurer and other factors. Your age, credit score, location, driving record and vehicle type all influence how to buy car insurance. Since age and driving record affect rates, your rates can be different from other drivers if you need to know how to get car insurance for the first time.

Learn more: Auto insurance quotes: How they are determined and what to look for

Types of car insurance

Broadly speaking, auto insurance provides coverage for property damage or theft, liability coverage for expenses related to the bodily injury or property damage of others, and medical coverage for the cost of injuries, rehabilitation, lost wages or funeral expenses.

Required auto insurance coverage varies by state, but nearly all states require drivers to purchase basic auto liability insurance.

Learn more: Types of car insurance

How much car insurance do you need?

As mentioned above, your state most likely has minimums on the different types of coverage that you need to carry. The NAIC actually has a chart detailing auto insurance coverage minimums by state.

You will commonly see ratios listed as minimums. For instance, it’s common to see 50/100/25. Those are simply the minimum types of coverage in thousands of dollars. So a 50/100/25 ratios for auto insurance means: if you’re at fault, up to $50,000 gets paid out for each person’s injury, $100,000 is the max total payout per accident and $25,000 is the max payment for property damage. As per state law, you often must have these maximum payouts as your minimum coverage amount.

However, an insurance agent may recommend that you carry more than the minimums. For instance, if your property is higher in value than the minimum coverage required by the state, you may need more coverage. An insurance agent can help you navigate how much coverage is right for you.

How to save on car insurance

Here’s the number one rule for how to buy car insurance: comparison shopping for your area of the nation is crucial for finding cheap insurance. Prices vary by insurer. Some companies offer much more affordable options than their competitors.

There are some actions you can take, outside of comparison shopping, to slash your insurance costs. One way you can save is by understanding how much coverage you really need and purchasing accordingly. It also pays to look for discounts from auto insurers for things like maintaining a good driving record, taking a defensive driving course or putting a limited number of miles on your car annually. If you need to know how to get car insurance for the first time, you may be a student. Look into student discounts, as well.

Requesting higher deductibles can also lower your insurance costs substantially. In fact, you could lower your collision and comprehensive coverage cost by 15 to 30 percent by raising your deductible from $200 to $500, according to the Insurance Information Institute. Moving to a deductible that’s $1,000 could save you 40 percent or more.

Learn more: How to find the best cheap auto insurance

What do I need to buy car insurance?

If you’re looking for how to get car insurance for the first time, or haven’t set up a new policy in a while, you might be wondering, “What do I need to buy car insurance?”

Allstate outlines the documents that you typically need to show in order to get car insurance:

  • Driver’s License, both for you and for people you expect to be driving your vehicle(s)
  • Vehicle registration
  • Current declaration page: this outlines current insurance coverage on any vehicles you may be getting a quote for

Once you have your items together, get a few online car insurance quotes to compare how you can save with one insurer vs. another. You may qualify for better discounts with a particular auto insurance company, so it’s worth the time to shop around for quotes before you buy.