How Car Insurance Works

It’s illegal to drive a car without insurance, so every driver has to have some understanding of how car insurance works. Here are the basics of what car insurance is, what kind of coverage you have to have, and more.

Car insurance is contract you have with an insurance company saying that you’ll pay them a fee each month, and in return they’ll give you money to repair or replace your vehicle in the event of an accident, depending on what kind of insurance you have.

If you have a financed or leased vehicle, you have to have full insurance coverage. Full coverage means you meet the minimum requirements for coverage in case of fire, theft, vandalism, falling objects, hitting wild animals, and natural disasters, as well as collisions.

A better name for this is comprehensive coverage—this isn’t necessarily “full” coverage, as there are degrees of comprehensive depending on how much coverage you sign up for. You can get, say, $1000 of fire coverage, or you can get $5000. As long as you meet the minimum, you’re considered to have comprehensive coverage.

If you own a car fully, you only have to have collision insurance, though it’s a good idea to have more than one kind of insurance if you can afford it. Many drivers opt to have collision-only insurance because their car isn’t worth the cost of extensive repairs that would require an insurance claim.

Even if you finance or lease a vehicle, the cost of insurance is still largely up to you, so shop around and compare rates before you make a final decision.

car insurance works