How Car Insurance Works?

Auto insurance is mandatory across the United States. It is the main way to ensure that losses from car accidents are covered, medical bills are taken care of and that, at the end of the day, all parties involved can get back to their normal lives.

The Purpose

The purpose of auto insurance is to try to return a person or property back to their previous status before the accident, or provide material compensation for irreversible damage. If you are involved in a minor crash and break your windshield or damage a bumper, the insurance company has to repair it for you. This does not include other perks like repaint the car, replace all windows or give you brand new tires. Similarly, if you break your leg in an accident, the insurance company will take care of the medical bills, but will not provide compensation for other health issues you may have. Individuals who attempt to gain undeserved benefits from exploiting certain terms in their insurance policy are committing insurance fraud, which is classified as a felony in the US.

The Contract

As you might have guessed from the above description, the auto insurance policy is a contract drawn between you, as the driver, and an insurance company. The insurer promises to reinstate your vehicle to its previous state or reimburse you for any losses and, in exchange, you promise to pay a certain fee, also known as the premium. Depending on your needs and budget, here are the main policies you can buy and the scenarios under which you are protected.

Liability Insurance pays for damages you cause to another party’s vehicle and/or passengers. It is the minimum coverage you can get and it’s mandatory in all American states and most countries across the world.
Collision Insurance covers you for damages to your vehicle as a result of a car crash, whether or not you were at fault.
Comprehensive Insurance pays for damages to your vehicle resulting from anything that doesn’t fall under the scope of the Collision Insurance, like vandalism, fire or natural disasters. Collisions with animals are covered by this policy.
Personal Injury Protection covers you and your passengers for medical bills incurred as a result of a car accident – again, whether or not you were at fault.
Rental Insurance, as the name says, is the policy that covers you against any mishaps that can occur when you rent a car.
Towing Insurance pays for a tow truck in case your vehicle can no longer be operated, usually as a result of an accident.

In order to decide which policy is right for you, evaluate your needs first. If you use public transportation or ride a bike to work or school every day and only take the car out of the garage on weekends, you would probably want to go with the cheapest policy. But if you drive it every day, park it in the open frequently and always carry passengers, you will want a more comprehensive package.

How Car Insurance Works?

The Purpose

The Contract

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