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Key takeaways:
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Car insurance protects the value of your vehicle in the event of an accident or theft. In some cases, it also covers injuries to yourself or others.
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How much you’ll pay for car insurance is related to your risk of being involved in an accident, the value of your car, and the amount of your deductible.
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Most states require proof of auto insurance and have minimum coverage limits for liability insurance.
Having auto insurance is a requirement in nearly every state. But beyond state minimum requirements, car insurance is crucial to your financial protection when you get behind the wheel.
Let’s take a closer look at how car insurance works, what it costs on average, and what types of coverage you may want to consider.
In this article:
What is car insurance?
Car insurance is a type of insurance that helps protect vehicle owners from financial fallout in the event of a car accident, theft, vandalism, or other incident involving motor vehicles that results in property damage or bodily injury.
Car insurance companies issue a legally binding contract called an auto insurance policy that outlines the coverage it will provide. Many policies cover:
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Property damage or theft of your car
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Legal responsibility to cover injuries and property damage to others
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Medical expenses related to injuries resulting from car accidents
How does car insurance work?
You may wonder how your insurance coverage pays the huge amounts involved in car insurance claims, especially for at-fault accidents. After all, your auto insurance premiums are relatively affordable compared to what you’d pay out of pocket.
Car insurance is priced to spread the financial risk between you and your insurance company. Lower coverage limits or higher deductibles usually mean you pay less in premiums in exchange for bearing more financial liability for out-of-pocket costs in the event of an accident.
When you purchase car insurance, you’ll typically pay a higher premium if you’re deemed to be at greater risk of causing an accident due to your driving record, age, and other criteria. You may also be offered less affordable car insurance if you’ve had a lapse in coverage due to failure to pay premiums or poor credit history.
Learn more: Ways to save on auto insurance
Who is covered by car insurance?
It’s not just the policyholder and any drivers listed on the policy that are covered by your car insurance in case of an accident. It’s usually any licensed driver that you permit to use your car.
This is called “permissive use,” but it does have some exceptions and limitations, including reduced coverage limits in some states for drivers not listed on the policy and restrictions on coverage if the vehicle was used for business purposes.
Types of car insurance coverage
To better understand how car insurance works, it helps to know the types of coverage most insurance companies offer.
Liability coverage
Liability car insurance is usually state-mandated and includes two different types: bodily injury liability and property damage liability.
Bodily injury liability coverage provides for expenses related to injuries or death to other drivers or passengers in an accident in which you were at fault. Property damage liability coverage fronts the cost of vehicle repairs, car replacement, or damage to property that occurs as a result of your actions behind the wheel.
Collision coverage
Instead of covering the costs of damage to someone else’s car or property in an accident, collision insurance protects the value of your vehicle by paying for car repairs or replacement.
Comprehensive coverage
Comprehensive insurance pays for all the other things that could do damage to your car that aren't related to an auto accident such as natural disasters, theft, and vandalism.
Underinsured or uninsured motorist coverage
Many states require underinsured or uninsured motorist insurance in case you’re in a hit-and-run or any other accident with a driver who doesn’t have car insurance or enough insurance coverage to offset their liability.
Personal injury protection (PIP)
In no-fault states, personal injury protection insurance is often required to cover medical expenses, funeral costs, or lost wages for you or your passengers in the event of a car accident, regardless of fault.
Medical payments coverage (MedPay)
Although it's usually optional, a handful of states require medical payments coverage (MedPay). This insurance covers medical bills in the event of an accident but doesn’t reimburse for lost wages or other expenses related to car accident injuries.
Other car insurance coverage options
Check online or talk to an auto insurance agent to find out if your insurance company offers any of the following optional coverage types.
Roadside assistance: Have a flat, locked out, or need a tow? Emergency roadside assistance insurance has you covered.
Mechanical breakdown insurance: If you need a little cushion for car repairs that extend beyond your car manufacturer’s warranty, mechanical breakdown insurance covers failures of major components like the engine and transmission.
Rental car reimbursement: If your claim is covered, rental car reimbursement covers the costs of a rental car while your vehicle is being repaired or replaced.
New car replacement: When your car is totaled, new car replacement insurance kicks in to replace your vehicle with one of the same make and model.
Gap insurance: If your car is totaled, gap insurance bridges the financial gap between your car’s actual cash value and what you owe on your car loan.
Your insurance provider might offer even more options for specialty coverage, such as:
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Auto glass insurance to fix a broken windshield
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Classic car insurance if you drive an antique
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Custom parts and equipment insurance for a car you've modified.
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Rideshare insurance for professional drivers
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Pet injury protection to cover vet bills in case of an accident
Learn more: Common types of car insurance coverage explained
What is not covered by auto insurance?
Here are a few scenarios and types of damage that aren’t likely to be covered as part of a claim on a basic auto policy:
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Personal property, including electronics, jewelry, or cash
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Car maintenance and general wear and tear
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Aftermarket modifications or car accessories
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Damage or injuries caused by unlicensed drivers
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Damage or injuries incurred during criminal use
It’s also worth mentioning that insurance companies won’t cover intentional damage inflicted in hopes of an insurance payout. That’s car insurance fraud, and it could result in the immediate cancellation of your insurance policy and potential criminal penalties.
How much car insurance do you need?
Any discussion of how much car insurance you need should start with the minimum amount state laws mandate. Most states require proof of auto insurance, specifically liability insurance, up to certain coverage limits.
Next, consider how much insurance you need to cover your personal liability and protect your net worth. You may want to buy more than the minimum amount of coverage required in case you cause an accident and get sued.
Minimum car insurance requirements are commonly $25,000 per person and $50,000 per car accident for bodily injury liability, and $25,000 per car accident for property damage.
Some states also require uninsured or underinsured motorist coverage and personal injury protection (PIP) or MedPay. Additionally, if you have a car loan or lease, the lender may require you to purchase full coverage or to have more robust coverage limits.
Learn more: How much car insurance coverage do I need?
How much does car insurance cost?
How much you pay for an auto insurance policy depends on the insurer, the vehicle, the location, and the driver. Car insurance rates can vary significantly based on the following factors:
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Driving history
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Vehicle type
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Vehicle use or mileage
On average, Progressive says liability-only car insurance averages $80 to $157 per month.
To secure lower auto insurance rates, maximize the auto discounts your insurance company offers or consider usage-based car insurance.
Learn more: How to find cheap car insurance in 2025
How do car insurance deductibles work?
A car insurance deductible is what you’ll pay in out-of-pocket costs before your auto insurance coverage kicks in. This usually applies to both collision and comprehensive coverage. Typically, the higher the deductible, the lower your auto insurance rates and vice versa.
For example, let’s say you have a $500 deductible, and you back into a mailbox one morning in a hurry to get to work. If it causes $750 worth of damages to your car, you’d have to pay $500 of that cost before your car insurance would cover the remaining $250.
In a few states, such as South Carolina, Florida, and Kentucky, windshield repairs and replacements are not subject to deductibles, so check with your auto insurance company before you decide whether to pay out of pocket for a cracked windshield.
Learn more: What you need to know about car insurance deductibles
How to file a car insurance claim
An essential piece of how car insurance works is the claims process. Follow these steps for a less stressful experience filing an auto insurance claim.
Step 1: Report the accident
Even if it's a minor fender bender, each state has its own rules about reporting accidents to the police. When in doubt, contact the police immediately after a car accident, especially when there are injuries or visible vehicle damage.
Learn more: What to do after a car accident: Your step-by-step guide
Step 2: Gather documentation
While at the scene and in the aftermath, gather documentation such as insurance information from other drivers involved or eyewitnesses, pictures of vehicle damage and the accident scene, and a copy of the police report.
Step 3: Contact your insurance agent
The next call should be to your insurance company to report the accident and start the claims process. In no-fault states, you’ll work with your own auto insurance company to process a claim. In at-fault states, you’ll work with the at-fault driver’s company throughout the claims process.
Learn more: How to file a car insurance claim
Is car insurance required?
Driving without car insurance is illegal in almost every state and can carry hefty fines, license suspension, or even jail time. Additionally, if you’re in an at-fault car accident, you’ll be personally and financially liable for any vehicle damages or bodily injuries that occur as a result of your actions behind the wheel.
If you do get caught driving without car insurance coverage or your insurer reports a lapse in coverage to the state, you might be asked to obtain an SR-22 certificate. This certificate of financial responsibility will almost certainly result in increased car insurance rates as you’ll be classified as a high-risk driver for up to three years in some states.
Learn more: Minimum car insurance requirements in all 50 states
Car insurance FAQs
What does 25/50/25 mean in auto insurance?
The specific phrase “25/50/25” usually refers to coverage limits on auto insurance policies. For example, most car insurance policies offer $25,000 per person in bodily injury and up to $50,000 per accident. The last number refers to common coverage limits for property damage, which usually total up to $25,000 per accident.
How do car insurance payments work?
Your car insurance payment is called a premium, and most companies offer payment options that include monthly, quarterly, or even annual billing. While monthly payments may be more manageable for your budget, auto insurance companies usually offer discounts for policyholders who pay up front in six-month or annual premiums instead.
This article was edited by Tim Manni.
