How Car Insurance Works

Even though car insurance is required in nearly every state, many drivers don’t have the best understanding of how it works.  Many people just look for cheap auto insurance and take the best deal that they can find, but for most drivers, this isn’t the smartest choice.  It’s important to understand the fundamentals of how car insurance works before you can make the right decision when purchasing it. 

The Basics of Insurance

Basically, insurance helps people offset the risks like illness, accidents, and injury — that they face in their daily lives.  Insurance can’t protect people from experiencing these things, but it can offset the financial cost.  An insurance company essentially combines resources from a large group of people that can be used to help a subset of people when they experience rare events like accidents.  The costs of both damage and injury following a car accident can be steep, which is why many states require some form of car insurance.

The Different Types of Insurance

There are various types of car insurance to cover various scenarios.   This gives drivers flexibility to choose the coverage that they need based on how they drive, where they live, what their financial situation is, and so on.  Certain coverage is required in certain states, and other types are optional.

Liability coverage covers the cost of any damage or injury that you cause to others.  Collision coverage is for damage your vehicle sustains in a collision.  Comprehensive coverage covers damage to your vehicle caused by something besides a collision.  Uninsured or underinsured motorist coverage pays for damage to your car if the liable driver has inadequate liability insurance.  Personal injury protection pays your medical expenses regardless of fault.  There are various other types of insurance, but these are the most common types.

A Primer on Deductibles

A deductible is essentially the figure that you are responsible for paying if you make an insurance claim.  For instance, if you have a $250 deductible and are involved in an accident that causes $1000 of damage to your car, you have to pay $250 before your insurance company will cover the remaining $750.  The cheapest car insurance will generally have a higher deductible than more expensive policies, so it’s important for people buying cheap insurance to evaluate what kind of deductible they can afford.

Understanding Insurance Rates

The deductible that your policy includes is not the only thing that affects your insurance rate.  A policy that offers more coverage will obviously cost more.  Your own history as a driver can affect rates; your age, gender, and driving history also make a difference.  Your vehicle and its features may also affect the rates that you are offered; for instance, if you have a high-quality alarm installed, you may get a lower comprehensive rate.

When you are looking at car insurance, it’s important to understand the different types of insurance, how deductibles work, and what factors go into setting your rate.  Choosing the most affordable car insurance is always tempting, but a policy that doesn’t offer enough protection can cost you more in the long run.  Understanding how car insurance works is the key to finding the balance between affordable insurance and insurance that truly meets your needs.

Courtesy of New Jersey Auto Insurance Firm

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