What is car insurance?

Car insurance is a contract between you and an insurance company in which the insurance company agrees to cover your financial expenses arising from an auto accident. The insurance company may also compensate you if your car is stolen. Car insurance covers damage to your vehicle that is not connected to an accident as well.  Your car is one of your most expensive possessions. You never know when an accident or negative event could happen to it. However, there is no guarantee that these occurrences ever will happen. Thus, you purchase car insurance hoping that you will not actually need to use it. Still, car insurance offers you tremendous financial protection if you do need to use it.

>>MORE: Car Insurance Terms Explained in Plain English

What is car insurance?

Car insurance is a type of financial security that you can purchase.  An insurance company pledges to pay a certain amount for certain expenses in exchange for you paying a monthly, biannual, or annual fee.  This fee is called a premium. Expenses that the insurance company may cover include both damage to property and personal injury.

Automobile insurance companies limit the financial amounts that they pay out in the event of accident or damage. The company sets limits by category and clearly denotes these limits in the insurance contract.  

Car insurance is mandatory in 48 states.  In New Hampshire, you are not required to have car insurance. You must, however, demonstrate that you can be financially responsible for damages that may result if you are involved in a car accident.  In Virginia, if you do not have insurance, you must pay an Uninsured Motor Vehicle fee.

>>MORE: Is it illegal to drive without insurance?

What car insurance covers?

What your car insurance covers depends on your specific policy. Generally, you want your car insurance to cover damage to your car arising from an accident or otherwise. You also want it to cover damage to the other person’s car, your liability, if you are at fault in an accident.  Additionally, you want your car insurance to cover personal injury damages that you and your passengers sustain in an accident. Moreover, your car insurance needs to cover the other driver and his passengers’ personal injury expenses should you be at fault. Your car insurance should also cover non-vehicle property damage that involves your car.

Your car insurance often includes several different coverage types.  There are three primary types of car insurance coverage. These are liability insurance, comprehensive insurance and collision insurance.  Other insurance coverage you may want includes medical payments coverage, Uninsured Motorist Property Damage Insurance, and Uninsured Motorist Bodily Injury Insurance.  Therefore, your car insurance policy should include several different coverage types for you to be adequately covered.

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Who is covered by car insurance?

Car insurance covers you, the driver, your car, and your passengers.  You are typically covered by your car insurance even if you are not driving the car. Furthermore, you may be covered by your car insurance if you are not in a car. (i.e. if you are hit by a car while walking across the street)

Your car insurance also covers the driver of the other car and his passengers in accidents in which you are at fault. Additionally, the driver’s property (the car) should be covered.  Your car insurance should also cover property damage to property other than cars. If you have ever backed into a house or other structure, you know how important this is.

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How much does car insurance cost?

There are several factors that affect car insurance rates.

  • The type of coverage you want to include in your car insurance. The more types of coverage are included, the more your monthly premium is.
  • The limits of these coverage affects monthly premium too. The higher the coverage limit is, the more expensive the car insurance rate.
  • Personal demographics: age, gender, marital status and location (usually at zip code level) may play a role in your final monthly premium
  • Your driving record, your credit score, and your car are important factors affecting your car insurance rates.
  • The car insurance company whom you buy the insurance policy from will dictate your premium. Different companies assess risks differently.
  • Different car insurance companies may consider other factors to determine your final premium.

Therefore, you should always price shop your car insurance with at least 3-5 companies to determine the cheapest and read reviews of these companies to select the final one you deem the best for you.

>>MORE: How to Compare Car Insurance Quotes from Different Companies?

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