What Is Car Insurance and How Does It Work?

What is car insurance? If you’re a first-time car owner, or even if you’ve been on the road for a while, you may not be totally clear on how car insurance works. The types of coverage can be confusing, and there are industry terms that you may not be familiar with. To help you have a more comprehensive understanding of how your coverage works, our insurance experts have developed this guide that answers the question, ‘What is auto insurance?’ Here, you’ll find everything you need to know to be sure that your policy is exactly what you need.

What is car insurance?

Car insurance exists to protect you from potentially catastrophic financial loss if you are in an accident or your car is damaged in some other way, such as through fire or vandalism. A typical policy includes several types of coverage, each of which applies in a different situation.

In return for providing this financial protection, you pay a fee, called a premium, to your insurance company. These fees are not the same across companies, so it’s important to shop around to find the most affordable coverage for your needs. Reading your policy documents can help you understand where your coverage begins and ends, and it is a good idea to go over it with your agent when you purchase a new policy.

How does car insurance work?

Once you purchase a policy, you will pay a premium, usually monthly or quarterly, for your coverage. If you fail to do so, you may experience a coverage lapse that would leave you without insurance.

Some types of car insurance include a deductible, which is an amount you are required to pay before coverage kicks in. You choose the deductible when you purchase coverage, and it should be an amount you are comfortable paying in the event of a claim. Although liability does not have a deductible, collision and comprehensive do, along with a few other types.

If you are in an accident or other vehicle mishap, you will file a claim with your company. If it is approved, you will receive a payout (or the payout will be made directly to whoever is repairing your vehicle) based on the company’s assessment of your loss, minus any deductible. If your car is totaled, generally the payment will be based on the vehicle’s actual cash value (ACV) rather than its replacement cost. If you want to learn more about what that means, talk to your agent when you purchase your policy.

Types of car insurance

Most states (New Hampshire is the exception) require you to purchase a state-mandated amount of car insurance coverage to drive legally on public roads. That minimum may include liability coverage and nothing more. For more robust coverage, you can add optional types of insurance to your policy for additional coverage. This table outlines the most common types of car insurance.

Although these are the most typical types of coverage, your insurer may offer an assortment of other, optional coverages that add functionality to your policy. For example, many companies have gap insurance, which covers the gap between what your company pays out for your totaled car and what you owe on the car loan. Other common endorsements include roadside assistance, new car replacement and rental reimbursement.

How to file a car insurance claim

If you get in an accident, the process for filing claims is similar across car insurance companies. After an accident, you should:

1. Get to safety and call the police. Make sure everyone is in a safe location after the accident and call the police so you can get an official record of what happened. Depending on the accident’s severity, you may need to call 911 for medical assistance.
2. Document the damage. Take pictures of the damage, both yours and that of the other party.
3. Do not admit fault. Do not admit liability even if you think you may be at fault for the accident. Your insurance company will determine who is at fault after receiving details about the accident.
4. Gather the documentation needed to file your claim. Your insurance professional can provide you with this information, but it generally includes a “proof of claim” report and a copy of the police report.
5. Contact your insurance company. Call your insurer or use your insurer’s online claim portal or mobile app to file the claim. You may be required to contact your agent as well. Monitor your claim progress through the insurance company and be sure to follow up with your claim specialist.

Before you file a claim, check with your insurance provider to see what specific steps are necessary for your claim so you do not experience any unnecessary delays or issues.

How much does car insurance cost?

The average cost of car insurance in the U.S. as of August 2025 is $2,679 for full coverage, while minimum coverage insurance averages $808. Your own costs are likely to vary because premiums are highly personalized and unique to each driver and their vehicle.

Insurers use multiple factors to determine your rate, although some factors are limited or banned from being considered in some states. Your location plays a role, with drivers in busy urban areas often paying more for coverage. Age typically matters, as does gender. Your credit-based insurance score could play a role, as well as your car’s age, make and model. Your driving history is probably the most important indicator of your rate, with good drivers generally earning the lowest premiums.

Asking for quotes from some of the best car insurance companies can help you find the most affordable coverage. It’s simple and fast to ask for quotes, and you can often do so just by answering a few questions on an insurer’s website.

How much car insurance do you need?

As we noted above, your state is likely to have a minimum amount of required coverage. This generally includes specific amounts for the following types of coverage:

• Bodily injury liability per person
• Bodily injury liability per accident
• Property damage liability per accident

This is often written out like this: 50/100/25, which, in this case, means $50,000 in bodily injury liability per person, $100,000 of bodily injury per accident, and $25,000 property damage per accident. Those numbers are the maximum your policy will pay for your accident if you are found to be at fault, if you’ve purchased a 50/100/25 policy.

With these maximums, however, consider this: the average cost of a new car in the U.S. is more than $49,000.  If you caused an accident with a fairly new car and totaled it, your policy would only pay out on the first $25,000, and you would be responsible for anything over this amount.

For that reason, experts often recommend that you purchase more than the minimum. Many recommend a policy including 100/300/100. If you have a loan or lease, you may also need full coverage or other optional types of insurance to fulfill your lease arrangement.

How to save on car insurance

There are multiple strategies you can use to save money on your car insurance. Start by asking for quotes from some of the companies with a reputation for writing cheap car insurance policies. Here are a few more ways to save:

• Make sure you’re taking advantage of all possible discounts. Review your policy annually in case you’ve become eligible for any new ones.
• Pay attention to your driving skills. Insurers often save the best rates for those with no marks on their license. If you have past infractions, consider taking a defensive driving course to brush up on your skills. This may also earn you a discount.
• Consider signing up for your company’s telematics program. This could save you as much as 40 percent off your premium. Keep in mind that some insurers may also raise your rate if they record unsafe driving habits.
• If you can afford to, increase your deductible. This will generally lead to a lower premium, since your insurer won’t be paying as much in the event of a claim.

What do I need to buy car insurance?

Buying car insurance isn’t difficult, and if you are new to the process, you may want to ask for help from a knowledgeable licensed insurance agent. They can answer any questions you might have about types and levels of coverage and can guide you to a policy that works for your situation.

In general, you will need to have the following available:

• The basic information (name, address and possibly Social Security number) for any named drivers on the policy.
• Your driver’s license, as well as the license for any other drivers on the policy.
• The vehicle’s registration.
• Banking information, especially if you are setting up an electronic payment system.
• The car’s vehicle identification number (VIN)

The more of this information you can supply, the more accurate your quote will be. Once you have decided on the company you wish to work with, you will probably need to supply your first payment and determine the start date for the policy.

Frequently asked questions

• What car insurance company has the best coverage types and rates?
  

  It depends. Car insurance companies can use about a dozen factors to calculate your premium, including your location, driving history and vehicle type, or even your credit history in some cases. For this reason, car insurance is almost like a fingerprint — no one policy will be exactly the same as another. That’s why one of the best ways to find the best company for you is to shop around for free car insurance quotes and compare the options.

• Do I need car insurance before buying a vehicle?
  

  While you won’t need an active insurance policy before buying a car, you will likely need to show proof of insurance to complete your purchase and drive off the lot. Since buying a new car can be an all-day event, some people prefer to set up their policy to go into effect on the day they pick up the car. If you already have an existing policy, your current coverage may temporarily extend to your new vehicle, but this can come with some risk, as it’s limited to only the coverage you carry on your old car. Plus, this coverage extension usually only lasts for 30 days. That’s why many insurance professionals recommend that you either add the new car to your existing policy or finalize your new policy the day of your car purchase.

• How do I cancel my car insurance policy?
  

  Canceling a car insurance policy is usually straightforward, but each company has a different process or requirements to complete this request. Some insurers will accept a verbal request to cancel, and others will require you to submit your request in writing. Furthermore, some insurance companies will ask you to provide proof that you have obtained new insurance or have canceled the registration on your vehicle. Since this process varies from company to company, you may want to contact your agent for specifics on canceling your policy.

• What is accident forgiveness coverage?
  

  Accident forgiveness is optional coverage offered by many insurers that can protect you from an increased rate after your first at-fault accident. There is often a fee to add this coverage to a policy, but if you have a good driving record, you may be eligible to add this coverage at no cost with some carriers.