What You Need to Know: How Does Car Insurance Work?

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In this article


  • Auto insurance helps protect drivers in the event of financial loss involving their vehicle.
  • Understanding the mechanics of car insurance is important if you're looking to save money on your policy without sacrificing the quality of coverage.
  • Some insurers may use your credit report and credit score to help determine your premiums.

Even the most careful driver knows that accidents happen. From fender benders to a totaled vehicle, when something happens to your vehicle that's beyond your control, car insurance is there to help cover these unexpected costs.

How does car insurance work? Learn the ins and outs of car insurance — including what it does and doesn't cover and how to find the best policy for your unique situation.

How does car insurance work?

Although auto insurance policies vary, in general terms, auto insurance helps protect drivers in the event of financial loss involving their vehicle.

Drivers purchase a policy from an insurer that covers specific kinds of damage. The policyholder then makes regular payments toward the policy premium. In exchange, the insurance company agrees to compensate the driver in the event of an accident that involves the type of damage covered by their policy.

If an accident happens, you'll have to file a claim with your insurer. They'll decide what to pay based on the unique circumstances of the accident and the kind of coverage you've purchased.

There are three primary components of a car insurance policy you'll need to understand: the premium, the deductible and the types of coverage available to you.

What is a car insurance premium?

Once you choose a policy that fits your needs, you'll owe the insurance company an annual payment called a premium. Depending on the policy, you can split the premium into monthly or bimonthly installments, or you can choose to pay it all at once.

Premiums vary from policy to policy and are determined by factors both in and out of your control. Examples include:

  • What types of damage your insurance covers. More coverage means a higher cost.
  • Your driving record. Drivers with good records are likely to have fewer accidents, which translates to less expensive premiums.
  • Vehicle usage. More time on the road means more opportunity for accidents and a costlier policy overall.
  • Where you live. Urban drivers usually have the highest premiums.
  • Your age and gender. Younger people and men are more likely to be involved in collisions and other accidents, which can lead to higher premiums. On the other hand, older people and women are considered less risky and can generally secure lower rates.
  • What kind of car you drive. The cost of your car and its age can affect insurance costs. For example, a new luxury car is more expensive to insure than a used economy car.
  • Your credit score. A low credit score might indicate that you're less financially responsible and may mean a higher rate. In some states, you may be eligible for a lower insurance rate based on your credit scores. Some jurisdictions, however, do not allow credit information to be used for underwriting auto insurance.
  • Your deductible. High deductibles reduce your total premium.

What is a car insurance deductible?

A deductible is the amount of money you'll be required to pay out of pocket before your insurance company will compensate you. For example, imagine you have collision coverage with a deductible of $500, and you're involved in an accident that requires $2,700 in repairs. After you file a claim, your insurer should agree to compensate you for $2,200.

If an insurance policy helps protect you against significant financial loss in the event of an accident, the deductible helps protect the insurer by discouraging claims for minor damage and better distributing financial risk. In other words, insurance companies don't have to pay for every minor dent and scratch, which frees up funds to cover damage that might otherwise be financially ruinous to a policyholder.

What types of car insurance coverage are available?

Policies differ, but most car insurers offer several types of coverage packaged together. These protect you from out-of-pocket costs in all kinds of situations, including vehicle and property damage, medical bills and even legal fees.

Following are some of the most common types of car insurance:

  • Liability insurance covers damage to other parties when you're legally at fault in an accident, including injuries, damage to vehicles, the destruction of other objects like a house or a street sign, and legal fees.
  • Collision insurance covers damage to your own vehicle if you're involved in a collision with another driver.
  • Comprehensive insurance covers damage to your vehicle from non-collision events or acts of nature, such as break-ins, severe weather, a cracked windshield or an accident involving an animal.
  • Medical payments/personal injury protection covers medical costs for the driver and passengers in an accident regardless of fault.
  • Uninsured/underinsured motorist bodily injury or property damage insurance covers medical costs for your injuries or property damage if you're in an accident with an uninsured or underinsured driver.

Explore insurance quotes here. Equifax does not sell or underwrite insurance.

How do I find the best car insurance rates?

Understanding the mechanics of auto insurance is important if you're looking to save money on your policy without sacrificing the quality of coverage. Here are five ways to help make sure you're getting the best rates.

  • Do your research. You'll only find the best coverage (and the best prices) if you investigate all your options. Don't be afraid to shop around.
  • Consider your credit report. In states where it's allowed, insurers may use your credit report and credit score to determine your premium, so try to be financially responsible by making credit card and other payments on time, keeping an eye on credit use and checking your credit score regularly. A higher score and a clean credit report may indicate that you will be less expensive to insure, thus reducing your costs.
  • Consolidate insurance policies. Bundling two or more policies (such as homeowners and auto insurance) from the same company can earn you a big discount.
  • Increase your deductible. Higher deductibles mean lower premiums, which means more money in your pocket. However, before you commit to a policy with a high deductible, make sure you know your risk profile. If you're prone to accidents, this may not be the best option for you.
  • Seek other discounts. Contact your insurer to find out if you're eligible for any discounts. For example, insurance companies often offer reduced premiums for policyholders who are considered safe drivers, or for cars with up-to-date safety features.
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