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How Does Car Insurance Work?

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Maria Neira
April 8, 2021

How does car insurance work? Well, isn't that a loaded question? Car insurance is like protection from the unforeseen future. It ensures that you won't be financially ruined by a car accident you might cause or may be affected by otherwise. 

Life and driving can be unpredictable. So, it's smart to be prepared. In America, you often don't have a choice. Most states require drivers to have car insurance. The amount of coverage you need varies depending on where you live in the U.S.

Here, you will learn all about how car insurance works.  

A brief history of car insurance  

Do you ever lay awake at night thinking about how car insurance came to be and who came up with it? Probably not. But we're going to explain it to you anyway. 

Long before the GEICO lizard ever drew breath, one of our country's founding fathers was thinking about coverage. He also invented more than his fair share of things. That's right, Benjamin Franklin had a huge hand in the development of insurance. PBS claims that our buddy Ben formed the Philadelphia Contributionship in 1751. It was the first company in the colonies to provide fire insurance. 

Members of this Contributionship agreed to make payments to build a fund used to pay for fire-related losses associated with another member. In the first year, the group issued 143 policies. Over the course of seven years, not one insured property caught fire. That's Murphy's Law at work. 

Although car insurance was before Franklin's time, he did recommend crop insurance, life insurance, and coverage for widows and orphans. Franklin's policies had the same goal as car insurance policies: relieve financial burden if/when disaster strikes. 

According to the Ohio Historical Society, the first person to buy auto liability insurance was a man named Gilbert J. Loomis in 1897. The policy protected him if he damaged property or injured or killed an individual in an automobile accident. Since then, car insurance has slowly but surely become more popular and comprehensive.

How it works 

Car insurance is there for you when you need help recovering from injuries related to a vehicle collision. It's also a method of protecting you from damage and expenses caused by an accident. Basically, it is designed to keep you from suffering a major financial burden from an accident, no matter who is at fault. 

Car insurance deals with risk. You carry a lot of risk if you aren't protected with car insurance. If you are uninsured in the event of an accident, you could owe a lot more money than you have. That's no fun. 

Purchasing car insurance alleviates some risk. You pay a monthly premium to ensure that in the case of an accident, the insurance company will take on much more risk than you do. 

Why is car insurance important? 

In life, there are no guarantees. This phrase is used often, but it particularly applies to auto insurance. Getting behind the wheel of a car might not seem like a risk, but it is. You can try to be the safest and best driver possible, but there are many factors out of your control when driving. 

For example, you have to trust that every other driver on the road is being safe and paying attention. Car insurance is a safety net for when drivers make mistakes — whether it's you or another driver at fault. 

How much does car insurance cost? 

There are several factors that go into determining car insurance rates. Have you ever heard the rumor that red cars have to pay a higher premium on car insurance? Apparently, it's false. But, this myth highlights the fact that car insurance costs vary depending on specific details. Cost is determined by different personal factors, including age, ZIP code, credit score, and your car's make and model. 

The national average for car insurance cost in 2020 was about $199 per month. That comes out to $2,388 a year. 

What different types of car insurances are there? 

There are many types of car insurance coverage to choose from. The trick is being able to choose which ones are right for you. Below is a list of the different types of car insurance typically offered. 

  • Liability Insurance: This is mandatory in most states. There are two types:
  • Bodily Injury: Helps pay for another person's injuries if you cause an accident. 
  • Property Damage: Supports costs associated with the property you may have damaged in an accident. 
  • Collision: Pays for the damages caused to your car in an accident. Fault is not a factor. 
  • Comprehensive: Covers car replacement if stolen or damaged in a non-collision accident
  • Medical Payment: It's head-to-toe protection. It covers medical expenses of an insured driver and their passengers if any are injured due to an accident. 
  • Personal Injury Protection (PIP): This helps customers pay for costs not covered by your health insurance. 
  • Personal Umbrella Policy (PUP): Umbrella coverage is there for you when “regular” insurance doesn't cut it. Think of it as a safety net policy. 
  • Roadside: Provides financial aid for roadside assistance costs.
  • Rental Reimbursement: Pays for a rental car while awaiting primary car repairs.
  • Sound System Insurance: Replaces stolen/damaged car equipment (rare coverage).
  • Uninsured and Underinsured Motorist: Helps pay for property damage and medical expenses that are caused in an accident by a vehicle owner who is uninsured or underinsured. 

What do state regulations have to do with car insurance?

As stated before, car insurance is required in almost all states. U.S. drivers must buy and maintain a certain level of car insurance from a company in case of an accident or injury to another person or property. 

The law could come after you if you fail to maintain coverage. The few states that do not require you to purchase auto insurance make you show evidence of financial stability in the lieu of insurance. For example, if you show a surety bond, cash deposit with the state or display a certificate of self insurance you are eligible to opt out of car insurance. 

Iowa, New Hampshire, Ohio and Virginia do not require auto insurance. The remaining 46 states do.

Techniques for choosing the right car insurance

It's important to take time to research the type of coverage you need before calling an insurance company for a quote. Basic coverage is usually liability insurance. The minimum state requirements for car insurance is just a guideline, but you can take extra precaution if you feel it's necessary. 

It can be quite common for drivers to choose comprehensive coverage in addition to liability coverage. Companies like Allstate provide some optional add-ons such as umbrella coverage, which provides liability coverage over and above your standard auto insurance or homeowners insurance. To summarize, this type of coverage provides safety in areas where normal coverage has reached its limits. 

Additional coverage supplies protection in different areas that may be more beneficial to some drivers than others. The decision process is highly personal, which is why you will have the best results with your insurance plan if you spend time studying what is best for you. There are some tools that make it easier. 

Use Squeeze 

Squeeze is a free service that offers saving tactics for recurring household bills. One facet the service covers is auto insurance. Starting with Squeeze is a great first step to narrowing down your car insurance needs. 

Choosing the best car insurance for you can be overwhelming and time-consuming. Squeeze puts auto insurance savings on cruise control by finding the best rates for you. When they compare auto insurances, they make sure you are getting the most coverage at the lowest rate. 

Stress less and save more with Squeeze. 

Consider your personal factors 

As discussed, car insurance price is determined by your personal information. If you carry accident history, consider looking for an insurance company that's more lenient in that area. If you are a student, look for a company that provides a student discount

There are many different discounts rewarded at different companies. Look into which ones work best for you. 

To sum it up

Car insurance can sound intimidating, but there's really nothing to be afraid of. It's something that everyone has to deal with by law. We're all in it together — on the road and in paying insurance premiums. 

If there's one thing to take away from what you've read here today, it's this: Do your research. Identify the factors that affect you as an insured driver and use tools like Squeeze to help you find the best rates and coverage.