How does car insurance work? A guide

Selecting the right car insurance policy can sometimes feel overwhelming, but it’s an essential step in protecting yourself financially on the road.

Every driver has different needs, and finding the right balance between coverage and cost requires a solid understanding of how it all works. Many factors, including your driving habits, credit history, and the type of car you own impacts your premium rates. By evaluating your personal risks and coverage requirements, you can make smarter decisions that provide both financial security and peace of mind.

Learn more about What "Full Coverage" Car Insurance is for insight into broader coverage options.

What is car insurance?

Car insurance is a contractual agreement between a driver and an insurance provider that offers financial protection in case of accidents, theft, or other unexpected vehicle-related incidents. By paying a regular premium, policyholders receive coverage that helps cover repair costs, medical expenses, or liability claims if they’re responsible for damages or injuries.

Without adequate coverage, drivers risk significant out-of-pocket expenses that could strain their finances. Thus, car insurance acts as a critical safeguard, ensuring that unforeseen events don’t lead to overwhelming financial burdens.

Is car insurance required?

Car insurance is legally required in almost every state, but the specific requirements vary depending on where you live.

For instance, most states mandate at least a minimum level of liability coverage, which helps pay for damages and injuries you cause to others in an accident. However, some states, like New Hampshire and Virginia, allow drivers to forgo insurance if they meet specific financial responsibility requirements. Additionally, certain regions require additional coverage, such as personal injury protection (PIP) or uninsured/underinsured motorist (UM/UIM) coverage.

Failing to meet these minimum requirements can lead to serious consequences, such as fines, license suspension, vehicle impoundment, and even legal trouble.

In many states, first-time offenders face fines ranging from a few hundred to several thousand dollars, with repeat offenses leading to steeper penalties. Additionally, uninsured drivers may have their registration and driving privileges revoked until they provide proof of coverage. In the event of an accident, an uninsured driver may also be held personally liable for damages and medical expenses, leading to potential lawsuits and financial devastation.

Learn more about Car Insurance Requirements And Laws By State to get familiar with the regulations in your region.

Basic car insurance coverage requirements

Drivers are typically required to carry a minimum amount of liability insurance to make sure that, in the event of an accident, they can cover the costs of damages or injuries they cause to others. Liability coverage is divided into two main components: bodily injury liability, which pays for medical expenses, lost wages, and legal fees if you injure another person, and property damage liability, which covers the cost of repairing or replacing someone else’s vehicle or property.

Having liability insurance not only helps others, but also protects you from significant out-of-pocket expenses. If you cause an accident and don’t have adequate coverage, you may be held personally liable for medical bills, vehicle repairs, and even lawsuits. Liability coverage helps provide a basic level of financial security, ensuring that you can fulfill your legal obligations without facing life-changing financial consequences.

What is a car insurance premium?

A car insurance premium refers to the amount a policyholder pays to an insurance company in exchange for coverage. This payment can be made monthly, quarterly, semi-annually, or annually, depending on the insurer's terms.

The cost of a premium is determined by several factors, including the driver’s age, driving history, location, type of vehicle, coverage limits, and even credit score in some states. Insurance companies assess these factors to determine the level of risk a driver presents—higher-risk drivers typically pay higher premiums, while lower-risk drivers may qualify for discounts. Here, maintaining a clean driving record, bundling policies, or choosing a higher deductible can all help lower costs.

What is a deductible in a car insurance policy?

A car insurance deductible is the amount a policyholder must pay out of pocket before their insurance company covers the remaining costs of a claim. Deductibles typically apply to coverage types like collision and comprehensive insurance, meaning if you file a claim for vehicle damage, you’ll first pay the deductible amount, and the insurer will cover the rest up to the policy limit.

For example, if your deductible is $500 and your repair costs total $2,000, you would pay $500, and your insurer would cover the remaining $1,500. Choosing a higher deductible can lower your monthly premium, but it also means you’ll pay more out of pocket if you file a claim, while a lower deductible results in higher premiums, but reduces upfront costs in the event of an accident.

For a deeper dive, review our Car Insurance Deductible Guide, which explains how deductibles work and how to choose the best option for your needs.

What does car insurance typically cover?

When selecting a car insurance policy, it’s important to understand that coverage can vary significantly based on both legal requirements and personal choices. While state laws dictate a minimum level of liability coverage, drivers can personalize their policies with additional protection for greater financial security. Optional coverages such as collision, comprehensive, and medical payments insurance can help take care of costs that basic liability insurance doesn’t.

Liability coverage

Liability coverage is a mandatory requirement in nearly every state, ensuring that drivers can cover the costs of damages or injuries they cause to others in an accident. This coverage is divided into two main parts: bodily injury liability (BIL) and property damage liability (PDL).

Bodily injury liability helps pay for medical expenses, lost wages, and legal fees if you’re responsible for injuring another person in a crash. Property damage liability, on the other hand, covers the costs of repairing or replacing another driver’s vehicle or any damaged property, such as fences, buildings, or street signs. Each state sets its own minimum liability limits, but drivers are free to choose higher coverage amounts for greater financial protection against costly accidents.

Uninsured and underinsured motorist coverage

Uninsured and underinsured motorist coverage protects you financially if you're involved in an accident with a driver who either has no insurance or lacks sufficient coverage to pay for your damages.

Uninsured motorist bodily injury (UMBI) coverage helps pay medical expenses and lost wages if an at-fault driver has no insurance, where uninsured motorist property damage (UMPD) would help pay for damage to your vehicle in the same situation.

Similarly underinsured motorist bodily injury and underinsured motorist property damage coverages would kick in when the at-fault driver’s insurance limits are too low to fully cover your expenses.

While some states require drivers to carry this coverage, others make it optional. Regardless of legal requirements, UM/UIM coverage is a valuable safeguard, ensuring you’re not left with high out-of-pocket costs due to another driver’s lack of adequate insurance.

Collision coverage

Collision coverage is a type of car insurance that helps pay for repairs or replacement of your vehicle if it’s damaged in an accident, regardless of who’s at fault. This coverage applies when your car collides with another vehicle, stationary objects like trees or guardrails, or even when you roll your car. In contrast to liability insurance, which covers damages to others, collision coverage focuses on protecting your own vehicle, ensuring that repair or replacement costs are covered after a crash.

This coverage can be particularly valuable for drivers with more expensive vehicles, as it helps prevent costly repairs or a total loss in the event of an accident. It’s also beneficial for those who drive in areas with high traffic or accident-prone roads, where the likelihood of a collision is higher. Additionally, drivers who have a car loan or lease may be required to have collision coverage, as the lender or leasing company wants to verify the car is protected.

Comprehensive coverage

Comprehensive coverage focuses on non-accident-related damages, such as theft, vandalism, natural disasters, falling objects, or animal collisions. Unlike collision coverage, which only covers damages resulting from a crash, comprehensive coverage addresses a broader range of incidents that could cause harm to your vehicle. For example, if your car is stolen, vandalized, or damaged by a tree falling during a storm, comprehensive coverage helps pay for repairs or replacement, minus your deductible.

Policyholders may choose to include comprehensive coverage if their vehicle is valuable, new, or if they live in an area prone to natural disasters or high crime rates. On the other hand, drivers with older vehicles or those who live in areas with minimal risks might opt to forgo this coverage. Ultimately, whether to include comprehensive coverage depends on the value of the car, the risks of the surrounding environment, and personal preferences regarding level of protection.

Medical payments and personal injury protection (PIP)

Medical Payments Coverage (MedPay) and Personal Injury Protection (PIP) play crucial roles in covering medical expenses after a car accident—regardless of who’s at fault.

MedPay helps pay for hospital bills, doctor visits, and related treatments for you and your passengers. It’s typically a more limited form of coverage and is available in many states as an optional add-on to a standard auto insurance policy. Personal Injury Protection, on the other hand, offers broader coverage by not only paying for medical bills, but also covering lost wages, rehabilitation costs, and other essential services.

The requirement for MedPay or PIP varies by state. For instance, PIP is mandatory in no-fault insurance states, where drivers file injury claims with their own insurance company regardless of who caused the accident. In other states, both PIP and MedPay may be offered as optional coverages, but can provide critical financial relief after an accident.

Specialty coverages

GEICO offers several additional specialty coverages designed to protect you against a wider range of potential scenarios, giving you peace of mind in nearly any situation.

Other coverages to consider include:

• Emergency Roadside Service: Takes care of towing, battery jump-starts, flat tire changes, fuel delivery, and lockout services if your car breaks down.
• Rental Car Reimbursement: Pays for a rental vehicle while your car is being repaired due to a covered accident, up to your policy limit.
• Mechanical Breakdown Insurance (MBI): Helps cover the cost of repairs for major mechanical failures—similar to an extended warranty, but typically at a lower cost.

What is not covered by car insurance?

While car insurance offers protection against a plethora of potential damages and issues, there are still certain instances it doesn’t cover. Before committing to a plan or assuming that you’re covered in any type of situation, it’s essential to know what your specific plan protects against and what it doesn’t.

Scenarios not typically covered by car insurance include:

• Wear and tear: Insurance doesn’t cover routine maintenance or damage due to normal wear and tear—such as tire or brake replacements.
• Using your car for ridesharing: If you get into an accident while driving for a ridesharing company like Uber or Lyft, your personal auto policy won’t cover damages unless you have specific rideshare coverage.
• Intentional damage: Any damage you cause to your vehicle on purpose, including insurance fraud attempts, is not covered.
• Excluded drivers: If someone is specifically listed as an excluded driver on your policy, still operates your car and causes an accident, your insurance will not likely pay for the damages.

What determines the cost of car insurance?

Car insurance premiums aren’t one-size-fits-all—they’re influenced by a variety of factors, from your driving history to your vehicle type and even where you live. Insurers assess these details to determine the level of risk you present as a driver, which directly impacts how much you pay for coverage.

While some factors, like age and location, are beyond your control, others—such as maintaining a clean driving record or choosing a higher deductible—can help lower your costs. Additionally, many insurance providers offer discounts for safe drivers, bundling policies, or even good students.

Understanding what affects your car insurance rates can help ensure you find the best coverage at the most affordable price.

Driving record

Your driving history is one of the most significant factors influencing your car insurance premiums, as it reflects your risk level as a driver. A clean record with no accidents or traffic violations can qualify you for lower rates and even discounts for safe driving. In contrast, a history of speeding tickets, at-fault accidents, or serious violations like DUIs signals to insurers that you pose a higher risk, leading to increased premiums.

Some insurers also offer usage-based programs that track real-time driving habits, rewarding cautious drivers with lower rates. Maintaining a responsible driving record over time is one of the most effective ways to keep your insurance costs low.

Vehicle type

The value and type of a car also play a crucial role in determining insurance rates, as they directly affect the potential cost of repairs or replacement.

High-value vehicles, such as luxury cars or sports cars, typically come with higher premiums because they’re more expensive to repair or replace and may be at greater risk of theft. Similarly, high-performance cars with powerful engines often lead to higher rates since they’re statistically more likely to be involved in accidents. Conversely, vehicles with strong safety ratings, lower repair costs, and advanced security features may qualify for lower premiums.

Don’t let this dissuade you from getting that premium car you’ve always dreamed of if that’s what you’re after—just remember to factor insurance rates into your total cost of ownership before making a decision.

Location

Location is another key consideration for insurance providers when determining your premiums.

Drivers in urban areas typically pay higher rates due to heavier traffic, increased accident rates, and higher chances of vehicle theft or vandalism. Conversely, rural areas often have lower premiums since there are fewer vehicles on the road and a reduced risk of collisions.

Furthermore, different states and cities have unique insurance regulations, minimum coverage requirements, and claims frequencies—all of which impact pricing. Even within the same city, ZIP codes with higher crime rates or accident statistics may result in increased premiums, while safer neighborhoods can lead to lower costs.

How does the car Insurance claims process work?

When an accident, theft, or other covered incident occurs, policyholders must follow specific steps to report the claim and work with their insurer to assess damages. The claims process typically involves filing a report, getting an inspection or estimate, and receiving payment for repairs or replacements, depending on the coverage. Knowing what to expect and how to navigate the process efficiently can help you avoid delays and maximize your benefits.

How to file a claim

In the event you have to file a claim, there’s a specific procedure you’ll need to follow in order to receive a settlement. Particularly in the direct aftermath of an accident, it can be easy to forget certain steps as adrenaline is typically high and minds are racing. Assuming you’re uninjured, slow down, take a deep breath, and remember these steps, as it can save you a lot of trouble down the road.

1. Report the incident: Contact your insurer as soon as possible to report the accident or damage. You’ll be asked to provide your policy number, details of the incident, and the date/time it occurred.
2. Gather necessary information: Be sure to get the names, addresses, and contact details of all parties involved, including witnesses. Also, record all accident details, such as the location, time, and circumstances, while photographing the accident scene if possible.
3. Work with the insurance adjuster: Get an estimate from your insurance company. This can often be done through photos, a local repair facility, or with an adjuster in person. Your company will coordinate this with you and help find the best method based on your unique situation.
4. Review your settlement offer: Go over the claim settlement offer thoroughly to ensure it aligns with your coverage and damages. If you disagree with the offer, discuss it with your adjuster. Remember, many damage estimates can only note visible damage. If there are additional damages found during the repair process, the repair facility will work directly with the insurer to have them reviewed for payment.
5. Finalize repairs or replacement: Once your claim is approved, schedule repairs or look for a replacement vehicle. Don’t forget to keep receipts and records of all repairs and payments for future reference.

Working with repair shops

After filing a car insurance claim, many insurance companies offer assistance in finding approved or recommended repair shops—often through a network of trusted partners. These shops are typically pre-screened by the insurer to ensure they meet quality standards and provide fair pricing.

While you’re free to choose any repair shop, selecting one from the insurer’s network often streamlines the process, as they may directly coordinate billing and expedite repairs. Some providers even offer warranties for repairs done at their recommended shops, providing added peace of mind. Regardless which route you decide to go, it's important to choose a reputable and convenient shop to ensure the repairs are done correctly and in a timely manner.

How to get car insurance

Getting car insurance has become more convenient with the availability of online resources offered by insurers.

To get started, you’ll just need to gather your personal, vehicle, and driving information and use an insurer’s online quote tool to get an instant estimate of your premiums. These resources allow you to compare different coverage options, adjust limits, and even access available discounts—all from the comfort of your home. Once you’ve found the right policy, you can purchase it directly online, often receiving your policy documents immediately.

Get a quote online

With GEICO, getting your free online car insurance quote is simple—it takes only a few minutes and can save you a lot of headaches down the road. Simply enter your ZIP code, answer some personal and vehicle-related questions and voilà! You’ve got your quote and are only a few steps away from securing your car insurance.

Get a quote from a local agent

Looking to speak in person with a GEICO agent that’s familiar with your area and the unique challenges that local drivers face? Finding a local agent is easy—just type in your address, set your parameters, and we’ll get you set up with an agent in no time.