What exactly is Auto Insurance?

Though no one wants to imagine that they could be involved in a car accident, they are more common than you think; in the U.S. alone, an accident takes place every 18 seconds. Auto insurance protects you by limiting your financial liability for accidents. In fact, it’s so important that every state in the country — except New Hampshire — requires drivers to purchase at least minimal insurance. But what exactly is auto insurance, and what does it do?

Car insurance involves a legal agreement between yourself, the driver, and one of many insurance companies, namely one. You agree to pay a premium, or the cost of the coverage, and in return, your insurance company will pay for damages accrued in an accident or other incident covered by the specific terms of the insurance policy. Your policy defines which incidents are covered and which are not.

Most policies require a deductible, or an amount of money that you are required to pay before the insurance kicks in. For instance, if you have a $500 deductable and get in an accident that results in $1,000 in damages, you’d pay $500 and the insurance company would pay the rest. Generally, the higher the deductable, the lower the premium and vice versa.

Insurance policies come with a range of coverage options. Liability coverage pays for damage that you cause to someone else, but it doesn’t pay for damages to you or your car. In contrast, full coverage pays for losses to others and to you. Full coverage costs more than liability-only coverage. Other options that may be covered in a policy include bodily injury, property damage, collision and under- or un-insured motorist coverage. Factors such as your age, driving history, geographic area and the vehicle you drive also affect the cost of coverage.

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