Understanding How Car Insurance Works

Understanding How Car Insurance Works

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You're peacefully driving down the road when it happens. Then out of nowhere, you hear a bang, a crunch of sheet metal, and your car spins around before stopping on the shoulder. Gathering yourself while still processing what happened, you check over various body parts, ensuring you're in one piece. 

The other vehicle isn't far away, and its driver slowly emerges before the two of you walk toward each other and start the process of working out what happened and exchanging information. You call the police, and an officer arrives to take down names and write up a report on the details of the accident.

That's just one of the countless ways an auto accident can play out. 

Now what? If your vehicle suffered significant damage, it could cost thousands of dollars to fix. Thankfully, in this scenario, you haven't suffered physical harm, but what if you had? Expenses would also likely put a severe strain on your bank account. Who pays for these unexpected damages?

That's where car insurance comes into play. What does car insurance do? And what does auto insurance liability coverage provide you? Let's look at car insurance in detail and how it protects you from financial hardship.

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What is car insurance?

Car insurance provides a financial safety net for you, your passengers, your vehicle, and others when accidents occur. Various insurance companies, or carriers, furnish car insurance policies with differing levels of coverage, depending on the plan chosen. 

After a collision, vehicle repairs can cost multiple thousands of dollars. You’ll also want repairs performed by a certified mechanic with top-quality parts, which only adds to the eventual sum. 

In some cases, vehicle damage is so bad it’s considered a total loss or “totaled” and needs replacement. Car insurance covers these expenses, so your car is as good as new once everything’s fixed. If you’re at fault in an accident, car insurance also pays for the other driver’s vehicle repairs. 

In the unfortunate case of physical injuries suffered in an automobile accident, car insurance helps with medical expenses. Though injuries range in severity, receiving good medical care is expensive, and car insurance is there to make sure you get what you need. Depending upon circumstances, car insurance also covers the medical care expenses for your passengers, as well as others involved in a collision.

Car insurance isn’t as simple as submitting expenses to the insurer and paying back what you owe. A car insurance policy features several specific coverage areas and levels of financial benefit, so it’s essential to understand them before choosing one. 

Driving a car that’s in excellent shape helps you stay safe no matter where you go. And when buying a used car or truck, finding one that’s been well cared for and has no issues gives you peace of mind. At Shift, certified mechanics perform 150-point inspections on all cars, and you get a free Carfax report for the ultimate transparency.

What does auto insurance coverage provide you?

Car insurance policies contain detailed areas of coverage, with different levels of financial protection. The policyholder decides on the specific plan features at the time of application, so it pays to know the details before deciding on a plan. 

Property damage liability insurance pays for any damage you cause to other people's vehicles or property. This type of coverage is a requirement in most states. 

Bodily injury liability insurance pays the medical expenses of others injured in an accident if you're at fault. This insurance is mandatory in most areas of the U.S.

Medical payments coverage, or MedPay, reimburses you for medical costs should you be hurt in a collision. MedPay is a requirement in some but not all states.

Personal injury protection insurance, or PIP, assists with healthcare costs and other obligations from an accident, no matter who's at fault. Some states require PIP.

Comprehensive insurance pays for damage to your vehicle unrelated to an accident, such as vandalism or weather events, and is an optional feature on some auto insurance policies.

Collision insurance covers the cost of repairing your vehicle after an accident. When added to comprehensive insurance, it's referred to as "full coverage."

Rental reimbursement pays for a rental car while your car is in the shop after a collision. This feature is also optional. 

Gap insurance, or guaranteed asset protection, pays the remaining loan balance if your vehicle is totaled in an accident. Gap insurance is also optional.

Roadside assistance helps when you're stranded and need extra fuel, a jump start, or a tow. Roadside assistance is an additional add-on chosen by the policyholder, too.

Understanding deductibles

When you file a claim for vehicle repairs or medical expenses, you’ll have to pay an initial amount, or deductible, before receiving benefits. Depending on the insurance plan you choose, typical deductible amounts are $250, $500, and $1,000.

Lower deductibles raise your insurance premiums, while higher deductibles do the opposite. 

Car ownership comes with different financial responsibilities. Among them is finding suitable financing, so you can pay over time and keep extra money around from month to month. Shift works with a network of trusted lenders who compete for your business, helping you secure the best rate on financing.

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How much does car insurance cost?

Car insurance policies aren’t simply a one-size-fits-all way of helping drivers pay for unforeseen expenses. Unique factors go into carriers deciding on which coverage you qualify for, as well as the rate of your premiums. 

As of 2021, full coverage car insurance in the U.S. averages $1,592 per year or $133 per month. This is for drivers with a clean driving record and good credit. 

If a driver has been at fault in a wreck or has bad credit, those average rates rise to $2,439 and $2,812 per year, respectively. 

Other factors determining car insurance premiums include the type of vehicle insured, the state in which the insured lives, miles driven per year, and driver age. 

Different insurance carriers offer varying rates, using different formulas, so researching ahead of time can save you money in the long run. Or, if you want more personalized attention to walk you through the process, talking to a company representative or an independent broker helps to understand all of the details.

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Understanding car insurance in summary

Car insurance guards you against financial hardship in the event of an accident. With vehicle repairs and medical expenses possibly amounting to several thousands of dollars, car insurance provides needed financial protection. 

Finding the right auto insurance plan involves researching different levels of coverage, deductible responsibilities, and carriers to get the best one for you. 

With so many different factors affecting car insurance premiums, looking at other companies for the best rate can prove to be a wise financial decision. 

When you buy a used car, you want to get a great deal on a quality vehicle and don't want the stress of negotiating. That's why Shift makes car buying easy, with fair, no-haggle pricing driven by powerful machine learning algorithms and tons of data. And with a seven-day, "no questions asked" refund policy, you receive extra reassurance that allows you to easily return your vehicle within a week. So no matter if you're buying an electric car or an SUV, Shift makes sure you're happy with your purchase.

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Shift Editorial Team