Insurance can be confusing, but it can help you to find the
right coverage at the best price to understand more about how it works and why
it's required.
Car Insurance Requirements
While the car insurance requirements vary by state, drivers
must always prove they can pay damages in the event of an accident. This is
called proving financial responsibility.
Some states allow drivers to prove their ability to pay
damages by posting a bond or certificate; however, car insurance is typically
the easiest way for drivers to fulfill the requirement.
To learn all about the types of car insurance coverage
required in your state, visit our Insurance Requirements section.
Benefits of Car Insurance
Before car insurance was widely adopted and mandated, car
accident victims would usually get no form of compensation in an accident. In
the event that a victim did sue the driver at fault, those drivers often faced
huge costs that could be financially crippling.
Requiring car insurance helps states protect drivers from
the enormous costs that can be associated with an accident. It ensures that
both:
The at-fault
driver can cover the costs of the injuries or property damages resulting from
the accident without losing huge sums in a lawsuit.
The victims of the
accident can seek the medical care required, pay for funeral expenses, and/or
fix their property in a timely manner without paying out of pocket.
Car insurance can give you the peace of mind knowing that
you'll be financially covered after an accident.
Types of Car Insurance
The most common type of insurance that is legally required
is liability insurance, which covers damages to the other party when you are at
fault. However, there are numerous other types of coverage that can offer
additional protection from the costs of injuries and property damage to you and
your passengers. These include:
Comprehensive
coverage – Pays for property damage after an incident that is not
accident-related.
Collision coverage
– Covers damage to your vehicle from a traffic collision.
Uninsured/underinsured motorist bodily injury coverage – Helps pay your
expenses when you've been hit by someone with no or insufficient insurance.
Uninsured/underinsured motorist property damage coverage – Helps cover
damages to your property if you've been hit by an uninsured or underinsured
driver.
Medical expense
payments coverage – Helps you pay for your and your passengers' medical
expenses, regardless of who was found at fault.
For more information on the various types of coverage available
on the market, visit our Coverages section.
How Insurance Companies Manage Risk
Like all insurance, car insurance rates are assessed based
on risk. This means that the insurance provider:
Calculates your
likelihood of making a claim.
Bases your premium
on that level of risk.
Car insurance carriers have found that certain factors
statistically affect your chances of getting into an accident, so they use
those factors to determine your premiums. They include (but are not limited
to):
Your driving
record.
Tickets, DUIs,
accidents, etc. will make you riskier to insure.
Your vehicle's
make, model, and year.
Your age, gender,
and marital status.
Your occupation.
Your credit
history.
NOTE: Not all
states allow use of your credit history to determine your rates.
Your claims
history.
How many miles you
drive per month/year.
If you are a low-risk driver, you'll have an easier time
finding cheap rates. If you are high-risk, you'll find that you you'll pay higher
premiums, and you may even have a harder time finding an insurance provider to
offer you coverage.*
It's important to remember that not all companies calculate
risk the same way. Some companies may place more weight on certain factors and
less on others, and it may be reversed in another company. Your best bet is to
speak to multiple car insurance companies and/or compare car insurance rates
online.
Discounts may also factor into your rates. Make sure when
you shop around for car insurance to ask about discounts that may apply to you.
* Drivers who've been denied coverage can find it through
their state's automobile insurance plan, albeit at a higher premium.
Accidents and Your Auto Insurance
If you get into an accident and you are found to be at
fault, you will file a claim with your car insurance company to cover the
damages.
After the claim is processed and funds are paid out, your
insurance company may consider you riskier to insure and may increase your
premium as a result.
Note that if you don't file a claim but you are still cited
by the police in an accident, your insurance rates can still go up due to the
increased risk factor associated with your driving habits.
The best way to obtain and maintain low car insurance rates
is to drive safely, avoid accidents, and keep your driving record clear.
How Car Insurance Providers Make Money
Car insurance companies make money by collecting premiums
from their pool of consumers. The money collected from the company's consumers
“in case" of an accident is put away to pay out claims that are submitted.
The large majority of consumers won't file a claim during
the span of their relationship with their insurer. This means that the
insurance company typically has enough money from their consumers' premiums to
pay out their claims, so you can feel comfortable knowing if something happens
you'll be covered.
Insurance companies also ensure they don't lose money by
imposing coverage limits, meaning they put a specific cap on what will get paid
out, based on the customer's chosen premium. Simply put, if the customer pays
more, he can elect a higher payout. This helps the company manage risk and make
money in the long-term.
Source : http://www.dmv.org/insurance/how-car-insurance-works.php
