How Does Car Insurance Work?

At its core, car insurance is designed to protect you, your passengers, other drivers, and pedestrians.

Nearly all states require drivers to have car insurance, except New Hampshire, which requires drivers to purchase car insurance or meet financial responsibility requirements.¹

Insurance is a contract between you and an insurance company, in which you pay a fee (premium) in exchange for the company helping pay costs after an auto loss.  

To understand how car insurance works, it helps to break the process down as follows: 

1. Apply for a policy.

2. Pay the premium.

3. An accident occurs, or something damages your car.

4. File a claim.

5. Insurer adjusts the claim and pays the covered costs. 

When you file a claim, an adjuster will assess the damage, review each type of coverage, and make payments to the appropriate parties based on the coverage you have.

The following chart explains different types of car insurance coverage. Each state sets the minimum required coverages and minimum limits.

You may also add optional coverages to your policy for an additional fee, such as rental car coverage and roadside assistance.

Because every insurer prices these coverages differently, comparing quotes is the best way to see what you'd actually pay. Luva lets you line up quotes from multiple carriers side by side so you can compare coverage and price.

Car insurance policies not only specify what the contract covers, but also what it won’t cover if you have a loss. 

Look for these exclusions on your car insurance policy:

• Mechanical breakdowns: Engine failures, electrical problems, and other mechanical issues not caused by an accident

• Normal maintenance: Oil changes, brake repairs, tires, etc. 

• Personal belongings: Purses, wallets, electronics, cell phones, sporting equipment, etc. (these items are typically covered under a tenant or homeowners policy).

• Unlisted/excluded drivers: Drivers who aren’t listed on the policy or who are specifically excluded

• Intentional damage: Damage that you deliberately cause to your vehicle

Car insurance policies also typically contain exclusions for:

• Racing

• Stunt driving

• Rideshare commercial use operators

• International drivers 

While your insurance will pay for covered losses to your vehicle if you have collision and comprehensive coverage, you may have to pay for part of the loss by way of your deductible.

A deductible is a standard feature in car insurance policies that describes how much you must pay before the insurance company pays. 

For example, a single-car collision hitting a guardrail falls under collision coverage. If you had a $1,000 deductible and the damage cost $5,000 to repair your car, you’d pay $1,000, and your insurance company would pay the remaining $4,000. 

You can often choose different deductibles for comprehensive and collision. Typically, a higher deductible lowers your premium, while a lower deductible increases it.

Car insurance companies use lots of data to help them determine the potential risk of you filing a claim. Drivers who fall into a high-risk category can expect to pay more for car insurance.

These are some of the common factors that may affect your premium:

• Age: Rates typically decrease as you get more experience behind the wheel, then creep back up in your later years due to higher perceived risk. Our research shows violation rates drop sharply with age, from roughly 36% among the youngest shoppers to about 18% among the oldest.²

• Driving record/claims history: Accidents and violations will almost always raise your rate. According to our research, more than one in four insurance shoppers report at least one violation on their record.²

• Gender: In many states, male drivers pay higher premiums than female drivers on average, though some states restrict the use of gender in rating.

• Marital status: Married drivers are statistically associated with lower risk, which often translates to lower car insurance rates in states that permit this rating.

• Location: Your ZIP code reflects local risks like theft, weather, traffic density, and the overall accident and claims history of your area.

• Credit history: In most states, a good credit history signals lower risk, helping you secure better rates.

• Annual mileage: Insurance companies may charge more or less depending on whether you commute to work and how far.

Since insurers weigh these factors differently, the same driver can get very different quotes from one company to the next. Luva makes it easy to compare rates from multiple carriers at once, so you can see which carrier prices your profile most favorably.

Car insurance, either in the form of an insurance policy or financial responsibility, is required in all states. 

While New Hampshire drivers don’t necessarily have to buy insurance, they must prove that they can financially pay for damages if they cause an accident.

Without car insurance, another party could hold you financially responsible for damage to their car or property, medical bills, and pain and suffering.³ A large loss could cause a severe financial hardship for you.