How Does Auto Insurance Work?

Fran Majidi July 26, 2019

It used to be that only wealthy people owned cars because drivers had to qualify based on their ability to pay for damages to people and property if they were to have an accident. Imagine having to pay 100% of what it costs to replace a brand-new car and cover hospital bills? Right. Insurance was created so that anyone at any given time could be financially prepared for an accident at a fraction of the cost.

Insurance payments for insurance coverage are paid in monthly premiums, in a lump sum for the year and semi-annual payments. If you get into an accident that is your fault, you first pay a deductible, or set amount of your choosing, before insurance covers most if not all that remains on the balance owed.

Everyone pays a different rate to be insured.The factors chosen to determine your rate are factors that indicate risk. Insurance, in the end, is a way of mitigating risk. The riskier you are, the more you’re expected to pay because certain behaviors show that you are more prone to having an accident. Factors differ from one company to the next. In some states, your credit is used to determine your rate but not in others. Some factors commonly used to determine your car insurance rate include age, driving history, occupation and garaging address.

Generally speaking, the better a driver you are and the fewer accidents you have, the better your rate will be.

To drive legally, you must carry your state’s minimum required insurance coverage on your car. Nearly every state requires liability property and casualty insurance, and many require more. In no-fault states like Michigan you must have more coverage, usually PIP insurance, which covers damages and injuries regardless of who is at fault.

Most states require liability insurance at minimum, but liability coverage only protects you against the other driver if the accident is your fault. You need to buy additional insurance to cover damages to your own car in case you have an accident that is your fault. You also need more insurance if you owe more money on your car loan than what your car is worth. Otherwise, you’ll still carry a remaining balance if your car is declared a total loss and you’re paid out by your insurer.

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