How Does Car Insurance Work
And Best Companies In 2021
If you’re a first time driver or considering a new car-insurance company, you may be wondering, “How does car insurance work?” Auto insurance can be confusing. But once you understand the basics, it becomes easier to understand.
Auto insurance is legally required in most states. It also covers unexpected losses and helps avoid out-of-pocket expenses. Getting the most out of your car insurance is easy when you understand how car insurance works, what coverage is and isn’t available, and what to expect.
Choosing the right car insurance is one of the top ways to reduce your insurance costs if you know how to do it right. Understanding what makes a car insurance premium higher or lower, will also save you money on your car insurance. Sometimes people with no claims see their car insurance go up due to insurance company premium rate increases. It helps to understand how to shop and get the best price. Here are some tips to help you choose your car insurance coverage and save on the cost.
1)Choosing Your Car Insurance keys:
- The first step in shopping for auto insurance is to decide what kind of coverage you need, including the deductible you want to pay.
- While shopping for insurance companies, you must compare both premium costs and the companies’ underlying financial health.
- Once you’re ready to sign up for coverage, ask about discounts such as good driver, low mileage, or retiree perks.
2)Do I Need Car Insurance?
You don’t need auto insurance to hold a driver’s license in most states, but the car, truck, RV, or motorcycle you’re driving must be insured. The insurance covers the vehicle and, usually, whoever is authorized to drive the vehicle.
Driving without required car insurance can have severe legal and financial consequences, such as license loss, jail, accident damages, or car impoundment. Your car insurance costs will be higher as a result.
More than six million police-reported car crashes are reported annually in the U.S., including personal injury and property damage.Safe driving can help avoid accidents, but you’re never in full control of on-the-road circumstances. Accidents are sometimes unavoidable, as are damages or injury.
Pros of Car Insurance
- Ensures you’re legally driving a car
- Protects your savings and assets by covering unexpected expenses related to legal, medical, and property claims
- Can include “extras” for emergencies, including rental reimbursement and towing assistance
- Protects a significant asset (your car) from loss or serious damage
Cons of Car Insurance
- Expensive if you have limited driving experience
- Only carrying the state minimum required by law could lead to serious financial consequences if you’re at fault in an expensive accident
- Making claims can cause your annual costs to increase
- Comparing insurance offers, document language, and limitations can be confusing
3)How Does Car Insurance Work?
First, you’ll get an estimate (or quote) for the insurance price (the premium), with several different options based on the maximum protection amounts (coverage). Coverage is based on your state requirements. For example, in some states, the insurance company is required to offer you uninsured motorist coverage.
You select the protection (coverage) you want and pay the premium of your insurance contract (policy) in monthly, semi-annual, or annual payments.
If you have an accident or want to make a compensation claim, you exchange insurance information with the other driver and contact the police to come to the scene or ask them how to file a report.
With the right coverage, the insurance company takes care of negotiating and paying costs. In some cases, you’ll be responsible for a small amount, known as the deductible the amount you’ve agreed in advance to pay if you make a claim.
In states with “no-fault” insurance laws, each party’s own insurance company covers injury claims, no matter who is “at fault” in the accident. States initiated no-fault laws to reduce lawsuits seeking compensation. No-fault insurance states have different minimum insurance type and amount requirements.
4)What Does Car Insurance Cover?
At a minimum, car insurance policies cover your liability (or responsibility for an accident) for bodily injury to others and property damage you cause. Some insurance coverage is mandatory, while other types are optional.
Before calling the insurance company and getting your insurance quote, take the time to decide what kind of coverage you need. Every state has minimum car insurance requirements. The basic coverage is usually liability insurance, some people refer to this as one-way insurance. However, there can be some confusion when using that term, so it is always best to use the term used in your insurance policy (Liability) to make sure you understand what you are getting. It is important to know what policy limits your state requires so you can decide what policy limits you would like.The minimum is a guideline, you can take higher limits to protect yourself.
Very often, you may decide you want liability plus comprehensive coverage, even if you don’t want collision. Part of your cost will depend on your choice of adding Collision or Comprehensive coverage, or both. Learn about Comprehensive Insurance coverage here and Collision.
Here are some common types of coverage:
|Bodily injury liability coverage||Pays for bodily injuries and other claims if you’re at fault in an accident; may include hospitalization, doctor’s visits, and legal bills. It does not reimburse you for your injuries but covers the other party you injured.|
|Property liability coverage||Protects you from claims from damages you’ve caused to others’ personal property, such as cars, walls, fences, and other objects. It does not cover damage to your vehicle if you’ve been in an accident.|
|Personal injury protection (PIP)||Commonly required in no-fault insurance states, PIP covers injury and economic expenses and losses for you, household relatives, car occupants, and pedestrians.|
|Medical payments coverage||Covers injuries due to a car accident, whether you are at fault or not, for yourself, your family members, or your passengers.|
|Uninsured and underinsured motorist||Covers claims when the driver who hits you is uninsured or underinsured, or if you’re the victim of a hit and run.|
|Comprehensive coverage||Covers damage, other than a collision with another car or object. Some of the risks covered include contact with an animal, fire, theft, vandalism, explosion, earthquake, windstorm, hail, water, flood, riot, and often, glass breakage.|
|Collision coverage||Covers the damage to your car if in a collision with another vehicle or object.|
|Guaranteed auto protection (GAP)||If you owe more on your leased or heavily financed car than it’s worth at the time of a claim, GAP coverage pays the difference. Also known as lease/loan payoff.|
Optional, more customized insurance coverage can include:
|Roadside assistance||Can cover towing costs, jump-starts, and help with flat tires, among other issues. Coverage varies depending on the insurer, and also known as emergency road service.|
|Auto glass insurance||Glass may be included in comprehensive insurance coverage, but some insurance companies also offer full glass coverage or low- or no-deductible glass coverage.|
|Rental reimbursement||Pays for a rental car while your vehicle is undrivable or being repaired due to a covered claim. Also known as rental reimbursement and transportation expense coverage.|
|Custom equipment||Covers high-value car equipment, such as a stereo or custom wheels.|
|Mechanical breakdown||Covers car repairs for new and leased vehicles, as an alternative to the dealer’s extended warranty.|
|Rideshare insurance||Prevents gaps in coverage when a personal vehicle provides rideshare or delivery services.|
5)How To Get Car Insurance:
First, you’ll get a quote (or estimate) by providing an insurance company, independent agent, or broker with the necessary information about your car, including the make, model, and year, and your personal information. You can usually get several auto insurance quotes in a few minutes, and in most cases, get a policy issued right away or on the same day. Most insurance company websites can provide an online quote.
The insurance price is locked in for a set time period (term). When the policy renews, the price may change again if there have been changes. If you choose to change insurance companies partially through the period for a lower rate elsewhere, you may receive a refund and face penalties.
- Car insurance is a requirement for driving a car in the U.S.
- There are a variety of insurance options
- Requirements for car insurance vary by state
- The cost of car insurance varies by insurer, so shop around for the best price
- Higher deductibles can save you 40% or more on car insurance
6)How Car Insurance Is Priced
Car insurance is priced based on your personal information, driving experience, and specific details about your car. The insurance company calculates a base insurance rate, then applies discounts, credits, or surcharges depending on your circumstances. The insurance company calculates your premium for a set term, such as six months or one year.
To determine how much to charge you, insurance companies could use some or all of these factors:
- Your age, address, driving history, marital status, and insurability or credit score
- All the car’s drivers and their driving histories
- Accidents, tickets, or violations
- Car use (commuting, travel, business)
- Car type (make, model, and year)
- Value of the car and any car modifications
- Anti-theft devices
- The total coverage amount
- Your deductible
A higher deductible lowers the price of your premium. For example, your collision and comprehensive premiums may be cut by 40% or more by increasing your deductible to $1,000, with some insurance companies.
7)What Deductible Should You Choose?
If you choose comprehensive and collision coverages, you will need to decide what deductible amounts you would like. You can read more about using your deductible to save money on insurance here.
Other coverages you may also be interested in are:
- Emergency Roadside Service
- Gap Insurance
8)Choosing an Insurance Company
When you are ready to select your insurance provider, besides just looking for the best car insurance premium, you will want to take some time to research what insurance company you want to go with by learning about their financial strength. This article may help: The Best Car Insurance for Price, Satisfaction and Claims.
Another important aspect of choosing your insurance provider is knowing if or how they will use your credit score to determine your price. Take the time to research different companies. You may also want to look at our list of the most expensive cars to insure, which has some great information on what might impact the cost of car insurance or learn more about Finding the Cheapest Car to Insure When Making a New Car Purchase may also help.
9)Car Insurance Discounts
Each car insurance company offers discounts. One car insurance may provide a lower rate based on how you use your car, while another may not. Quotes from different insurance companies will give you the best price for your unique situation.
Examples of car insurance discounts:
- Payment discounts (including paying the premium in full, paperless statements, autopay)
- Plan renewal or loyalty discounts
- Good-student discounts
- Defensive-driver course or safe drive discounts
- Discounts for bundling more than one car, or multiple policies (home, renters)
- Discounts for keeping your car in storage
- Discounts for anti-theft devices
- New car discounts
- App-based or usage-based insurance discounts
- Military, union, or other job-related discounts
If your situation changes during the year and you’re now eligible for a potential discount, call your agent to see if they can apply it; for example, now you’re a good student with straight As and you weren’t before.
10)Making the Call
When you have your list of selected car insurance providers you are ready to start calling around to search for the one who can give you the best deal. It is important to have certain information such as your driver’s license number, and details of any claims you have had in the past. Your current insurance company may be able to provide you with a letter of claims experience if the new company requires it. In addition, having a list of discounts to ask about can save you some extra money.
Ask about discounts such as:
- low mileage
- winter storage discounts
- professional, university degree, occupational or association discounts
- good driver discounts
- telematics discounts also known as Usage based car insurance discounts
- green car – environmentally friendly discounts
- alarm or tracking device discounts
- retiree discounts
- student discounts, or student away at school discounts
11)Understanding Your Car Insurance Policy
It is important to know how your car insurance policy works and how it can work for you. Here is some help in understanding your policy:
- Getting What You Paid For
- Car Insurance Frequently Asked Questions
12)Filing a Car Insurance Claim
Let’s hope you never have to file a car insurance claim, but if you do it is important to learn some things before the accident comes. Learning what things you need to do when you have an auto accident can help the claims process go much smoother. Here are some claim filing tools you will want to learn before you file a car insurance claim:
- I Had a Car Accident!
- 5 Steps to Filing Your Car Insurance Claim
- Aftermarket Parts and the Insurance Company – Do You Have a Choice?
13)Best Car Insurance Companies 2021
Picking the best car insurance can be difficult. Finding a car insurance company that will give you a good price is important, but you should also consider a number of other factors that are not always obvious. To help you find the best insurer for your needs, we researched the top car insurance companies across the country. We considered their coverage options, rates, customer satisfaction rankings, claims experiences, and discount options to come up with our list of the best car insurance companies of 2021.
Best Car Insurance of 2021
- Best Overall: GEICO
- Runner-Up, Best Overall: Amica
- Best for Young Drivers: State Farm
- Best Customer Satisfaction: Erie Insurance
- Best Regional Insurance: Auto-Owners
- Best for Military Members and Their Families: USAA
- Best Range of Coverage Options: Progressive
- Best for Motorcycle Drivers: Markel
13-1)Best Overall GEICO
GEICO is a subsidiary of Berkshire Hathaway, the second-largest car insurer in the U.S. GEICO has high levels of customer satisfaction in consumer surveys for its online tools, customer service, and claims. In addition to all the regular car insurance coverages, GEICO also offers accident forgiveness, emergency road service, and mechanical breakdown coverage.
GEICO is also known for its long list of discounts, including for members of over 500 groups (including military branches, employers, and schools), as well as safe-driving discounts through the DriveEasy program.
GEICO is our top pick for the best car insurance company due to the range of coverages it offers, its wide variety of discounts, and its high-ranking results on customer satisfaction surveys, including being ranked #1 out of 19 insurers for digital customer service experience by J.D. Power.
What We Like
- Discounts for members of over 500 groups
- Wide range of coverage options
- Guaranteed repairs from GEICO’s preferred repair shops
- Offers mechanical breakdown insurance
- Top-ranked digital tools, including an app and virtual assistants that work with Siri, Alexa, and Google Home
What We Don’t Like
- No GAP insurance
- DriveEasy and guaranteed repair programs are not available in all states
- Offers a main phone number with many prompts, instead of dedicated quotes and claims phone numbers
Read our full review: GEICO car insurance
13-2)Runner-Up, Best Overall Amica
Amica Mutual Insurance company has been around since 1907 and ranks highly for customer satisfaction with its claims handling.It’s also ranked #1 in New England for overall customer satisfaction, according to J.D. Power.Amica also offers some coverage perks that stand out, such as a waiver of depreciation the first year you have a new car.
In addition to traditional car insurance, Amica offers dividend-paying policies, which means that if the company does well, eligible policyholders may receive dividends of 5% to 20% of their annual premiums.
Amica’s car insurance discounts are impressive, including a 25% multiple car discount, a multi-policy discount up to 30%, discounts for drivers under 30 whose parents are insured with Amica, and a loyalty discount up to 10%.8 The company has a financial strength rating of A+ (Superior) with AM Best, which shows that it’s financially stable and able to pay out future claims.However, customer satisfaction with the insurer’s digital service is below average, according to J.D. Power.
What We Like
- Highly ranked for claims satisfaction by J.D. Power
- Waiver of depreciation on new cars on the first year of ownership
- Dividend-paying policies available
- Free repairs of damaged auto glass and deployed airbags
What We Don’t Like
- Dividend policies not available in all states
- No usage-based or telematics options
- Below-average ratings for digital customer experience
Read our full review: Amica car insurance
13-3)Best for Young Drivers State Farm
State Farm is a well-known name in car insurance, and it’s the largest auto insurer in the U.S. State Farm offers various standard discounts, like a student-away-at-school discount, a multi-policy discount, and a 25% good student discount.The company also offers a rideshare endorsement if you plan to drive for Uber, Lyft, or a food-delivery app, as well as roadside assistance in case of a breakdown.
What sets State Farm apart as our top pick for young drivers is that it provides even more opportunities for teens and young adults to cut insurance costs by learning to drive safely. The Steer Clear program is an app-based driver training tool for drivers under 25, who can earn up to 15% off their insurance by completing the program within 6 months.The Drive Safe and Save program rewards drivers of all ages with up to 30% in discounts for safe driving habits. Both programs can make a big difference in your premium when you’re paying higher rates as a young driver.
State Farm is rated average or better on J.D. Power studies of customer satisfaction with claims and overall experience.
What We Like
- 25% good student discount
- Steer Clear program offers up to 15% off for drivers under 25
- Drive Safe & Save program offers discounts up to 30% for safe driving habits
What We Don’t Like
- Doesn’t offer as many optional coverages as other insurers
- Average customer satisfaction rankings for claims and service
Read our full review: State Farm car insurance
13-4)Best Customer Satisfaction Erie Insurance
Erie Insurance has been around since 1925 and is highly ranked for claims satisfaction and overall customer service.Erie is a regional insurer and provides coverage in Illinois, Indiana, Kentucky, Maryland, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, Wisconsin, and the District of Columbia, although not all coverages and discounts apply in all states.Erie works through local independent agents, which means that agents can help you shop around with several insurance companies to find the best combination of price and coverage for your needs.
Erie offers all the basic car insurance coverages, with some unique options like pet injury coverage and replacement coverage for both old and new cars.The new car option will replace your vehicle if you total it within the first two years of ownership, while “better car” protection provides you with a loss settlement large enough to replace an older car with a model that’s two years newer.Erie also offers diminishing deductible plans as well as a “rate lock” option to help you avoid rate increases.
What We Like
- Rate Lock feature could keep your premiums consistent for years
- Highly ranked for customer satisfaction
- Lots of optional coverages let you customize your policy
- Pet injury coverage covers vet bills up to $500 if your pet is injured in an accident
What We Don’t Like
- Rate Lock feature is only valid as long as your policy conditions do not change
- All coverage options are not available in all states
- Only available in 12 states and DC
Read our full review: Erie car insurance
13-5)Best Regional Insurance Auto-Owners
Auto-Owners was established in 1916 and has been insuring customers through independent agents for over 100 years. Auto-Owners is a regional insurer that offers coverage in 26 states.
Aside from the usual car insurance coverage options, Auto-Owners offers classic car insurance, GAP coverage, and diminished value coverage (which compensates you for the perceived value loss on your car after you have an accident and not just the cost of repairs). It also has a few deductible advantages that can save you money in a claim: The common loss deductible means you’ll pay a lower deductible if both your home and car are damaged by the same event (and are both insured with Auto-Owners), your deductible will be waived if you have an accident with another Auto-Owners-insured car.
Auto-Owners offers most of the standard car insurance discounts, such as multi-policy discounts for home or life insurance, online payment discounts, and good student discounts.It also has high customer satisfaction rankings in Central, North Central, and the Southeast U.S., according to J.D. Power.
What We Like
- Top-ranked for customer satisfaction
- Coverage options for classic and modified cars
- New car replacement and diminished value coverage
- Single-deductible option if your home and car are both damaged
What We Don’t Like
- Only available in 26 states
- No online quotes
Read our full review: Auto Owners car insurance
13-6)Best for Military Members and Their Families USAA
USAA is the 5th largest insurer in the U.S., and it exclusively offers insurance for veterans, military members, and their families.Year after year, USAA gets the highest scores on customer satisfaction rankings for service and claims in independent surveys, although it can’t technically rank due to its membership requirements.
USAA offers basic car insurance with some military-specific features, like up to 15% off comprehensive coverage when you store your car on a military base.It offers all the usual coverages, plus add-ons like ridesharing, rental car reimbursement, and accident forgiveness.
Discounts with USAA include savings for being a good student, taking defensive driving and safe driving classes, and loyalty. USAA’s solid reputation, loyalty discounts, and military storage options make USAA our pick for best car insurance for military members and their families. Plus, policyholders may qualify for dividends during profitable years.
What We Like
- Highly ranked for customer satisfaction and claims satisfaction
- Optional accident forgiveness can help keep rates low after a claim
- Offers rideshare insurance
- Coverage options are tailored to the needs of active-duty service members
What We Don’t Like
- Only available to members of the military and their families
- Service is largely online and through a call center, not through local offices
Read our full review: USAA car insurance
13-7)Best Range of Coverage Options Progressive
Sure, Progressive covers all the basic car insurance coverages you need. But it really shines when it comes to adding extra coverages to your policy, such as loan/lease payoff, Mexico car insurance, and coverage for custom parts and equipment. The insurer also offers rideshare insurance, roadside assistance, and a disappearing deductible option as endorsements.
Progressive’s collision coverage automatically includes up to $1,000 of coverage for pets who are injured while riding in your car.
A long list of discounts includes savings for everything from maintaining continuous coverage to owning Progressive also offers two unique tools. The first allows you to request and compare quotes from multiple insurers at the same time, which makes it easier to see which combinations of coverages and price is the best fit for your needs.The second, Name Your Price, lets you specify how much you want to spend on car insurance, and offers different combinations of coverage options that fit your budget.
Ratings of customer satisfaction with the claims process and overall experience are average, according to J.D. Power.However, Progressive has an A+ financial stability rating from AM Best, which shows it has a superior ability to meet its financial obligations.
What We Like
- Pet coverage included in collision policies
- Lots of options let you customize your policy
- Name Your Price and comparison tools make shopping for insurance easier
What We Don’t Like
- Average customer satisfaction scores
Read our full review: Progressive car insurance
13-8)Best for Motorcycle Drivers Markel
If your ride has two wheels (or three) instead of four, you’ll need a slightly different kind of insurance and you’ll want to consider a company that has specialized in motorcycle insurance for more than 40 years. Markel insures all types of motorcycles, from dirt bikes to cruisers, and the company customizes each policy based on the type of coverages you need, including:
- Trailer coverage
- Mechanical breakdown coverage
- Roadside assistance and trip interruption
- Funeral expense coverage
Markel claims that its discounts, including for safe driving and anti-lock brakes, can help drivers save up to 35%.Plus, the company also insures other recreational modes of transportation such as boats, snowmobiles, and bicycles (including e-bikes).
While J.D. Power doesn’t rank motorcycle insurers, Markel has a financial stability rating of A (Excellent) from AM Best.This rating indicates that it’s well able to meet its financial obligations, like paying out insurance claims.
What We Like
- Multi-bike discount is good for couples or families who own more than one motorcycle
- Solid list of optional coverages
- Specialty insurance options for several kinds of recreational transportation
What We Don’t Like
- Not rated on customer service studies
- No listed multi-policy discounts for combining different types of vehicles (e.g., motorcycle and snowmobile)
Read our full list: Best motorcycle insurance
Car insurance provides coverage for damages you are responsible for as a result of your ownership or operation of your car (liability). It also covers damage to the car itself if you purchase collision or comprehensive coverage. In most states, it’s mandatory to have car insurance in order to operate an automobile.
Insurers offer unique rates depending on individual factors, including your driving record, location, age, your vehicle and how you use it (business or personal only), typical mileage, credit-based insurance score, and other factors that can vary between U.S. states. The amount of insurance coverage you want to purchase also impacts your premium.
Shopping around for car insurance will give you the best chance of getting a good price. Each insurance company may use the same factors to calculate your premium, but some may be more lenient than others when it comes to claims, credit scoring, or driving history.
To identify the best car insurance companies, we reviewed the financial stability, coverage options, discounts, customer service rankings, and claims experience scores of 25 regional and national insurers. We also considered factors specific to certain groups, like military members and young drivers. While this list is a great starting point for choosing your car insurance, we always recommend requesting quotes from at least three insurers to make sure you find the best combination of value and coverage for your needs.
Although the price is a factor when choosing your car insurance, if you want to find the best car insurance, you should also consider the following:
- The reputation of the insurance company: This includes financial stability ratings, complaints records with state regulatory boards like your State Insurance Commissioner’s Office or the NAIC, and customer complaints, reviews, and rankings for claims satisfaction and overall customer service satisfaction.
- Coverage options: Companies offer different types of coverage, and some may be more important to you than others. For example, not all companies offer GAP coverage or rideshare insurance, so if you need one of these endorsements, make sure the company you choose offers it.
- Payment options: Some people prefer to pay for their car insurance up front, while others prefer equal installments or payment plans. Choose a company that makes paying your premium as easy as possible for you. Some insurance companies offer discounts for certain methods of payment, although this should not be a major factor in your choice. Remember that it’s important to make payments on time and avoid getting canceled for non-payment.
- Customer service model: Whether you like to meet with your insurance representative in person or prefer to manage your policy online, consider how the insurance company you choose delivers service for regular transactions, sales, or claims.
- Online services or apps: If you want to manage your policy online or through an app, look for a company that is highly ranked for its digital services. Some companies even have digital assistants that work with Siri, Alexa, or Google Home.