What Is Car Insurance?

by COUNTRY Financial

If you’ve ever wondered, ‘What is car insurance?’, you’re not alone. It’s a broad topic, and with so many different coverage options, buying it can get confusing.

In this article, we’ll explain how car insurance works, explore differences between the many types of car insurance coverage  and help you decide what’s right for you and your family.

Car insurance: what it is, what it does

Simply put, car insurance is a contract between a car owner (you) and an insurance company. That contract—referred to as a “policy”—outlines your auto insurance coverage; it legally defines exactly what types of incidents the insurance company will cover, how much they’ll pay for those incidents (policy limits), and how much you, the policy owner, will pay in premiums.

The main purpose of auto insurance is to protect you from financial hardship if you’re in an accident. It helps pay for repair costs, legal fees, medical expenses and more, preventing you from paying entirely out of pocket.

What does car insurance cover? 

The short answer is, it depends on what type of coverage you purchase. A car insurance policy is a collection of various coverage types; some are included in a “standard” policy, and others you can buy as add-ons.

As for what comes in a “standard” or “basic” policy, that depends on where you live. Minimum coverage is required in all 50 U.S. states, with each state establishing its own specific requirements.

Here are the main types of car insurance coverage:

• Liability coverage: Helps protect you financially if you’re found legally responsible for injuring someone or damaging their property. It can help pay for expenses such as medical bills or property repair costs.
• Collision coverage: Helps pay for car repairs if it’s damaged in a collision. This includes accidents with other drivers but extends to solo accidents—if you hit a tree or mailbox, for example.
• Comprehensive coverage: Covers car repairs for damage caused by events other than collisions, such as theft, vandalism, weather and natural disasters, etc.
• Medical payments coverage (MedPay): Helps pay for medical costs if you or your passengers are injured in an accident, regardless of which driver is at fault.
• Personal injury protection (PIP): Offers the same coverage as MedPay but is more comprehensive; PIP also helps reimburse lost wages, physical rehab and more following an accident.
• Underinsured motorist protection: Covers physical and property damage resulting from an accident with another driver who has some car insurance, but not enough to cover the costs of the accident.
• Uninsured motorist protection: Covers physical and property damage resulting from an accident with another driver who has no car insurance.

If an accident is severe and you’re found at fault, the injured party may file a lawsuit. Consider speaking with your insurance agent about umbrella insurance for additional protection.

Additional auto insurance coverage 

These types of car insurance coverage are never required by state law and must be purchased separately. They’re designed for uncommon or emergency situations—you may not use them often, but you'll appreciate having them if the need arises.

• Roadside assistance coverage: Reimburses the cost of emergency aid should you become stranded on the road. It covers things like towing, locksmith fees, flat repairs and more.
• Auto glass and windshield repair or replacement: Covers damage to glass used in headlights, taillights, and car windows.
• Rental car coverage: Most car insurance policies offer protection for rental cars, but this additional coverage can add another layer of security.
• Coverage for ridesharing: If you use your car as a source of income, you’ll likely need a commercial or business insurance policy to cover your insurance while ridesharing. Some states require insurance companies to offer options for this situation. If you use your personal vehicle as a rideshare car, discuss options with your insurance agent.

What’s not covered by auto insurance?

While car insurance is an important part of your protection plan, it won’t cover all the costs you may have as a car owner. 

Here are a few things car insurance does not cover:

• General car maintenance: Tune-ups, replacement of worn parts and other repair costs won’t be covered by car insurance. They’re considered general maintenance and are simply part of the cost of owning a car.
• Mechanical breakdowns: Breaking down on the road won’t be covered by your insurance. That said, purchasing emergency roadside assistance coverage could help reimburse costs of towing, flat-tire replacement and more.
• Property inside your car: If anything is stolen from within your car, your car insurance may not cover the costs to replace it. However, if you have home insurance, you may be covered by personal property coverage. Check your home policy to see what coverage you have.

How does car insurance work?

Here’s a quick overview of how car insurance works:

1. Pay your premium
   An insurance premium is the amount you pay your insurance company to keep coverage active. When people refer to “paying their car insurance bill,” they’re talking about a premium. The amount is agreed upon when you sign your contract and depends on how much coverage you have.
2. File a claim
   If you’re in an accident or your car is otherwise damaged, vandalized or stolen, the first thing to do is file a claim with your insurance company. This can be done by calling your agent, going online or using your mobile app, if applicable.
3. Pay your deductible
   A deductible is an amount you pay out-of-pocket before insurance coverage kicks in. As with premiums, the deductible amount is agreed to when purchasing the policy. Unlike premiums, however, deductibles vary depending on the applicable coverage.
4. Repair the damage
   The claims team will review your claim and arrange to inspect the damage to your vehicle. Most insurers offer several appraisal options, and your representative will guide you through the process.

Do I need car insurance?

Yes, you do. All 50 U.S. states require car insurance to drive legally. Remember, the level and types of required insurance vary by state.

How much car insurance do I need?

Factors like where you live, driving risks in your area, your driving habits and the value of your vehicle all play a major role in determining how much insurance you need.

Car insurance state requirements

One of the biggest influences on how much coverage you need is your location. As mentioned, car insurance requirements vary significantly by state.

Most states require only liability insurance, while others mandate additional protection such as:

• Personal injury protection (PIP)
• Medical payments coverage (MedPay)
• Uninsured/underinsured motorist coverage

Most drivers need more than the bare minimum to stay protected. Knowing your state minimum car insurance requirements is essential, but keep in mind that these minimums can leave you underinsured—especially in states with high medical or repair costs.

How much liability insurance do I need?

Liability insurance is legally required in almost every state. It protects you financially if you’re determined to be legally responsible for injuring another person or damaging their property. It helps pay for damage you caused, like another person’s medical bills, the cost of repairing their property, etc.

Most states have a “25/50/25 minimum” rule when it comes to liability coverage, which looks like this:

• $25,000 in bodily injury liability per person
• $50,000 in total bodily injury liability per accident
• $25,000 in property damage liability per accident

Although these limits meet the legal standards in many states, they often fall short in real-world accidents. Medical bills and vehicle repair costs can exceed minimums quickly, leaving you responsible for the remaining expenses. Many drivers choose higher limits for stronger financial protection.

How much does auto insurance cost?

What you pay for car insurance depends on you and the decisions you make. Personal details about yourself, how much coverage you buy—all of these can affect your premium. 

Here are some factors that determine how much auto insurance could cost:

• The car you drive: Some cars are more expensive than others to insure. Typically, more expensive cars and cars that are often stolen have higher car insurance rates.
• Where you live: Living in a high-density area generally means your car insurance will be higher than if you live somewhere rural or less urban. There are simply more cars in large cities, which means the chance of an accident is higher.
• Your driving history: Have a clean driving record with few accidents or tickets? You’ll likely pay less for insurance. If not, you’ll likely pay more. Many insurance companies offer car insurance discounts for good drivers and for avoiding claims.
• Types of coverage you purchased: As mentioned earlier, all 50 U.S. states require minimum levels of certain coverage types. You’ll pay less if you stick with those, but you may not be fully protected. Buying additional coverage gives you more protection, but at a higher cost.
• Coverage limits: If you purchase additional coverage types, you’ll also select coverage limits for them. Again, higher limits provide more protection but cost more.
• Your deductible: Deductibles work differently than coverage limits: The lower your deductible, the higher your insurance premium. But remember, a higher deductible means you’ll pay more out-of-pocket when filing a claim.

Car insurance deductibles: finding the right balance

Many drivers also want to know how deductibles affect how much insurance they need. Your deductible is the amount you pay out of pocket before your insurer covers the rest of a claim. It directly impacts your premium.

Here’s the basic trade-off:

• Higher deductible = lower monthly premium, but higher out-of-pocket costs
• Lower deductible = higher monthly premium, but lower out-of-pocket costs

Choosing the right deductible requires a balance between what you’re comfortable paying monthly and what you can afford to pay if you have an accident.

Keep car insurance up to date

Meet with your insurance agent regularly to review your car insurance and to make sure you and your family have the protection you need. Your agent will also help ensure you’re getting any available auto insurance discounts. Most insurers offer discounts for having more than one type of insurance with one company, as we do with our Multi-Policy Discount.

When you know how auto insurance works and what it does, you can rest assured knowing you’ve got the protection you need without overpaying.

Published 5-10-23
Updated 4-15-26