All states except New Hampshire and Virginia require drivers to have minimum amounts of car insurance. But many of us don’t quite understand our policies or the insurance process in general. We’ll go over what auto insurance does and doesn’t cover, how insurance payouts work, what to do if you get into an accident, and how insurance works when someone else drives your car.

What Auto Insurance Doesn’t Cover

You pay an insurance premium regularly, and in exchange, your car insurance company protects you financially if you file a claim, like an accident or theft, that your policy covers. Your policy outlines the limits of your protection. For example, your insurance provider might cover property damage in the event of an accident, with a limit of $50,000 per accident.

But if you lack comprehensive coverage and your car is stolen, that won’t be covered and you’ll have to purchase another car out of pocket. That’s why the amount of coverage matters. If you don’t have full coverage, things like medical expenses may not be covered in at-fault accidents.

What Auto Insurance Covers

States have different minimum requirements for auto insurance. You might add coverages beyond the minimum, depending on your budget and desired level of protection. The following types of coverage are common:

• Liability: If you’re at fault in an accident, liability coverage pays for the damage. This includes damage to other vehicles and objects, injuries to other drivers and passengers, and lawsuits if another party sues you. Keep in mind that liability coverage does not pay for damages to your own vehicle; that’s collision coverage, detailed below.
• Collision: Unlike liability coverage, collision coverage protects your own vehicle in the event of an accident. This coverage kicks in if your vehicle collides with another vehicle or with a stationary object, or if your vehicle overturns.
• Comprehensive: Comprehensive coverage protects you if your car sustains damage due to events other than collisions. This includes things like theft (the car itself or a part like a catalytic converter), vandalism, falling trees, and flooding.
• Medical payments/personal injury protection (PIP): Both medical payments and PIP cover medical bills for you and your passengers in a car accident, regardless of who’s at fault. Medical payments coverage is available in most states, while PIP is available only in states where laws require it. Though the coverages overlap, PIP is more comprehensive.Fourteen states and Puerto Rico require medical payments, PIP, or similar coverage: Delaware, Florida, Hawaii, Kansas, Maine, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania, and Utah. In Arkansas, D.C., Kentucky, Maryland, South Dakota, Texas, Virginia, and Washington, providers must offer PIP, but it’s not required.
• Uninsured/underinsured motorist coverage: If an uninsured or underinsured driver hits your vehicle, this covers injuries to you and your passengers, as well as damage to your vehicle.
• Other optional coverages: You can customize your policy to your needs by adding additional coverages, like gap insurance, new car replacement, rental car reimbursement, and more. 1

What Auto Insurance Doesn’t Cover

Auto insurance does not cover wear and tear to your vehicle, so make sure you’re keeping up with regular maintenance such as oil changes. It also doesn’t cover driving for commercial purposes, like food delivery or ridesharing, unless you add rideshare coverage to your policy.2

How Car Insurance Payouts Work

Before your policy kicks in and your insurance company pays you for damages or bills, you’ll often have to pay a deductible. For example, let’s say you have a $500 deductible for your comprehensive coverage. If a tree falls on your car and causes $2,500 in damage, you will pay $500 and your insurance company will pay the remaining $2,000.

If your vehicle is totaled (i.e., if your vehicle sustains damages beyond repair or if the repairs cost more than the value of the vehicle), your insurance will pay you the value of the vehicle at the time of the loss. Keep in mind that if you owe more in loans than your car’s worth, you’ll have to pay the difference unless you have gap insurance.