How auto insurance works

What is auto Insurance?

While this may seem like a silly question, most people actually don’t know how to explain how auto insurance really works. Insurance simply kicks in when we're in an accident and from there it all gets taken care of in the background. But what really happens in the background, and how does it all affect you?

Why We Need Vehicle Insurance

Plain and simple, people are accident-prone. We get distracted, make mistakes, let our emotions get the best of us, and we drive aggressively. All of these factors heavily contribute to our daily driving habits, and eventually these things lead to accidents.

Car insurance was created to protect ourselves from one another. Vehicle damage and medical injuries stemming from accidents can get very expensive, and most people don't have enough money put away to pay for the costs of an accident up front. Used to be, people would simply no longer have a vehicle until they could afford one again, but now auto insurance allows us to move on with our lives quickly.

How Does it Work?

The concept of insurance is one of risk mitigation. The basic idea is to have enough money put away to cover costs in times of need: a rainy-day fund. Insurance agencies came about to fill a larger role. For the cost of a pre-determined payment amount, an insurer promises to pay for your expenses should an expensive situation related to your policy come about. The insurer tries to predict the probability of something bad happening to you, say a car accident, and how much it will most likely cost. With one customer, this may be difficult. Some people go their whole life with just one or two accidents on their record, while others get into one several times a year.

But with many customers, they start to deal with percentages and probabilities. While you may not have an accident soon, the chances of someone in a group having an accident starts to approach the statistical average. If an average accident costs $10,000 total, and on average a person gets in an accident once every four years, the insurer has to collect a minimum of $2,500 each year (or $208 per month) to break even. Start adding variables, like less or more coverage, and rates start to fluctuate.

Your Rates

Knowing how it works will help you understand why you're given certain quotes. If you've been in many accidents or have tickets on your record, you're a higher risk. And auto insurance is risk mitigation.