How Does Car Insurance Work?

Whether we agree we need it or not, almost every state requires us to have at least a minimum amount of liability insurance to own and operate a motor vehicle (when did car insurance become mandatory?).

The penalties for not purchasing car insurance can be harsh. A temporary suspended license, or even total loss of our driving privileges may result if caught without it.

So how does car insurance work?

Basically, car insurance is a contractual promise to pay out money in the event you cause someone bodily injury or property damage as a result of an accident you are found to be “at-fault” for.

We pay an insurance premium in exchange for any potential accidents we may cause and insurance companies “pool” that money to pay for the associated costs.

As a consumer, you decide what liability limits you want and if you need things like collision coverage and/or uninsured motorist coverage.

It may seem like a pain to fork over the money for each insurance policy, but imagine the worst-case scenario:

You cause an accident that severely injures or even results in someone’s death. Without insurance, you would be responsible for paying for all of the damages.

Imagine a jury awards a $500,000 judgment to the family of the injured party. While it may seem unlikely, there are about 25 million auto accidents each year, occurring every 16 seconds. Insurance doesn’t seem like such a bad deal now does it?

How do insurance companies make money?

Car insurance companies typically make most of their profit by investing the premiums they collect. There are some companies that actually lose money based on the premium they collect! The only profit is made on the investments.

For example, an insurer may bring in $100,000,000, but pay out $105,000,000 in claims. While that clearly demonstrates a loss for the year, the same insurer might have made $10,000,000 in the stock market by investing the money we pay them before having to pay it out for claims.

This would result in a $5,000,000 overall profit. Not bad for a year’s work, eh?

Of course, the goal of every insurer is to set their rates at a point where they make an “underwriting” profit, i.e. not paying it all out in claims, while also making money in the stock market or via other investments.

Compare Top Insurance Providers:
Auto Insurance Quotes
State:
Life Insurance Quotes
State:
Homeowners Quotes
State:
Health Insurance Quotes
State:

This post was written by The Truth Team on May 4, 2010 Comments (0)