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How Does Auto Insurance Work?

You pay premiums and they pay for accidents. Is the relationship with an auto insurance company really that simple? Well, yes and no.

Roles and Responsibilities

Here’s a quick rundown of the basic roles and responsibilities involved with acquiring and using auto insurance.

Choose an insurance company Offers auto insurance
Select your coverage levels within the ranges offered Offers various coverage options and amounts
Pay your premiums on time Issues policy insuring your vehicle
File claims for accidents or other losses covered by your policy Evaluates and validates claims and pays approved expenses minus any applicable deductibles

The Insurance Relationship

Once you have a policy in place, you probably won’t have much interaction with your insurance company other than paying your premiums. That’s not a bad thing. In fact, it’s basically at the heart of how insurance works.

So long as the insurance company accurately predicts the likely number and costs of future claims by its policyholders, and charges those policyholders’ sufficient premiums, the relationship works for all involved.

Key Takeaway: Policyholders are protected from infrequent, unexpected, and often catastrophic losses while being charged comparatively smaller amounts on an ongoing basis.