Educational Article

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.

YOU	INSURANCE COMPANY
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.

Thousands of policy holders pay premiums to an insurance company.

When a covered claim is submitted by a policy holder, the insurance company pays out according to the purchased coverage, sometimes substantially more than the policy holder ever pays in premiums.

The statistical chances of any one policy holder needing to file a claim are very low, which means the insurance company is regularly collecting more money than it is paying out.

Collected funds that aren’t immediately needed to pay claims are held by the insurance company, allowing them to pay future claims when they occur.

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.