Think of auto insurance like a safety line for rock climbers — something that’s there in case you need it, but you hope you never do. Except, instead of saving you when you fall off a mountain, car insurance covers expenses after an accident. 

But let’s be honest: Nobody wants to pay for extra features they don’t need. So to find the right coverage, you’ll want to understand what auto insurance is, why you need it and what it does (and doesn’t) cover.

Let’s take it from the top.

What is auto insurance?

Auto insurance pays for injuries or property damage after an accident, at least up to the policy’s limits. That financial protection is why insurance is usually required by state law in order to own or drive a car.

Medical bills and car repair costs can add up when multiple vehicles and drivers are involved, which can quickly become overwhelming. And because the cost of car insurance depends on many different factors (like where you live and what kind of car you drive), it can be difficult to understand how much you’ll pay and how much coverage you’ll need.

Shopping for the right insurance can be difficult for anyone. That’s why NerdWallet created a car insurance buying guide to help you find the right car insurance for your unique situation. 

» MORE: What factors affect car insurance rates

Why do you need car insurance?

Reading an auto insurance definition isn’t quite the same as understanding why you need it. Because after an accident, you’ll probably be more interested in how it works and what exactly it does.  

Car insurance is required in most states, so the first reason you need it is to meet your state’s minimum insurance requirements. But perhaps more importantly, car insurance provides financial protection. It keeps you from having to pay out of pocket for expenses that come up after a wreck, so long as they fit within your policy’s maximum limit. 

The cost of an accident can quickly add up. For example, the average cost of property damage after an accident is $4,700 per vehicle, according to 2020 data from the National Safety Council.

But if injuries or death occur, expenses can climb to more than $100,000 per person. So unless you have $100,000 stashed in your sock drawer, a car accident could result in serious financial ruin.

Here’s an example of how much an accident could cost you:

Scenario: You’re driving through an unfamiliar part of town and hit another vehicle at an intersection. Your car costs $3,000 to fix, and the other driver’s repairs are $2,000. The other driver also needs back surgery because of the accident, and the medical bills come out to $30,000. 

Total out-of-pocket cost without car insurance: $35,000

Because you were at fault in the accident, you’re responsible for paying all of those bills out of pocket if you don’t have auto insurance. But that’s not the only version of this story. 

Let's say that in this scenario, your car insurance policy covers $25,000 in medical bills per person, $50,000 for total medical bills and $15,000 for total property damage. You’re responsible for repairing your own vehicle, but your insurance covers the other driver’s car repairs and $25,000 of their medical bills. After your insurance pays out, you’re responsible for paying $5,000 for the other driver’s remaining medical expenses, plus $3,000 for your own car repairs.

Total out-of-pocket cost with car insurance: $8,000*

*Based on a liability-only car insurance policy with limits of $25,000 in bodily injury liability per person, $50,000 in bodily injury liability per accident and $15,000 in property damage liability.

» MORE: Compare car insurance rates

What auto insurance covers

Here are some of the most common types of car insurance coverage and what they cover:

• Liability coverage is the “meat and potatoes” of insurance. It pays for medical bills or property repair costs that result from an accident you caused.

• Uninsured motorist coverage pays for your own medical bills and property repair costs if you’re hit by someone without car insurance.

• Underinsured motorist coverage works like uninsured motorist coverage. It pays out if the cost of your own medical bills and property damage exceeds the other driver’s liability coverage limits.

• Collision coverage pays for your own traffic-related car repair expenses (after you pay your deductible) no matter who is at fault in a crash.

• Comprehensive coverage is like Mother Nature insurance for your car. It pays for repair costs from inclement weather like tornadoes or hurricanes as well as vandalism or hitting a wild animal.

• Medical payments coverage pays the medical expenses for you and your passengers after an accident, no matter which driver is at fault.

• Personal injury protection coverage, or PIP, pays for medical expenses no matter who is at fault for the accident. It may also pay for things like funeral or child-care expenses.

• Gap insurance pays the difference between what you owe on your car loan or lease and the vehicle’s current market value if you total your car. 

» MORE: Types of car insurance and what they cover

What auto insurance won’t cover

Auto insurance isn’t a magical bubble that protects your car from everything. In the same way that health insurance typically won’t cover every medical expense, auto insurance won’t cover every car-related bill that comes your way.

Here are a few examples of what car insurance doesn’t cover.

Wear and tear. As a general rule, car insurance won’t pay for things like oil changes or flat tires. If damage isn't caused by an accident, you shouldn’t expect coverage.

Stolen belongings. Your auto insurance typically won’t replace your laptop if someone smashes your window to steal it, but a homeowners or renters insurance policy will cover anything stolen from your car, up to your policy limits.

Rideshare trips. Auto insurance won’t cover you when you drive for a rideshare service like Uber or Lyft. In fact, those companies have insurance that covers you only after you’ve accepted a fare and are transporting a passenger, but not between rides. Some insurers offer optional rideshare insurance that you can add to your personal policy for when you aren’t covered by a rideshare company’s insurance. 

The cost of a new car, unless you have new car replacement coverage. Even comprehensive and collision insurance won’t always pay out enough to replace your vehicle after an accident. If your car is totaled and you have those coverage types on your policy, your provider will estimate the value of your vehicle at the time of the accident to determine your payout.