ELI5: How does car insurance work and why it is mandatory to have it?

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The legal minimum is liability insurance. Since it’s very easy to cause hundreds of thousands of dollars of harm to someone else, states usually require you have some way of paying any damages in such a situation. The preferred way is an insurance plan: you pay an insurer a monthly/annual amount and they agree to cover most of any claims you are responsible for paying in the event of an accident you cause.


A bunch of number nerds called “actuaries” run a lot of very complex excel spreadsheets and determine the amount of money auto related crashes, thefts and other losses will be in a given area. They take this educated guess and divide that by the average number of drivers in the given area. They add little things like “desired profit margin” and “agents commissions” and “advertising budget” to get an average premium. Then these number nerds figure out things that are likely to lead to having a crash or loss and adjust this average premium to an individual policy.


Insurance is what is called a shared risk pool. Everybody pays a monthly fee to mitigate the financial risk of having an accident. Everybody pools their money and repairs are paid out of that pool. Safer drivers in this situation are basically subsidizing the reoair costs of less skilled drivers. If you are a higher risk of causing an accident then you pay a higher premium every month because you are more likely to decrease the size of the pool by making a claim. It is mandatory for 2 reasons. 1.) The bigger the pool the smaller the risk, which drives rates down. 2.) Unless you are particularly wealthy there is no reasonable way to expect you to be able to cover your liability in an accident, so the state requires you to carry enough liability insurance to compensate the other party for losses incurred by the damage you caused. Most states will waive the insurance requirement if you can demonstrate an ability to cover your liability on your own without insurance.


Car lot of money. You crash you pay. Most people with Jobs can’t afford because a lot of money. You get insurance pay for car when car get accident.


Mandatory (liability) insurance exists to protect vehicle owners from possibly facing bankruptcy after an accident. Injuries and costs associated with repair of one’s vehicle can already be a significant burden by themselves – additionally being held liable for damages caused to others could absolutely devastate a person or household without liability insurance.