How Does Car Insurance Actually Work?

5 minutes Published: 26/04/2021

Car insurance might seem complicated but the basics are pretty simple to get your head around. It’s important to make sure you’ve got a basic grip of how insurance really works when you’re trying to choose the right lease car. Here’s a brief overview of how it works.

Car insurance is a type of agreement that protects you against the cost of having to pay for damage to another person’s car out of your own pocket, in the event of an accident. In return for paying a monthly premium, your insurance policy will pay out if you cause damage.

If the accident is your fault, you claim the cost for the other person’s repairs and the money comes out of your policy. If the accident isn’t your fault, the other person will be responsible for claiming and the money will come out of their policy.

An uninsured driver will have to pay for any damage caused to your car in accident out of their own pocket, so there’s always the risk that they might not be able to pay, leaving you liable for the bill. Under the Road Traffic Act 1998, it’s illegal to not insure your car if you’re driving it on the road and this helps the reduce the risk of this situation happening.

Types of car insurance in the UK

There are three main types of insurance coverage in the UK. Third Party is the basic option and just covers you for damage to another person’s car. Third Party, Fire and Theft covers you for damage to another’s car, as well as damage to your own car caused by fire or theft. Comprehensive is the most expensive policy but gives the best coverage, covering you for damage to another’s car as well as your own, and damage caused by fire, theft or weather.

In terms of actually getting a car insurance contract, it’s surprisingly simple now, thanks to the growth of online comparison sites. All you need to do is fill out your personal details on the website, the type of coverage you’re looking for and details about your car and you’ll get a list of the best value insurance policies available for you.

Third Party

Third Party is the cheapest form of insurance coverage there is, covering the absolute basics. It’s called Third Party because the only thing this type of policy covers is the cost of damage done to another person’s car (the third party here).

Third Party, Fire and Theft

Third Party, Fire and Theft is slightly better than just basic Third Party coverage, and is seen as a good middle ground option. It gives you basic Third Party coverage, as well as protection against the cost of fire damage to your own car, or damage caused by your car being stolen. It still doesn’t usually cover the cost of damage to your own car that’s your fault though.

This is probably the most popular type of coverage for most people in the UK. Lots of insurers have caught wind of this popularity and have upped their prices. This means that you can often find Comprehensive policies that provide better coverage and might actually work out cheaper or the same price!


Comprehensive coverage provides the maximum amount of coverage, giving you Third Party cover, Fire and Theft coverage, and also covering the cost of repairs to your own car in an accident that was your fault.


Some types of cars – especially vintage or classic cars – require you to get specialist insurance out on them, that’s more suited to protecting their value.

GAP Insurance

This is an extra type of insurance policy that pays the difference between how much your car is worth on the market and how much it’s valued at by your broker. Some finance companies insist that you take out a lease GAP insurance policy before you begin your contract. We've weighed up whether gap insurance is worth it for you to make up your own mind.

How much does car insurance cost?

Car insurance varies massively in price depending on a whole host of factors. We’ve got a much more detailed page about the cost of car insurance here that you can check out, but here’s the basics. You’ll obviously pay more for a policy that protects you against more things.

Basically, car insurance quotes are also worked out according to how risky a driver the insurance company believes you to be. These companies obviously don’t want to be paying out loads of money because of clumsy drivers, so they’ll minimise their financial risk by upping the prices for people they consider to be more at risk of getting involved in accidents. It’s not particularly fair because it tars all drivers with the same brush and relies on stereotypes, but unfortunately it’s the norm throughout the industry.

Example of insurance costs

Here are three examples of how much insurance is likely to cost you.

So, imagine three drivers:

Sarah: Sarah is a 28-year-old IT technician who lives in a flat in Central Manchester. She only uses her car for social reasons and keeps it in an off-street car park that’s secure. She’s had her license for 10 years and has had zero claims as this is her first ever car.

Tom: Tom is a 40-year-old dentist who lives in Poole but commutes to Salisbury everyday (unlucky Tom). He’s had his license for 20 years and has 10 years no claim bonus. He stays in a detached house in the suburbs and keeps the car in his garage.

Robert: Robert is a 55-year-old freelance engineer and leases his car through his business. He drives a lot for his work and has had his license for 30 years, with 5 years no claims bonus. He lives in a Glasgow townhouse and parks on the street.

Here are the cars they’re looking at – three of the most popular on the leasing market:

  • Volkswagen Golf
  • Mercedes Benz C-Class
  • Audi A4

And here are the quotes that they can expect to get from insurance companies:


Mercedes-Benz C-Class: £978.88

Volkswagen Polo: £1,966.17

Audi A4: £2,120.6


Volkswagen Polo: £749.28

Mercedes-Benz C-Class: £966.56

Audi A4: £881.8


Mercedes-Benz C-Class: £730.00

Volkswagen Polo: £996.80

Audi A4: £740.30