How Does Car Insurance Actually Work?

Chloe Murphy 8 minutes Published: 08/11/2021

Car insurance might seem complicated but the basics are pretty simple to get your head around. Here’s a brief overview of how it works!

Car insurance is a type of agreement that protects you from the cost of having to pay for damage to your or someone else’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.

Here, we’re going to run through what you need to know about getting car insurance. We’ll cover everything from why you need it, what types there are, and how much it could cost.

If you’re leasing, see our post “do lease cars include insurance” before diving in here.

Why do you need car insurance?

You need to have car insurance because you can’t legally drive without it.

In the UK, you must have at least third party car insurance (more on this later) to drive on a public road.

With car insurance, if you’re in an accident that’s your fault, you can claim the cost of 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 both cars in an accident out of their own pocket - plus a fixed penalty of £300, 6 penalty points on your license, and your car could potentially be seized. If the case made it to court, you are vulnerable to an unlimited fine and complete disqualification from driving.

Don’t risk it! But if you’re reading this, we don’t think you are planning on it!

What are the types of car insurance? 

There are three main types of insurance coverage in the UK:

  • Third party
  • Third party fire and theft
  • Comprehensive 

Each offers varying levels of cover, with the most basic being the cheapest, and gradually getting more expensive as the cover increases.  

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, however lots of insurers have caught wind of this and 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.

What specialist types of car insurance are there?

In addition to the standard three types of insurance, you can also get different types of insurance to suit specific needs for a driver or car. 

These are usually intended to make it cheaper for you when a standard policy would be expensive, or are designed with policies addressing specific cars.

  • Black box - Black box insurance is typically aimed at new drivers, as first policies can be particularly expensive. A black box device is fitted to the car that monitors your mileage and speed, which can be used to prove you’re a safe driver worthy of a lower premium.
  • Specialist - Some types of cars – especially vintage or classic cars – require specialist insurance that’s more suited to protecting their higher values.
  • Learner driver - Car insurance taken out with your provisional license that covers you and the car until you get your license.
  • Short term - Only covers you for a short amount of time. Ideal for if you’re hiring a car, or driving long distances and want another driver to take over.
  • GAP Insurance - An extra type of insurance 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 lenders 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 is often seen as a huge additional cost of driving, but in most cases it varies depending on individual circumstance. You might have looked up quotes already and asked yourself, “Why is my car insurance so high!?”

Basically, the average car insurance cost in the UK is worked out according to how risky you are to insure. This is based on both your personal information, and the type of car you want to insure.

For your personal information, the insurance company is going to be looking at:

  • Where you live - If you live in an area with high crime rates, it’s more likely they’re going to have to pay out, so it’s going to cost you more.
  • Where you keep your car - Keeping your car in a secure location when you’re not driving can help lower quotes, as there’s less chance of your car being broken into.
  • Your driving history - If you’ve got years of experience and no claims, insurance companies will feel more confident giving you a lower quote. Conversely, if you’ve got no experience or numerous claims or convictions, you’re going to face higher quotes.
  • Your age - Unfortunately for young drivers, you’re often faced with the highest cost. As younger drivers tend to be newer drivers, there’s usually more accidents and risk involved. You can read more in our post "how much is insurance for a new driver?"

For the car you’re looking to drive, the insurance company will assess:

  • The make and model - So much comes into play when insuring your car, and it’s difficult to determine the cost until you actually get a quote. More expensive cars are usually higher to insure due to the price of repairs and replacing parts, however older models pose equal risk due to outdated safety features.
  • Engine size - The bigger your engine size, the higher your insurance cost is likely to be. 

You can also reduce your quote by opting for a higher excess. This is the amount that you agree to pay in the event of a claim where you have been at fault. 

It will be based on the factors above, but voluntary excess is an additional amount you can promise to pay to help lower your insurance premium.

How long does car insurance last for?

Most insurance policies cover you for one year from the date that you take out the policy. If you decide you want to take a different policy instead and are wondering how to change your car insurance, it’s best to get in touch with your insurance company as there’s typically an early cancellation fee.

When you’re looking for a cheaper or different type of policy, you may be able to avoid this fee by asking for a new policy with your existing insurer.

For shorter term insurance, you can also get policies that cover you for a few days or weeks. These are typically a little more expensive.

Should I pay monthly or annually?

If you’re looking at your car insurance quote and grimacing, there is the option to cover the cost over a year with monthly instalments. 

However since interest is typically charged on your insurance, this could mean you end up paying way more than the initial amount that had you wondering if you need a car in the first place.

In most cases, it’s best to pay annually if you can afford it. 

Is it worth adding additional cover?

When shopping around for insurance premiums, you’ll notice that most comparison sites ask if you’d like to add on any extra cover.

These usually come in the form of:

  • Breakdown cover - Offers assistance if your car breaks down, and sometimes includes a courtesy car.
  • Legal cover - Covers your expenses to an extent if you need to take legal action due to an accident.
  • Courtesy car - Offers a temporary vehicle for you to use should your car get stolen, or whilst it is in the garage.

Occasionally these can be included in your main quote, so it’s best to read through what the policies you’re looking at are actually offering. 

In some cases the additional cover can be more expensive than it would be for example to hire a car while your car is off the road. However these do offer the convenience of knowing it’s already taken care of.

How do I choose the right one for me?

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.

Choosing the right type really depends on the type of cover you think you need. It’s compulsory to get at least third-party insurance, but if you’re a new, cautious, or accident prone driver, it’s probably worth going for comprehensive insurance. You’ll have peace of mind knowing that if anything happens, you’re not going to end up out of pocket.

If you’re planning your budget for a new car, we’ve explored other car running costs to consider in a separate post.