Every six months or once a year, you pay the insurance company an amount of money called a premium. Then, if you're ever in an accident, the insurance company uses this money to pay any medical or repair bills that are a result of the accident. The insurance company can afford to do this, and still make money, because only a small number of people are in accidents each year, while many more people pay them premiums.

In most states, you need to have auto insurance to legally drive (find out your state's requirements). But, auto insurance can also give you peace of mind. Depending on the kind of coverage you buy, it can pay for:

• Damage and injury you cause to someone with your automobile
• Damage to your automobile
• Some of your medical expenses in case of an accident
• Legal and court costs if you cause an accident
• Damage or injury to you, your passengers and your automobile caused by uninsured or under-insured drivers
• Damage due to theft, vandalism, hail and other weather-related events

No. If you have $25,000 in, for example, bodily injury insurance, then the insurance company will pay up to $25,000 if you cause a accident where other people are injured.

If you're in an accident, you have to pay a certain amount of money yourself, before your insurance company will begin to pay for your repairs or medical bills. This amount is called "a deductible." Here's an example of how this works if you have a deductible of $500.

Yes. All but five states require you to have auto insurance to legally drive. States don't want people driving who can't pay for the damage and bodily injury they cause. So the states set minimum requirements to cover these costs. Find out your state's requirements.