Understanding car insurance: types of cover and features
Last updated: October 2026
Key takeaways
- Car insurance covers the cost of loss, damage or liability involving your vehicle, in exchange for a premium
- Only Compulsory Third Party (CTP) insurance is required by law in Australia; other types of cover are optional
- Your premium reflects a set of individual risk factors, so two drivers with the same cover can pay different amounts
- An excess is what you contribute towards a claim before your insurer covers the rest
- Telling your insurance provider about changes to your car, or how you use it, can help ensure you’re covered if and when a need to make a claim arises
Every registered vehicle in Australia needs compulsory third party insurance, but that only covers injuries to people. Damage to your car, or to someone else's property, sits with the cover you choose to take out on top of it.
Understanding what each type of car insurance covers can help you know what protection you have if something goes wrong. This guide walks through how car insurance works in Australia, from premiums and excess through to claims and cover levels.
What is car insurance and how does it work?
Car insurance is a product that covers the cost of loss, damage or liability involving your vehicle. You pay a premium, monthly or annually, and in return your insurer agrees to cover the events set out in your policy.
When one of those events happens, you lodge a claim and pay an excess, and your insurer covers the rest up to the limits that apply. What you're covered for depends on the types of car insurance you hold, which is why it's worth understanding your options before you buy.
Keep reading: What to do if you’re in a car accident
How does car insurance work in an accident?
If you're in a car accident, the process generally runs in the same order each time:
- Stop and check whether anyone is hurt, and call emergency services if they are
- Exchange names, contact details, licence numbers and registration details with the other driver
- If it is safe to do so, photograph the scene and the damage before the vehicles are moved
- Contact your insurer as soon as you can and lodge a claim
- Your insurer assesses what happened and decides whether the claim is covered under the policy
- You pay your excess, and your insurer arranges repair or settlement
If you weren't at fault and the other driver is identified, your insurer may recover its costs from theirs, and your excess can sometimes be refunded. If the other driver is uninsured, what happens next depends on the level of cover you hold.
Keep reading: Crash course on common types of car accidents
How does your cover type change what you're covered for?
The level of cover you hold decides how much of a loss your policy actually picks up. There are four levels available in Australia, and only the first is compulsory:
- Compulsory Third Party (CTP) covers injuries to people, but not damage to vehicles or other property
- Third Party Property Damage covers damage you cause to other people’s vehicles or property in an accident, but not the cost of repairs to your own car
- Third Party Property, Fire & Theft covers damage you cause to other people’s vehicles or property, as well as certain loss or damage to your own car from fire or theft
- Comprehensive car insurance generally provides broader cover for your own car and damage you cause to other people’s vehicles or property
For a full breakdown of what each level includes and doesn't include, see our guide to types of car insurance.
What is not covered by car insurance?
Every product has exclusions, which are the situations where cover doesn't apply. Common exclusions include:
- driving under the influence of alcohol or drugs
- driving without a valid licence
- using the car for a purpose the policy doesn't cover, such as rideshare or delivery work
- damage that comes from wear, rust or an existing mechanical fault
The exclusions that apply to your own policy are listed in the Product Disclosure Statement. If you have a car insurance policy with Real, you can find out more about how to make a claim on our website.
How do excess, premiums and policy documents work?
These are the parts of a policy that decide what a claim actually costs you, and what you're entitled to when something happens. Here's how each one works.
What is a car insurance excess?
An excess is the amount you contribute towards a claim before your insurer pays the rest. Choosing a higher excess generally lowers your premium, and choosing a lower one generally raises it. Some policies also apply additional excesses in certain circumstances, such as when a young or inexperienced driver is behind the wheel.
How are car insurance premiums calculated?
Your premium reflects the risk your insurer is taking on when it covers you. Insurers weigh up a set of factors, and because those factors are specific to you, two drivers with the same level of cover can pay different amounts.
| What insurers look at | Why it affects the premium |
| The car itself | Make, model, age and safety features all affect what it costs to repair or replace |
| Where it is kept | Whether it's garaged overnight, and the risk of theft, storm or collision in that postcode |
| Who drives it | The age and driving experience of everyone listed on the policy |
| How it is used | Private, business or commuting use, and roughly how far the car travels |
| Claims history | Previous claims, and how long the driver has gone without one |
| The excess chosen | A higher excess generally lowers the premium, and a lower excess raises it |
Understanding how your policy works before you need to claim can help you know what to expect.
What is the difference between agreed value and market value?
If your car is written off, how much you're paid depends on whether your policy uses agreed value or market value. Agreed value fixes the figure when your policy starts or renews. Market value is worked out at the time of the claim, based on what your car was worth just before the loss. Your premium, excess and any other applicable deductions are applied from your agreed or market value in accordance with your policy coverage.
| Agreed value | Market value | |
| How the sum insured is set | You and your insurer settle on a figure when the policy starts or renews | Worked out at the time of the claim, based on what the car was worth just before the loss |
| What you are paid on a total loss | The agreed value of a car, subject to the terms of the policy, payable excesses and other deductions | The assessed market value, which may be more or less than expected |
| What happens as the car ages | The figure is reviewed at each renewal | The amount falls as the car depreciates, without the driver doing anything |
| Certainty for the driver | The payout is known before a claim is made | The payout is not known until the claim is assessed |
The table above is a quick guide – for a full comparison, including how each figure is worked out and which suits different circumstances, see our dedicated guide to agreed value vs market value car insurance.
What is a Product Disclosure Statement (PDS)?
The Product Disclosure Statement sets out exactly what a policy covers, what it excludes and what limits apply, so it's the document to read before you buy rather than after you claim. The PDS, Financial Services Guide and Target Market Determination for each Real Insurance product are available on our Product Disclosure Statements page.
What is a certificate of insurance?
A certificate of insurance is a document that confirms the details of your insurance cover. It generally includes information such as the insured vehicle, the period of cover and other details specific to your product. Once your cover is in place, your insurance provider will issue your certificate of insurance. Check the details are correct and contact your insurance provider if anything needs to be updated.
What changes do you need to tell your insurance provider about?
Your policy is based on the information you gave when you took it out, so it's important to tell them when that information changes:
- Changes to usage: if you start using the car for business, move house, or change where it's parked overnight.
- Modifications: if you make a change to the vehicle itself, such as mag wheels, spoilers or performance modifications.
A change your insurer doesn't know about can affect a claim, so it's worth a call whenever something changes.
Keep reading: Navigate common questions about car insurance
Need a car insurance quote?
Real Insurance offers four car insurance options to drivers across Australia. These include:
- Comprehensive Car Insurance
- Third Party Property, Fire & Theft Insurance
- Third Party Property Damage Insurance
- Pay As You Drive Car Insurance
Frequently asked questions
What is car insurance in simple terms?
Car insurance is a policy that helps cover the cost if your car is damaged in an accident or by weather conditions, stolen, or causes damage to someone else's property or vehicle. You pay a premium for this cover, and your insurer pays out, minus your excess, if something covered by your policy happens.
How does car insurance work when you make a claim?
When you make a claim, your insurer assesses what happened against your policy's terms and decides whether it responds. If it does, you pay your excess and your insurer arranges repair, replacement or a cash settlement, depending on your policy coverage and the circumstances.
How are car insurance premiums calculated?
Insurers weigh up factors like your car, where you keep it, who drives it, how it's used, your claims history and the excess you choose. Because these factors are specific to you, two drivers with the same level of cover can pay different premiums.
How is agreed value different from market value for car insurance?
Agreed value is the amount an insurance provider agrees to insure your car for when you take out or renew your product. Market value is the reasonable market-related value that the market would pay for your car immediately before its loss or damage. Your premium, excess and any other applicable deductions are applied from your agreed or market value in accordance with your policy coverage.
Do I need to tell my insurer if something changes?
Yes – you should tell your insurer about changes like a house move, a change in how you use your car, or any modifications you make to it. Not doing so could affect whether your policy responds if you need to make a claim.
13 Oct 2026