The Complete Guide to Car Insurance
If you've just recently bought a car, your next logical step is to purchase car insurance. In fact, you may want to think about car insurance even before you buy a car. That’s because the amount of money you will pay for insurance partly depends on the type, brand, model and features of your car.
For those who know very little about car insurance, we will explain the concepts and information you need to know so that you can make the right decision.
What's Car Insurance and Why Do I Need It?
Some people refer to it as “auto insurance”, because of course you can get insurance for vehicles such as vans, trucks, and motorcycles. Basically, car insurance protects you from paying the full amount if you get into an accident on the road. Given the frequency of automobile accidents all over the world, the possibility of an accident is quite real.
It’s so real in fact that in many parts of the world, you can’t drive if you don’t have car insurance. In the US, most states require insurance before you can drive your car, although there are exceptions such as New Hampshire.
Still, common sense should tell you that you need car insurance. Carrying insurance gives you peace of mind. It gives you a reassuring knowledge that even if something goes wrong, at least it won’t make a huge impact on your finances.
Minimum Car Insurance Requirements
Even in New Hampshire, laws require that you carry car insurance if you’re involved in a vehicular accident or if you’re slapped with a major traffic violation or found driving under the influence. If you don’t have insurance and you’re unable to cover the damages of the injured party, then the state of New Hampshire can suspend or even revoke your license.
While most states have minimum car insurance requirements, these are of course different depending on the state you live in. To get the most up to date info, you’ll need to call or check the DMV website of your state/area.
These requirements are usually presented through three numbers, such as California’s 15/30/5. The first two numbers (15 and 30) refer to liability limits on bodily injury.
In this case, each person involved in an accident can receive up to $15K and only $30K is allotted for each accident. The third number here means that for property damage the amount allocated is $5K. If the liability is greater than these amounts, then you’ll need to pay for them using your own money.
So What Kind of Coverage Do I Really Need?
This of course, depends on what kind of payments (called premiums) you can afford to make on car insurance. In general, you need to strike some sort of reasonable balance between the kind of coverage you can afford to pay for and getting coverage you really need.
This means that you invariably need much more insurance than what’s prescribed in the state minimum car insurance requirements. But how much more, exactly? This is up to you, but you really need to think about it.
In California, the minimum liability amounts do seem quite inadequate, doesn't it? Expensive medical bills can pile up so a total limit of $30,000 simply doesn’t seem enough if at least 2 people are seriously hurt.
And for property damage, do you have an idea how much cars cost these days? If a car is totaled, then $5,000 simply won’t be enough to cover the cost of a replacement.
Coverage
Now here are the main types of coverage you can get:
- Auto liability coverage. This covers your expenses (up to a point) if you’re the one at fault in the accident. This type of coverage may also cover legal expenses if you need a lawyer to defend you if you get sued.
One of the basic types of auto liability coverage is bodily injury liability, which compensates others if they are injured. This includes “pain and suffering”, as well as lost wages due to the injury.
The other type is property damage, which covers the cost of the damage to another person’s car or property.
- Medical payments. This type of coverage pays for the medical costs resulting from an accident, regardless of who was at fault. The terms differ depending on the insurance company. For example, the coverage may pay for the expense for an entire year after the injuries accident.
- Uninsured or underinsured bodily injury. If you’re injured and the other driver is at fault but doesn't have adequate insurance coverage, you may have to sue that driver so he will be forced to pay for your expenses. Or you can just get uninsured coverage.
- Collision coverage. This pays for the damage to your own vehicle if it collides with another object (such as another car). If you need a car loan or if you’re leasing a car, this type of insurance coverage is usually a requirement.
- Rental reimbursement or travel expenses. With this option, your expenses when you rent a car or commute will be reimbursed.
- Towing and labor. If your car needs roadside assistance while on the road, then your towing expenses are covered.
Comprehensive Insurance
This is also another type of coverage, but it’s one of the most misunderstood terms in car insurance. That’s because a lot of people think that the word “comprehensive” here comes with the dictionary definition of the word, when in reality it does not.
All over the globe, “comprehensive” insurance is comprised of many different types of coverage. For example, in the Philippines most car owners only availed regular insurance coverage for accidents and theft. But these car owners were rudely surprised that their insurance did not cover damage due to “acts of God”, such as flooding and earthquakes, following widespread flooding damage to cars due to a storm in 2009.
In the West, comprehensive insurance does cover a lot of things. It does not cover damages brought about by collision (for that you need collision coverage). Nor does it cover roadside assistance such as towing and labor, along with on-site services such as fixing or replacing your battery or changing your tires. And if you need to drive a rental because your car has been damaged or stolen, the cost won’t be covered by the comprehensive insurance.
But what types of damages are covered? In most cases (you’ll need to verify this with your insurance company of course) the damage covered are those not caused by a collision. These situations include:
- Certain natural disasters. These may include storm or earthquake damage.
- Damage due to a heavy object falling on your car. This means if a heavy billboard drops and hits your car, the cost of the damage is covered.
- Vandalism or theft. You’re protected against criminal acts such as these.
- Glass damage. This invariably happens to everyone’s car at some point.
- Fire damage.
So if you live in New York City, you may not need protection against theft, especially if you don’t drive a Honda Civic or Accord manufactured in 1997 or earlier.
In 1990, NYC saw 147,700 car thefts. That’s one theft for every 50 residents. By 2013, the number of car theft cases had dropped to just 7,400 which is roughly one theft per 1,100. Put another way, that’s a decline of 96%.
But if you live in California, protection against car theft may be necessary. The Top 10 metropolitan areas with the highest rates of auto theft were almost all in California.
Only an area in Washington managed to enter the list at #8. The state of California has the highest auto theft rate in the US. That rate is double the national average and 5 times the rate in the state of New York.
When you’re considering the type of policy you need, you need to think about more than just the limits. You also need to think about the deductible.
For example, if you have a $1,000 deductible that means the first one thousand dollars of each claim you make is your responsibility. You have to pay for that deductible yourself.
So using this example, if your claim is worth $3,000, then your insurance company only pays for $2,000.
Cost of Insurance
One of the ways of choosing an insurance company is to compare how much you’ll have to pay in premiums for the coverage you want. If two insurance companies offer the same exact coverage, then the better insurance company is the one which requires you to pay less.
But how do insurance companies compute your premiums in the first place?
Again, this will depend on the particular insurance company, which is why they offer different premiums. But some factors do pay a role in determining how much you’ll pay, regardless of which insurance company you approach.
Here are some of the factors insurance companies usually consider to compute your premiums.
- Your age. Insurance companies use statistics like a samurai uses a sword, and the statistics on how drivers of a certain age behave on the road are one of the clearest indicators.
If you’re very young or very old, then your premium will increase dramatically. That’s because the very young and the very old tend to get involved in more auto accidents than the age groups in the middle.
For teenagers, the problem is that generally they are immature, reckless drivers. They have the tendency to do stupid things like driving too fast or refusing to wear seatbelts. They also lack experience in driving.
For older drivers (those in their 60s and 70s), the problem is that their motor skills and reaction times may have been degraded as a result of their age. As a group, their health is much more suspect than other age groups, and that affects how they drive too.
Obviously you can’t do much about your age, but what you can do is to find an insurance company who doesn't penalize you because of your age as much as the other insurance companies.
- Where you live. If your location has seen a lot of accidents, car thefts, or acts of vandalism, then your premiums will undoubtedly shoot up. You may want to move out of the “bad” parts of town if you want to reduce your premiums although for the most part, it’s not exactly practical.
- The distance you drive regularly. If you only need to drive a few miles each day, then you can negotiate for lower premiums. For those who only drive on weekends, considerable discounts may be forthcoming.
- The type of car you drive. There are several important points to consider here. First, the value of your car is considered. If your car is expensive, then your premiums will obviously be higher. That’s because your car will be more expensive to repair or replace should anything happen to it, and that’s going to be something that insurance companies are especially wary of.
One notable example here is the Bugatti Veyron, which costs at least $2 million. According to one owner, his monthly cost of insurance is $2,500.
Then you also need to consider the speed and function of the car. A station wagon will be much cheaper to insure than a Subaru WRX. The WRX is marketed as a sports car and it may tempt drivers to go too fast and therefore become much more likely to get into an accident.
So if you’re going to buy a car, you may want to consider how your choice of vehicle will affect your premiums.
Essentially, you don’t want to get a small, fast car. The small size means that it’s usually affordable, and that means younger people can afford them. So when you add the potential for speed and the irresponsibility of youth, you end up with a higher chance of accidents and therefore higher premiums.
You may also enjoy lower premiums if the car you’re driving comes with superb safety and security systems. For example, if your car has lots of airbags and quality seatbelts, then it’s likely you won’t suffer from a serious injury when you get into an accident and this may enable you to enjoy lower premiums.
Installing an alarm system may also help prevent your car from getting stolen, and that may also reduce your insurance payments. So before you buy a car, you may want to check Consumer Reports to see a car’s insurance safety rating.
- Your credit history. Fair or not in your case, but insurance companies have found a direct correlation between having a poor credit score and a higher propensity to get into auto accidents. So you should make sure that you always pay your debts and credit card bills on time.
The reasoning behind this stat is that apparently, if you’re irresponsible enough to get borrow money you can’t pay back on time, then you may not be responsible enough to own a car and drive safely.
One of the most important steps you can take is to make sure that your credit score is accurate and correct when you apply for insurance. A lot of credit reports contain errors, and you need to take steps to correct those errors before you purchase car insurance.
- Marital status. While people get married for a lot of reasons, at least you can now consider lower premiums a bonus for your change in status. According to insurance companies, married people are more responsible and therefore they’re also better and safer drivers.
While this may seem a bit discriminatory, the numbers do back up this theory. In one study conducted by the National Institutes of Health involving more than 10,000 adults, it was discovered that drivers who have never been married were twice as likely to sustain a driving injury as those drivers who were married.
Now you may think that combining your car insurance policies may be the best option, but that’s not always the case.
What you need to understand is that both your driving records will be combined. So if your spouse has had a spotty driving record or has been involved in a number of auto accidents, your insurance company may raise your premiums.
It’s also a good idea to keep your insurance policies separate if your spouse travels many more miles in a day, week, or month than you do. If your spouse drives a collectible car or if it’s a much more expensive model than yours, then getting separate policies may be best.
- Claims history. If you have made too many claims on your policy in the past years, your insurance company will likely jack up your insurance premiums. After all, you’ve already given them proof that insuring your car will cost them a lot of money.
Here, what you need is some common sense. If you sustain $1,100 in damages to your car and your deductible is $1,000 then you should avoid making a claim. Getting your extra $100 in repairs won’t help you at all, since you’ll lose that money anyway when your insurance company increases your premiums.
- Driving record. Understandably, if you get a lot of tickets due to over-speeding or other irresponsible driving behavior, then you’re much more likely to ignore safety guidelines. So your premiums will also go up.
So what you need to do is to make sure you know the driving laws in your area so that you can avoid getting tickets. Don’t go over the speed limit, for example, because this will only result in higher premiums.
You may also discuss with your insurance company whether you can get a discount from them if you take a defensive driving course or other driver safety programs.
Some insurance companies offer discounts if you enroll in such programs. What’s more, you may actually become a better and safer driver because of it, and that means you will decrease your chances of getting into an accident, making a claim, and seeing your premiums rise.
Choosing an Insurance Company
There are several ways of doing this. One approach is to purchase insurance from major companies such as GEICO (Government Employees Insurance Company) and Progressive in the US.
For UK drivers, you can try out Aviva and Confused while Australians can look at Youi and Australia Post.
Major companies offer several distinct advantages. They tend to have the resources and the experience to make good on their promises. The fact that they are patronized by millions also lends credence to their reputation.
But major companies do tend to charge higher premiums. To avoid this, you can go online and get quotes from various insurance companies that operate in your area.
But the most effective way of getting insurance is to ask for references from family and friends, especially those who have experienced in making a claim.
Insurance companies are notoriously slow in paying out money to claimants, and what you need is a company that is not as difficult as the others. Watch the news and read reviews of people who had problems with their insurance companies denying their claims.
Basically, whichever insurance company you choose, you need to make sure that you’re crystal clear on what your insurance policy actually covers. Review your needs as your car gets older and its value goes lower.
When your car is only worth a couple of thousand dollars, a comprehensive and collision coverage may no longer make sense.
Find out what you need to do to make a claim on your policy. If you’re involved in an accident, get a copy of police reports and make sure you have a record of your medical and other extraneous expenses as a result. Call your insurance agent right away, or you may want to retain the services of a lawyer to help make sure that you comply with all the legal mumbo jumbo (check out this video about how to file a claim).
In any case, by making sure you get the right car insurance deal from a reputable and trustworthy provider, you will avoid unnecessary headaches if and when you need to make a claim.