It can often feel as though buying car insurance is a complicated process, with plenty of unfamiliar terms and caveats. While comparison sites have made it slightly easier to find auto insurance, in some respects, it can still be complex to sift through all of the available offers to find the insurance that’s right for you. However, as there are an estimated 273.6 million vehicles in America (1), it’s clear that most people will have to go through the process at least once in their lifetimes. To unravel some of the mysteries and myths, here are 5 things everyone should know about auto insurance.
1. How premiums are worked out
Car insurance companies will have their own procedures and formulas for working out premium prices, but there are some factors that stay consistent throughout. These include:
- The make and model of the car
- How the vehicle is used, such as only for commuting or for leisure as well
- The age, gender, marital status and driving history of the person applying
- Where the policyholder lives and the crime rate in that area
- In some states, the driver’s credit score will also be taken into account although many consumers believe this to be unfair (2).
2. The different types of optional coverage
When comparing car insurance quotes, there will be two different types of coverage to pick from; collision coverage and comprehensive coverage. One of the biggest misconceptions is that comprehensive policies will cover car damages due to collision (3), but this is not the case. Comprehensive cover will protect against theft and any damage that doesn’t result from collision, such as a fire, vandalism, or even hitting an animal on the road. Collision cover will reimburse costs if you collide into another vehicle or object when you’re at fault. These are both optional coverages, so it is important to understand what kind of insurance you need when choosing a policy.
3. There’s also mandatory coverage
Along with the collision and comprehensive coverage options, there are also two types of mandatory coverage for most states in America. This includes bodily injury and property damage liabilities. Some states in America will also insist that your policy includes medical payments or personal injury protection and/or uninsured motorist coverage. While some states may only believe these to be optional, the Insurance Information Institute recommends adding them to a policy for greater financial protection (4).
4. Gap insurance
For those who do add comprehensive or collision coverage to their policies, it is important to note that only the market value of the car will be covered. If a vehicle is leased or is on finance, then this could cause a gap if the car is lost, stolen or totaled. As vehicles depreciate quickly, then what the insurance will cover and what is owed on the vehicle may be different. This gap can be solved with specific gap insurance, which will pay the difference if the worst were to happen. Some auto dealers require those leasing or financing a vehicle to purchase comprehensive and collision coverage, although some leasing companies will include gap insurance into the lease payment. Ensure you understand what is and isn’t covered if financing or leasing.
5. Insurance discounts
Auto insurance prices can vary wildly, so many people look at ways they can bring these costs down. One way to do this is with insurance discounts, which is where you can be rewarded for being a safe driver. This could be because you have a vehicle with a good safety record, but perhaps also because it has extra safety features such as an anti-theft device. Some insurers also offer what is called ‘Black Box Insurance’ where a device is fitted into the vehicle that monitors your driving. Those who drive safely, and within speed limits, will be able to pay less overall for their insurance. However, it is also possible to get auto insurance discounts just from paying the full amount for the year instead of in installments. Also, being vigilant and checking for new deals every year when a policy expires will ensure you’re always getting the best insurance for the best price. If you let a policy auto-renew, then you may not be getting the best deal compared to shopping around.
Auto insurance can certainly feel like a minefield, but understanding some of the terms and jargon can certainly make it easier to pick the right policy. Many insurance companies will also be happy to discuss what everything means with potential customers, so never be afraid to ask.