If you drive a car, you need to be covered by some sort of automobile insurance. You have probably seen dozens of advertisements from insurance companies claiming to help lower your rates, improve your coverage, or just encouraging you to compare rates, but before you buy your first insurance policy or change insurance providers, the first step is understanding exactly how car insurance works.
Types of Car Insurance
There are several types of insurance coverage, each designed to cover different potential cost.
Liability coverage is required in most states if you want to drive. This coverage exists to pay for repairs and medical costs of any property or person damaged as part of an accident that was your fault. If you cause property damage by running into a building or fence, liability coverage will pay for that too.
Your liability coverage does not cover you or your car. It only covers other drivers and their vehicles. This means that if you cause an accident and damage your car or get hit by another driver who doesn’t have insurance, you will be on the hook to pay 100% of the repairs and medical bills yourself.
Collision insurance helps pay to repair or replace your car if it’s damaged in an accident with another vehicle, regardless of who caused the accident. It also covers your car if it’s damaged by another object, such as a fence or a tree.
Personal Injury Protection
Collision coverage will pay for damage to your vehicle, but it won’t cover the cost of any medical expenses you incur. To cover medical expenses resulting from an accident, you need Personal Injury Protection (PIP). PIP covers medical expenses, regardless of who was at fault in causing the accident, for both you and your passengers. Plus, it often covers lost wages if you are unable to work until you recover. Remember that if another driver caused the accident, his liability insurance will cover your car repairs and your medical expenses. However, you can have your own Personal Injury Protection as well. In some states, PIP is a required policy add-on. This is worth the additional cost if you are seriously injured and have high medical expenses.
Uninsured Motorist Coverage
Even though most states require auto insurance, there are still individuals who drive a car without having the needed insurance. These drivers are called “uninsured motorists,” and because there are uninsured drivers on the road, your insurance company may require that you have uninsured motorist coverage. Remember that the driver at fault is responsible for the bills related to your personal injury and auto repairs, but if this driver is uninsured, who pays?
Insurance companies developed policy coverage to address situations involving uninsured or underinsured drivers—one that covers physical harm and one that causes damage to your vehicle. Bodily Injury covers you, your passengers, and pedestrians who were injured or killed by a driver who does not have insurance. It pays for medical expenses, funeral expenses, loss of income while you recover, and sometimes pain and suffering. Property Damage covers the costs of repairing your car, and it may also cover other property such as your home or items in your car that were damaged in the accident. It can also cover your repairs from a hit-and-run accident where the other driver is unknown.
Comprehensive coverage is designed to insure your car for damages and repairs that are not caused by accidents, often events that are out of your control. This includes events such as theft, damage from fire, vandalism, weather damage, hitting an animal that runs in front of your car, and getting a cracked windshield.
It’s very important for you to understand that even if you have every type of automobile insurance coverage, you are still responsible for general mechanical repairs. These will always be paid for out-of-pocket.
Tort vs No Fault
Each state regulates car insurance independently, which means that the types of insurance coverage required will be different depending on where you are located. State rules generally fall into two categories: “Tort” and “No Fault.”
A tort state requires that someone be found at fault for causing the accident, and that driver is responsible for coving all damages. For example, if you cause an accident at were deemed at-fault because you ran a red light, your insurance would cover the other driver’s damages including medical bills, lost wages, and property damage. Tort states require drivers to have liability insurance in order to cover harm done to others. If the at-fault driver does not have liability insurance, he/she would be responsible for paying for the damages caused out-of-pocket.
It is possible that both drivers could be assigned blame in the accident so both share in the financial costs. For example, in the accident on January 1, Driver A was 40% at fault and Driver B was 60% at fault. This percentage of fault will determine how much each party is required to pay for repairs and damages.
Most states are tort states. The main advantage of the tort system is that it is perceived as more fair. The driver responsible for causing the accident (and his insurance company) is responsible the damage he caused, no more and no less. However, if the amount of the insurance payout does not cover the costs incurred, the injured driver can sue the driver who caused the accident. A disadvantage of the tort system is that a huge number of accidents end up in court, and the courts then need to determine who was at fault and how much to award. This is extremely expensive both in legal fees to the drivers involved in the accident and in the burden placed on the legal system.
No Fault States
The opposite of the tort system is the no-fault system. No-fault states generally do not make any effort to determine who was responsible for a collision. The costs for repairs and medical expenses are paid solely by each driver involved in conjunction with their own insurer. Because the costs incurred in some accidents are extremely high, the state may allow an injured driver to sue the other party if costs exceed a certain level. The court would then determine who was at fault based on police reports and eye witnesses.
In no-fault states where drivers are responsible for their own costs, having liability coverage and uninsured motorist coverage becomes less important but collision coverage and personal injury protection are usually mandatory.
There are currently 12 states with “no-fault” regulations: Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah, plus Puerto Rico and Washington D.C. Several other states offer the option of no-fault insurance policies in addition to tort policies.
Proponents of no-fault insurance argue that it makes filing a claim and getting compensation for repairs simpler and faster, and it removes a huge burden from the legal system. Opponents say that it does not properly discourage drivers from behaving recklessly which often results in higher premiums.
Driving Between States
If a driver from a no-fault state is visiting a tort state and causes an accident, he/she may be on the hook to pay a significant amount to the other driver if he/she does not have sufficient liability coverage. Conversely, many tort state policies treat drivers from no-fault states as if they are uninsured motorists, so Uninsured Motorist coverage would pay for damages from an accident.
How Much Insurance do I Really Need to Have?
Liability coverage is the minimum auto insurance coverage required to drive in most states. Remember that this insurance covers the other driver in an accident that you caused. Insurance companies may advertise that they offer the “lowest cost insurance,” catching the attention of new, young drivers and cash-strapped drivers. However, this low-cost insurance is for liability coverage only which means you and your vehicle won’t be covered when you cause an accident. At the other end of the scale, many so-called personal finance “experts” will advise all drivers to get the maximum amount of coverage they can afford. Following this advice means that you may be paying for coverage you don’t necessarily need. Take time to talk to your insurance agent for guidance on how to balance the trade-offs by determining your potential risks and the right amount of coverage for you.
Deductibles and Premiums
There are many factors that will influence the cost of your monthly premium, but the biggest factor that you can negotiate is the balance between your deductible and your premium. The deductible is the amount of money you pay first when you file a claim. The insurance company will then pay the rest. The premium is the amount you pay each month for your insurance coverage.
The amount of your deductible and the cost of your premium have an inverse relationship. The higher your deductible, the lower your premium. This relationship allows you some control over your total insurance costs. For example, you may want coverage for liability, collision, uninsured driver, and personal injury protection in case of a major accident. Even with all of this coverage, by having a high deductible, you can keep your monthly premium payments lower. You may have to pay a big sum out-of-pocket if you get into an accident, but your monthly premiums could be lower than someone who only has liability coverage and a very low deductible.
What Will Raise Your Rates
Besides choosing the type of coverages you need to have and determining how to balance your premium and deductible, there are several other factors that can influence how much your insurance rates will be.
Type and Year of Vehicle
The type of vehicle you drive has a definite impact on your insurance rates. Fast sports cars have much higher insurance rates, simply because they are more expensive to repair if they get into an accident. New cars are more expensive for the same reason. You may think that having an older car seems like the best option, but insurance companies will also charge more for cars over 15 years old. This is because older cars have higher failure rates than newer cars. Older cars are more likely to break down while on the road, causing an accident.
Crime also plays a role in how expensive your insurance might be. If you happen to drive a model of car that thieves prefer, the cost of comprehensive coverage will be significantly more expensive for you. The most frequently stolen cars usually are not the most expensive cars. They are the cars that can be cut up for individual parts and sold at higher rates.
Your Age and Gender
Historically, men typically get in more accidents than women do, so women usually get a bit of a break on their car insurance premiums. Younger drivers also pay more than middle-aged drivers since their lack of experience results in more accidents. Although they’ve had decades of experience driving, retirees may see their rates increase if they are physically impacted by changes in vision or are taking certain medications.
Urban areas have more drivers than rural areas, thus increasing the chance of collisions on your daily commute. If you live in a city, expect to pay more for insurance.
Other Drivers Using Your Car
If you have a spouse who also uses your car, you will pay more to insure your spouse. The insurance company wants to make sure that regular drivers of a vehicle have coverage too. Before you regularly drive someone else’s vehicle, such as your spouse’s or friend’s car, see if you need to purchase insurance. You may be considered an uninsured driver if their insurance does not cover other drivers. When you started driving your parent’s car as a teenager, most likely your parents saw a huge spike in their monthly premium.
Using Your Car for Work
If you use your car as part of your work responsibilities, such as making food deliveries or driving around for sales calls, your normal personal insurance will probably not cover you if you get in an accident on the job. You will need a special class of professional insurance in order to be covered. The good news is that your employer will usually compensate you, and if not, you can write off the expense on your income taxes.
If you frequently file claims with your insurance company, even for accidents that are not your fault, your premiums will go up. The insurance company sees that you are a higher risk because of where you are driving or the time of day you are driving.
Citations and Tickets
If you get speeding tickets or reckless driving tickets, your rates will start to go up quickly. These tickets show that you are a riskier driver.
What Will Lower Your Rates
Insurance companies consider many factors that can help lower your insurance rates, but be warned – if you tell your insurance company you qualify for these discounts but they find out you were misleading them, your policy will be cancelled and you may even be prosecuted for fraud.
Garage Parked Car
If you park your car in a garage each night, you can get a huge reduction in your monthly premiums. This is because cars parked in a garage see less “wear and tear” from the elements like rain and snow, get less damage from vandalism and debris, and are far less likely to get hit by other drivers while parked.
If you have renter’s insurance, homeowner’s insurance, or any other type of liability insurance, your insurance provider might offer a bundle price in order to get all of your business. Bundling different types of insurance with one company could knock off 15% from your premium costs for each of your insurance policies.
If you do not file claims frequently or if you have never filed a claim, your premiums will start to fall after a few years. You have shown the insurance company that you are low risk.
Safe Driver Courses
You may be able to take Driver’s Ed or a Safe Driver class and get a few dollars knocked off your insurance premium each month. Being an educated driver means you are less risky because you’ve learned how to be a safer driver. Many insurance companies will require you to take a safe driver course after receiving a certain number of speeding tickets or citations. If you do, you can avoid a huge spike in your premium.
Your monthly premium is determined partially by your history of claims, but you can also save money on this cost by getting a strong understanding of how insurance works. When you sign up for a policy, your insurance company will put you into a pool with dozens or even hundreds of other drivers who have similar characteristics (age, number of claims, type of vehicle, etc.). The insurance company then determines how much to charge you based on the average amount of money it had to pay out in claims for this group in previous years.
The criteria used to determine which group you should be part of changes from year to year, and it will be different for different insurance companies. Once you are part of a particular group within one insurance company, you most likely will not be moved to a less expensive group, even if you qualify. Insurance companies tend to review their “group characteristics” only every few years. If two insurance companies had completely identical groups, the premium cost could be different for individuals in both groups simply because one insurance company might pay out a more for claims than the other company. So new customers being added to the “pool” would be charged different premium rates. Why should you understand this? You could end up saving hundreds of dollars simply by shopping around at different insurance companies regularly. Even if your rates do not change from year to year with one company, they might be drastically different if you apply 12 months later with a different company. Most experts recommend shopping for new auto insurance at least once every two years.