In the market for car insurance? Knowing the basics can help you keep more cash in your pocket.
When it comes to locking down car insurance, a number of important factors come into play. And since it isn’t a one-size-fits-all deal, deciphering the type of coverage that best fits your lifestyle can get complicated—and fast. From there, stretching your dollar and pinpointing the best insurance carrier isn’t always easy.
We’re here to make things a little easier. Ready to demystify the whole car insurance thing? Here’s everything you need to know.
The common sense answer here is yes. While the exact insurance mandates will depend on your state, drivers are expected to prove that they can financially cover the damages if they cause an auto accident.
If you’re an uninsured driver who causes an accident, the repercussions can be major. From a financial standpoint, the other driver could potentially take you to court to demand payment for any damages or injuries they sustained. This is less likely in “no-fault” states, which make it trickier to sue uninsured drivers. That’s not to say it’s impossible, it’s just that damages generally have to be significant. In states that aren’t considered “no-fault” (a.k.a. the majority of states in the U.S.), uninsured drivers could be on the hook for all of these expenses if a judgment is filed against them in court.
In addition to the potential financial consequences of driving while uninsured, it’s likely that state penalties will apply as well. Being hit with hefty fines and/or having your license suspended or revoked are real possibilities.
There are lots of different types of coverage out there. The best plan for you all depends on your situation and state requirements. Here’s a breakdown, in ordinary terms, of the most common ones:
- Liability insurance: This is probably the most common type of coverage. If you cause an accident that results in damages to another person or property, liability insurance is what covers the cost.
- Bodily injury liability insurance: Similar to above, this type of liability insurance covers the expenses related to the injuries or deaths of others.
- Collision/comprehensive insurance: Let’s break this one down in individual terms. Collision pays for any damage your car sustains if it collides with either another car (regardless of who’s at fault) or even an object. On the other side of the coin, comprehensive insurance picks up the rest (think weather-related damage, theft, vandalism, animal run-ins, etc.)
- Uninsured/underinsured motorist coverage: This is exactly what the name implies. In the event that you get hurt or your car is damaged in an accident caused by an uninsured or underinsured driver, this type of coverage will protect you. This type of insurance is especially important if your own liability insurance only covers the injuries of you and your passengers if you’re at fault.
- Medical coverage: This covers the medical expenses that might arise if you or your passenger(s) are injured in a car accident.
- PIP coverage: PIP (or Personal Injury Protection) insurance goes a step further than basic medical coverage, usually taking into account things like loss of work, funeral expenses, etc.
- Umbrella policy: This is something like an excess policy that covers you after your liability coverage ends. It’s ideal for high-net worth folks who’ve got a lot of valuable assets at stake. A $1 million umbrella is fairly common.
- No-fault insurance: This type of coverage, available in 12 states, is designed so that your insurer pays for all your damages—whether you’re at fault or not. These states currently include: Florida, Hawaii, Kansas, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah.
When you have car insurance on your radar, you may feel bombarded with all the lingo. Here are some of the most common terms. And, most importantly, what they actually mean.
- Deductable: If you’re involved in an accident, this number is the dollar amount you’ll have to pay before your insurance provider picks up the rest of the tab.
- Premium: This is what you pay for your coverage. It’s usually on a monthly basis, but every policy is different.
- Claim: If you’re involved in an auto accident, you’ll need to file a claim with your insurance company. (Be sure to exchange insurance information with the other party ASAP.) This is what gets the ball rolling in terms of reimbursement and getting things straightened out. Claims can also be filed in the event your car is stolen or vandalized.
- Total loss: After an accident, your insurer may deem your car a “total loss” if the cost of the repairs is more than what the car is actually worth.
Again, this all comes down to your own individual lifestyle and needs. A good place to start is with your state’s requirements. (Sometimes the bare minimum is really all you need.) A solid rule of thumb when working out how much coverage you need is to make sure you’re covered for an amount equal to the value of your assets. In other words, how much do you have in personal assets? The answer can help guide you when it comes to determining how much coverage you need. For example, higher-net worth individuals would be wise to opt for more coverage. (If they don’t ,their assets could be up for grabs in a future lawsuit.)
Now for the meat and potatoes: How do you decipher the numerical ratio you see on different plans? This combination of numbers, which represents your coverage details, varies from state to state. Let’s use Georgia as an example, which looks like this: 25/50/25
- The first number means that $25,000 is the bodily injury liability maximum for one person who gets injured in an accident.
- The middle number means that $50,000 is the bodily injury liability maximum for all injuries in one accident.
- The last number means that $25,000 is the property damage liability maximum for one accident.
How is car insurance different for people who have an auto loan or are leasing a car?
If you’re leasing a car, you may have heard the term “gap insurance.” This actually isn’t strictly for leased cars; it applies to anyone who has an auto loan. It basically closes the “gap” between how much you owe and what the car’s current value is. If you total your car without this type of coverage, you’ll have to cough up the difference yourself.
Eg: say you have $23,500 left on your car loan when you get into a crash that totals the car.
- Let’s say your insurance company then deems your car to be worth $19,200.
- After you factor in a $500 deductable, your insurer ends up paying out $18,700.
- What’s left is $4,800 that falls into the gap.
If you have gap insurance, that amount is absorbed by your insurer. If not, it’s on you.
Another note about leasing, most dealerships require higher liability insurance limits on leased cars. Collision and comprehensive coverage may also be mandated.
If someone who isn’t listed on your insurance policy causes an accident in your car, it can quickly lead to panic. Let’s take a closer look at what happens in this situation. In short, it’s the vehicle’s insurance policy—not the driver’s—that counts here. To put it simply, you’re responsible for whoever’s driving your car. That said, this type of accident could result in you getting hit with a higher premium, even though you weren’t the one driving.
How much can you expect to shell out for car insurance? The truth is that a number of factors come into play where your rates are concerned. At the end of the day, what insurance companies care about is how likely you are to be in an accident. Everything from your age to your location, driving history and credit score can have an impact in determining your rates.
Having a history of always opting for the bare-minimum coverage could translate to a higher rate since it implies that you might not be super responsible. That’s not the only unexpected thing that could affect your rates; it turns out that married people generally pay less than single folks. (Getting divorced is also known to increase auto insurance costs.)
Not surprisingly, traffic tickets and past accidents can also come back to bite you. For example, some states require people who’ve had a DUI conviction to purchase high-risk insurance. Some insurers might go as far as to cancel your policy entirely. Again, other case-specific details will also be considered in determining auto insurance rates. It goes without saying that having a history of careless driving is a biggie.
Doing a little bit of homework on the back end can help you save big money in the long run. Here are a few handy tips when shopping around for car insurance.
- Get multiple quotes: Locking down car insurance coverage definitely isn’t a one-size-fits-all approach. In fact, it isn’t uncommon for two different carriers to provide quotes that vary widely. This is precisely why it’s wise to gather quotes from multiple companies, then take it from there.
- Check in on your rate every few years: Getting a fresh quote from your insurance company every two to three years may reveal opportunities to save. Recently married? Check in with your insurer to see if you’re eligible for a cheaper rate.
- Consider raising your deductible: In some cases, going for a plan with a higher deductible can significantly lower your premium. But do keep in mind that if you go this route, you’ll have to meet that high deductible should you ever file a claim in the future. If you feel comfortable taking the risk, it can be a money saver.
- Look into bundling your insurance policies: Already paying a monthly premium for renters’ or homeowners’ insurance? Check in with your current insurer to see if they offer any discounted auto coverage.
- Check to see if you’re eligible for any other discounts: Depending on your situation, you might be able to snag additional rate discounts. Some insurers offer specialty prices to members of the military and good students, while others provide discounts for low mileage or insuring multiple vehicles.
A good starting point when seeking auto insurance is to get quotes from some of the major carriers, which is free. Before you sit down to do this, do yourself a favor and have these details ready.
- Your current driving details: Be prepared to answer questions about your car and the type of driving you do (business and/or personal, as well as the average number of miles you’ll be regularly traveling). You can also expect the insurance company to ask you about other licensed drivers in your household.
- Your driving history: It’s a pretty safe bet that your driving history will come up. This includes any accidents you’ve been involved in, along with any tickets or traffic violations you’re received over the last few years.
- Your personal information: Chances are high that your location, age, marital status, living situation, and social security number will all be requested—so have them on the ready.