First time purchasing car insurance? It can be a bit overwhelming to understand the coverages, pricing, and all the terminology, but don’t worry. You will learn how to understand car insurance. Knowing how to understand car insurance will actually help alleviate and protect your financial well being. Think of car insurance as a financial safety net for your car and a means to help protect yourself from expensive bills.
This guide will help you learn and understand the car insurance policy process. This guide will go over the coverages and the things that help determine the price of the insurance. You will be able to feel financially secure the next time you drive a car.
What Is Car Insurance, and Why Is It So Important?
Car insurance can be very simply, explain as a contract between a person and an insurance company. The ‘insured’ must pay a regular agreed upon fee, called the premium. The insurance company must pay for specific financial loses that are car related, for a certain period of time that is agreed upon in a contract.
The primary importance of car insurance comes down to two areas: legal requirements and financial protection.
1. Legal requirements: Most states in the U.S. require liability insurance to drive legally. Fines, impoundment of the vehicle, and suspension of the driver’s license are potential punishments for being uninsured. The purpose of these requirements are to ensure all drivers can be held responsible for the damages caused to other parties during an incident.
2. Financial protection: Without insurance, the costs of an at fault accident, no matter how small the incident may seem, can be catastrophic. It requires thousands of dollars in repairs, and costs such as medical care and legal representation can be constant threats to an individual’s financial stability. Insurance protection covers all of the potential damages and expenses associated with an at fault incident, including costs for repairs, medical expenses, legal representation, and even costs associated to being sued. Without an insurance policy, you are fully liable for the damages caused during an at fault accident, and would have to pay for all repairs, medical expenses, and legal representation needed.
There is also vehicle theft, arson, fire, and even acts of nature. Insurance gives you that additional protection, and ultimately that peace of mind knowing that your money is protected.
The Building Blocks of a Policy: What Kind of Coverage is Offered
Your car insurance policy is not one product, but rather a collection of different types of coverages. You are able to tweak these and even combine them in order to build a policy that fits your needs. These are the most readily available coverages.
Liability Coverage: The Foundation of Your Policy
For the most part, liability coverage is the only kind of insurance that is required by law in all of the states. It’s also the form of coverage that does not cover you or your vehicle. It only pays for the damages you inflict on others, and their property. This coverage is broken into 2 parts:
Bodily Injury Liability (BI): This is the coverage that pays for the injury bills that are your responsibility when you are at fault for an accident, and the people that you are responsible for in the accident, are injured. It pays for and covers their medical expenses, lost wages, and pain and suffering. In every policy, there are limits for BI and they are in a 2 fold system. The limit is for one person in a car and then the limit is for the entire accident. 25/50 is an example because it means a total of $25,000 that is payable to only one person in an accident and then a cumulative limit of $50,000 that is payable to all the injured people.
Property damage liability covers paying for damage to someone else’s property after an accident as a result of your actions. In most cases, this will be damage to the other driver’s vehicle, however, this could also include damage to non-motor vehicles as well, such as a fence, mailbox, or even a building.
It is common for auto liability occurrence limits to be insufficient to cover the damages from a serious accident, as state minimum requirements for limits are often quite low. In such cases, having the option to purchase higher limits in order to better protect yourself is a good idea.
Coverage for your own vehicle is as follows.
Collision: This coverage is for damage to your vehicle in a collision with another object (e.g., another vehicle, a pole) or if your vehicle rolls over. This is covered whether or not you’re at fault for the accident. Lenders will almost always rule that you need to have collision coverage if the vehicle you are financing is a vehicle that you have a loan or lease on.
Comprehensive: This is also sometimes referred to as ‘other than collision’. This coverage is for damages not caused to your vehicle by a collision, covering instances such as theft, vandalism, fire, falling objects, severe weather, floods, and if you hit an animal. Just as comprehensive coverage is also often required by lenders for financed or leased vehicles.
Both collision and comprehensive coverage have a deductible, which will be explained in further detail below.
Additional Protection for You and Your Passengers
Aside from liability and damage to your vehicle, additional protection for you and your passengers can be obtained.
Uninsured/Underinsured Motorist (UM/UIM) Coverage: What happens if you get hit by someone who has no insurance, or doesn’t have enough insurance to cover your bills? This is where UM/UIM coverage comes into play. This coverage helps to cover your medical bills, and in some states, helps cover the cost of your car repairs, if the at-fault driver is uninsured. This coverage helps fill in the gaps for the uninsured drivers out there, which is unfortunately a large number of people on the road. This coverage is a must.
Medical Payments Coverage (MedPay): This coverage helps pay for medical expenses and funeral expenses after an accident for you and your passengers. This benefit is payable no matter who is at fault for the accident. It is supplemental coverage that is designed to help out when you have health insurance deductibles and co-pays. This is a good benefit for uninsured and underinsured people.
Personal Injury Protection (PIP): Required in no-fault states, this coverage is more expansive than MedPay. This coverage is designed to help pay medical expenses for you and your passengers. However, MedPay does not help reimburse people for lost wages, and things like childcare expenses that you incur due to your injuries. This is coverage for your injuries.This policy is custom to each individual – tailored with a step by step method
Step 1- Knowing Your Requirements
Rather than simply buying liability insurance based on state minimum regulations, do a little reflective thinking:
The Age and Value of Your Vehicle: If you have a relatively old vehicle, with little value, you may not want to have collision or comprehensive coverages, as you will be receiving little back and will lose more overall. It may not be worth spending hundreds a year on coverage for a car worth 2,000. On the other hand, newer vehicles or those which leave you with a loan, will warrant those coverages.
Your Economic Circumstances: If you have a lot of assets or a loan on the vehicle, and other valuables, it is useful to ensure that the liability coverages are more than just the minimums. Accidents of more than a few vehicles that cause serious injuries or receive a lot of litigation are not just a few tens of thousands, and state minimums can be reached very quickly – meaning opening up your personal assets to be targeted in a lawsuit.
In these Economic times, it is beneficial to understand how to curb costs when it comes to health care and insurance. health care costs can seem insurmountable but there are insurances, such as MedPaye and PIP, which can help cover the costs that you have to pay out of pocket as a result of a car crash when you are on a high deductible plan. MedPaye and PIP provide the covered you need to protect you when you need help the most.
Step Two is Understand and Choose Your Deductable
Deductables are the amount that you, as a consumer, need to pay out of pocket on a collision or comprehensive insurance claim before the insurance starts to help. An example of that is a situation where a consumer has a deductible of 500 dollars. If a car gets damaged to the extent of 3000 dollars you, as the consumer, have to pay the initial 500 dollars and after that the insurance will cover the other 2,500 dollars.
When you are choosing a deductable you need to understand that there is a trade-off system in place which is as follows:
If you are looking for a lower premium, you will have to deal with a higher deductable. that means you will have to pay out of pocket more to an insurance claim.
If you are looking for a higher premium, you will have to deal with a lower deductable. This means that the deductible is lower and the insurance will have to cover more costs.
At the end of the day you should consider a deductable where the insurance is just as affordable for you as you need it be and symmetrical such that it is a reasonable amount for you to cover it on the spot to be fiscal. If you are in need of a strategy, it is reasonable to place your emergency funds in a system that will match you deductible amount.
Step 3: Compare Quotes from Different Insurers
There is a huge range of costs among different companies for the same coverage. Car insurance is customizable reward product, so never take the first quote at face value.
Gather Information: Before you start, have your driver\’s license number, vehicle identification number (VIN), and current insurance (if any) accessible.
Shop Around: Contact at least 3.5 different insurance companies: a combination of national carriers, smaller regional insurers, and direct-to-consumer companies.
Comparison Tools: This can be made easier through a quote comparison website, but also contacting an insurance agent would be useful as they have access to a range of different companies.
Compare Apples to Apples: To accurately compare quotes, you have to be using the same type of coverage, limits, and deductibles. Otherwise, the cheaper quote would end up costing you a lot more in the long run.
Factors That Affect Your Premiums
A number of different factors go into the pricing of your premium. While some of them cannot be changed, others can be to help decrease your insurance costs.
Driving Record: Perhaps the most significant of the factors. If you have a history of accidents, tickets, and DUIs, you will be put into a different and more expensive risk category.
Location: Your area of residence greatly impacts your insurance premium. Urban locations with a lot of traffic and crime tend to incur higher premiums compared to rural locations.
Age and Gender: Statistically, young male drivers under the age of 25 tend to get in more accidents and, as a result, pay the highest premium. As the insured gets older, the premium tends to decrease until middle age, and then, in some cases, increases slightly for seniors.
Type of Vehicle: Your car’s premium depends a great deal on the make, model, and year of the vehicle. Sports cars or luxury vehicles tend to get more expensive premiums. On the other hand, vehicles with good safety ratings tend to have a cheaper premium.
