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How to get car insurance: A comprehensive guide

At a glance:

  • What is car insurance?

  • Car insurance and liability coverage

  • Other forms of car insurance coverage

  • Gap insurance: What it is and when it’s useful

  • The factors affecting car insurance premiums

  • How to save on car insurance

  • Car insurance summary

What is car insurance?

If you have a car, truck, minivan, or other vehicle, you most likely already have auto insurance on it. It's required in some form or other in nearly every state.

Most drivers understand the need for auto insurance because they know that the costs of an accident can be very high, and insurance is not prohibitively expensive. It's a small price to pay for peace of mind while you're behind the wheel.

But does your insurance cover what you need it to cover? Does it cover too much or too little? Can you raise your deductible and enjoy lower rates? This overview can help you look more closely at your coverage so that you don't have any lingering doubts about whether you are getting what you really need.

Car insurance and liability coverage

Liability coverage is so named because it pays for damages that you cause to someone else. It does not cover you. Liability is offered for two scenarios: bodily injury and property damage. Actual coverage amounts vary, and you can increase yours if need be for an extra charge on your monthly premium.

Bodily injury covers medical and rehabilitation expenses when an insured driver causes bodily harm to another person and is deemed responsible for it. Property damage pays for property that an insured driver destroys; for example, if he or she hits a fence or another car.

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Liability also covers legal fees if you are sued and found responsible for causing damage to another.

What does it cover?

Liability insurance covers the named insured, that person's spouse, relatives, and those who are driving the vehicle with the owner's permission. Vehicles covered include the named vehicle, additional vehicles that the insured person owns, and substitute vehicles (such as rentals) that are being used in place of the insured vehicle.

States require minimum levels of liability insurance. You have the option to buy more if you like. It is important to know that your liability insurance may not cover the full cost of damages you cause. If your insurance limit is $50,000 and you cause $70,000 of damage, you are responsible for that remaining $20,000, and you could be sued for it.

How it is presented

Liability coverage is often presented as a series of three numbers separated by slashes, e.g., 25/50/10. This is an example of "split limit" liability, in which the three limits of bodily injury per person, bodily injury per accident, and property damage are covered separately (as opposed to "combined limit" liability, which rolls them all into one coverage).

Other forms of car insurance coverage

You can supplement your liability coverage with other forms of coverage. Below are descriptions of these other forms of coverage. Your policy will provide details beyond these, including exceptions to coverage.

Collision

Collision coverage is for crashes. It pays for damages to a vehicle; if the vehicle is totaled, it pays the cash value of the vehicle. Collision coverage is optional, but if you take out a loan, the lender may require you to carry it.

Comprehensive

Comprehensive coverage is for damages to your vehicle that are caused by incidents other than collisions. Examples of these incidents are theft, vandalism, weather damages, or hitting animals. "Acts of God" is a term used by most insurance companies to refer to events outside our control. These events are typically weather-related.

Medical payments and personal injury protection

Medical payments and personal injury protection both cover medical expenses incurred by you and your passengers in an auto accident. They may also cover lost wages in some cases. Personal injury protection is mandated in some states.

A state may offer either medical payments protection or personal injury protection. Some states offer both.

Personal injury protection also goes by the name no-fault insurance. It pays regardless of who is at fault. However, it is limited; it doesn't cover pain and suffering, distress, and some other unfortunate results of an accident. In the event that your medical bills are higher than the covered amount, you will not be reimbursed. But in some states, you may file a liability claim against the other driver (if they were at fault) to attempt to get compensation for your medical bills.

Uninsured/underinsured

This form of coverage, abbreviated as UM/UIM, covers you if you are hit by someone who has inadequate liability coverage, either because they don't have enough coverage or they don't have coverage at all. The other party must be at fault, however. The insurance company pays for bodily injury losses. It typically does not pay for property damage to your vehicle because collision coverage takes care of that. UM/UIM also pays you if you are struck by a hit-and-run driver.

Even though your insurance company will cover your medical bills, it may also sue the other party for damages.

Loss of use

Loss of use coverage reimburses you for the inability to use your vehicle if it is being repaired for an insured loss. An example covered expense is a rental car.

Towing/Roadside assistance

Towing and roadside assistance coverage pay for costs due to road breakdowns.

Personal property

Personal property in a damaged vehicle is typically not covered under the policy; you usually must claim it under your homeowner's or renter's policy. But there are exceptions: some insurance carriers will cover devices that are intended for automobile use, such as navigation devices.

Gap insurance: What it is and when it’s useful

You may think your car insurance is enough to protect you. But often, it is not. If you buy a new vehicle, the moment you drive it off the lot, it becomes a used vehicle and its value begins to decline precipitously. In the first year, that drop in value is in the double-digit percentages, as high as 30%.

But in the event of a total loss from accident or theft, your auto insurance is designed to pay your lender the auto's current cash value, not the loan balance. So, if you owe $25,000 on the loan, but the current cash value is only $15,000, you can see the conundrum you would be in if you totaled the car. You'd still owe the lender $10,000.

If you have that kind of money at your disposal, then it may not be a problem. But if you don't have the money, that's where gap insurance steps in. The insurer pays that difference to the lender.

Your insurance company may already offer gap insurance as an add-on, so it pays to at least inquire about it. You can also buy it at the dealership, though it costs more there. Gap insurance is also known as loan/lease payoff coverage.

Gap insurance doesn't cover everything

There are some things that gap insurance will not cover:

  • Late fees or other administrative fees levied after the loan has begun

  • Payments that you have deferred

  • Unpaid delinquent payments that are due at the time of the loss

  • Towing and storage expenses

  • Additions or modifications to your loan, such as from refinancing (in this case, you would need to repurchase the gap coverage)

Do you need gap insurance?

Some important factors can help you decide whether to get gap insurance for your auto:

  • Can you pay the difference between what you owe and what your vehicle is worth? If that is not an issue, you probably don't need it. But if it is an issue, gap insurance can be very helpful for you.

  • Interest that the lender charges.

  • Is the interest rate on your loan high? If it is, then your principal payments will be relatively small, thus lengthening the time that the gap will be present.

  • Was your down payment low? The lower the down payment, the bigger that gap will be.

  • Is your finance period long, such as 60 months or more? If so, you will be paying off the loan relatively slowly, thus maintaining that gap.

  • Is your vehicle depreciating rapidly? Some depreciate faster than others, thus lowering their cash values. The faster it does, the longer it will take to close that gap.

  • Do you drive more than the average 15,000 miles per year? Putting high mileage on can lower the cash value of the vehicle, thus widening the gap. As a rule, anything that can lower the cash value will widen that gap.

  • Did you roll over other costs into your loan? For example, if you still owed money on a previous car that you traded in, that is negative equity being added to the new auto.

  • Are you leasing? In the event of a total loss, you are responsible for the loan balance. The difference between the cash value of the car and what you have paid can be significant because leasing costs are usually low. Many lease contracts include gap insurance.

At some point in the life of the loan, you will find that you no longer need gap insurance, and you can cancel it.

The factors affecting car insurance premiums

When insurance companies set premiums, they do not simply pull numbers out of the air. They use actuarial science to determine risks, and then they calculate premiums to pay for those risks coming to fruition. Here are the main factors they look for:

Vehicle characteristics

The nature of your vehicle will affect how much you pay for your premiums. More expensive vehicles cost more to repair or replace. That is why luxury cars have higher insurance costs. Also, the performance nature of the vehicle impacts your premiums: if it can operate at high speeds or enjoy other performance enhancements, it is assumed that it will be used for risky behavior. Sports cars fall into this category.

Chosen coverage

The coverage you choose affects your premiums. If you are raising your deductible, your premiums will drop accordingly. If you raise or lower your coverage limits, premiums will rise or fall in line with them. The number of covered risks you choose also impacts what you pay. This includes any add-ons that you select.

The driver

Your auto insurance company profiles you to determine how much of a risk you are, based on what you are and what you do.

  • As most people know, men are considered a higher risk than women, as they drive more and take more risks, meaning they are involved in more accidents.

  • Your age also matters. Drivers who are just starting out will have a built-in increase in their premiums, and this will begin to fall around age 25. It is assumed that teenagers are riskier by nature; on the bright side, if they get good grades in school, they may qualify for good-student discounts.

  • On the other end of the age spectrum, those over 65 see age-related premium changes. Slower reaction times and being more injury-prone make them a higher risk in the eyes of risk analysts. On the bright side, some companies offer retirement discounts to those who drive less.

  • Your behavior as a driver reflects on your risk profile. Insurance companies review your driving record for moving violations and accidents.

  • Are you married? If so, you have a statistically smaller risk of being in an accident.

  • Your credit rating now affects your premiums. Under the assumption that those with good credit ratings are more responsible and risk averse, insurance companies lower premiums accordingly—and raise them on those with bad credit ratings.

Use of the vehicle

How you use your vehicle may affect the premiums you pay. If you drive only a certain number of miles per year, or you use your auto primarily or only for commuting to work, you may qualify for a discount.

Some companies are now trying out pay-as-you-go (aka odometer-based) plans. These are insurance plans whose premiums are based on how many miles you drive. The fewer miles you drive, the lower the chance of an accident. How they are implemented varies. With some companies, you buy prepaid miles of insurance protection. When you reach your limit, coverage ends. You must keep track of your mileage to determine when to buy more. Other companies use GPS or on-board devices that send odometer information to the company.

How to save on car insurance

There are ways to find the best and the least expensive auto policies. You can find auto insurance quotes online, or you can work with an agent in your area.

Your insurance company will be evaluating you as a customer to make sure you are a good deal for them. You should do likewise. A company that is in bad shape could be a nightmare if you need to file a claim. They could offer terrible customer service or endless runarounds; or worse, they could be unable to cover your claim. You can check with the insurance department in your state to learn the health of insurance companies you are interested in. An important thing to check: the number of consumer complaints. If they are high, that could be a sign to move on to another company.

Also, look up companies' financial ratings. A popular source of ratings is the A.M. Best Co., which you can find online at www.ambest.com.

Get quotes from several companies and compare prices and coverage levels.

Auto insurance premiums can be a big expense for some people but not others. You can improve your chances of getting the best deal by following some basic tips:

  • If you don't yet have a car or you are considering buying a different one, think about the type of car. Sports cars and luxury cars cost more to insure. So do 4-wheel drive vehicles. Vehicles that have higher rates of accidents or that are targeted more by thieves typically have higher insurance rates.

  • Considering a hybrid or electric vehicle? You may be eligible for an insurance discount.

  • Consider how much you use the car. You might get discounts if you put low mileage on the car; you will be considered less of a risk that way. You might also have access to a pay-as-you-go option at the company.

  • Improve your credit score. Insurers may use your score to determine your premium. If your score is bad, pay down excessive debts and collection accounts. Always pay your current financial obligations on time, every time.

  • Do what you can to avoid traffic violations and tickets.

  • Increase your deductible. Save up money and keep it handy in case you need it. You might be able to increase your deductible a little bit more after that.

  • Premiums are less expensive for used cars than for new cars.

  • If there is a teenager on your policy, that could raise your rates. But many carriers offer discounts for good grades, safety driving programs, and installed monitoring devices.

  • If your car is older, consider reducing or dropping collision and/or comprehensive coverage.

  • Research all available discounts. You can get discounts if you install anti-theft devices and if you have airbags and anti-lock brakes.

  • Can you consolidate your policy with others under the same company? If so, you may qualify for a discount.

Car insurance summary

Even where it's not required by law, most drivers have some liability coverage. Before you buy auto insurance, you must decide how much coverage you need and what types of coverage are appropriate for you. And, of course, you'll want to find ways to cut your insurance costs.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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