Car Insurance

Insuring your car is more than just a good way to protect your new investment.  It's also a good way to protect others around you. In most states, you are legally required to carry insurance to protect your passengers, others that might be hurt by your car and damages your car might cause to the property of others.

Car Insurance

Insuring your vehicle is more than just a good way to protect your new investment.  It's also a good way to protect others around you.  In most states, you are legally required to carry insurance to protect your passengers, others that might be injured by your car and damages your car might cause to the property of others.

In this publication we're going to discuss why consumers need automobile insurance, the various types of insurance offered, as well as some of the factors that insurance companies can use to determine auto insurance policy premiums.

Basics of Auto Insurance

Don't be fooled into thinking you don't need car insurance just because you only drive a couple of miles a week.  Nobody hops into a car and intentionally rams into another car, deer or telephone pole (criminal exceptions noted).  The vast majority of us have ACCIDENTS - and these accident can even happen as we are pulling out of our own driveway.

Besides, when calculating how much your car insurance premiums will cost, most companies consider the amount of driving you do in that car.  For example is the car used for pleasure only, driven to school, or short commutes to mass transit parking lots?  We'll revisit this subject again later when we talk about some of the other factors that determine how much your insurance will cost.

In many countries throughout the world it is mandatory, or compulsory, to purchase auto insurance before driving on public roads.  In the United States, there are penalties for not purchasing auto insurance including fines, revocation or suspension of driving license or vehicle registration, and even possible imprisonment in some states.

In general, car insurance provides coverage for the insured party, the vehicle owned by the insured party and third parties.  Third parties can include vehicle passengers, other individuals involved in the accident as well as other owners of the vehicle such as a bank or lender.  Each of these insured parties is covered by one or more categories of insurance that are sold by insurance companies.

Categories of Car Insurance

Earlier we mentioned some of the reasons we need to have car insurance.  Well it is no accident that car insurance companies break down a policy into subcategories of insurance that fit very nicely with your insurance needs.  This gives you the ability to tailor your car insurance needs to your individual situation.  Generally, the four subcategories of car insurance include:

• Collision / Comprehensive Insurance
• Medical Expenses
• Liability Insurance
• Uninsured / Underinsured Vehicle Operators

Each of these different types of auto insurance is discussed in more detail in the sections below.

Collision / Comprehensive Insurance

Collision insurance covers the damage to your vehicle when you are in an automobile accident - up to the book value of the car.  Collision insurance is usually subject to a deductible.  These are the payments or costs that are required to repair the car.  Book value of the car will be paid to the insured if the cost of repair exceeds the book value of the car.

Under certain conditions, the insured may wish to sign a collision damage waiver (CDW).  Under this condition, the owner would not be insured for collision damage.

Comprehensive insurance covers damages to your car by an unknown party or an "act of God."  This covers damage to the car that is caused by what is known as "other than collision."  This includes fire, theft, vandalism, weather (such as hail) or impacts with animals such as deer.  This type of damage is known as comprehensive losses.

Medical Expense Insurance

In most states, the insured is required to obtain a car insurance policy that pays for medical expenses.  This applies to medical treatment for the driver as well as passengers involved in an accident.

Liability Insurance

This covers property damage or injury you might cause to others.  Liability insurance coverage is normally provided at a fixed dollar amount.  Liability payments usually occur when the insured is found to be negligent in some way.  For example, if the driver of the vehicle damages a utility pole, their liability coverage would pay for the expense of repairing or replacing the utility pole. 

Liability coverage is usually sold as a combined single policy limit or a split limit.

Combined Single Limit Policy

A combined single limit policy simply combines all types of liability coverage included in the policy, for example bodily injury and property damage.  All payments made during a single event are combined and limited by a single limit policy.

Split Limit Policies

A split limit policy allows the consumer to purchase separate coverage for both property damage and bodily injury.  For example, even during a single event, the maximum or limit for both bodily injury and property are not combined, but subject to the total maximum limit - separately.

Uninsured / Underinsured

Unfortunately, not everyone has car insurance and uninsured / underinsured motorists, or UM/UIM, insurance helps the consumer or passengers for damages or injuries if the other party involved in the accident does not have enough insurance coverage to pay for the damages that you incur.

Special Types of Auto Insurance

These are the primary subcategories of car insurance; but companies may offer other policy features such as:

• Loss of Use - which are payments made to car rental companies if a car is damaged and the owner needs to rent a car until the repair is completed.
• Loan or Lease Payoff - which is sometimes referred to as GAP Insurance, this provides insurance to pay off the gap between a car's market value and the amount of outstanding loan on the car.
• Towing Insurance - this type of car insurance is really a roadside assistance program and can policyholders cover problems such as flat tires or cars that run out of gasoline.

Cost of Car Insurance

Now that we understand why we carry car insurance, it's time to discuss what really matters - the cost of car insurance.  Most insurance companies determine the policy's cost or premium using a formula.  If you're an inexperienced driver, you're going to pay more.  Insurance companies don't have the time to follow each potential policyholder to see if they are a "wild child" or a "cautious kid."  So what are the factors that go into cost?  Here is a short list:

Age of Driver

Younger drivers - such as teens - are considered less experienced and would pay higher premiums.  However these same teenagers are sometimes offered discounts if they take driver education or get good grades in school.  In general, car insurance premiums begin to decline when drivers reach age 25.

At the other end of the age spectrum, older drivers are often offered senior or retirement discounts.

Driving Record

Past performance is sometimes used as an indicator of future performance.  Location of your home or place of employment can also affect your costs - urban rates are usually higher.  And since men tend to drive more miles each year than women, they have a higher chance of being involved in an accident - and therefore gender can sometimes determine insurance premiums.

Type of Vehicle Driven / Level of Coverage

The cost of car insurance would also take into consideration both the cost of replacing a vehicle and the type of vehicle driven (sports car versus minivan).  Premiums on auto policies would also be reflective of deductibles, or the level and/ or breadth of coverage selected (more coverage simply costs more).

Distance Driven Each Year

Some insurance companies take into account the distance driven or how the car is used during the year.  For example, pleasure use only versus commuting to a job.  These same insurance companies may ask drivers to estimate the number of miles the car will be driven each year or require the policyholder to submit odometer readings each year at renewal.

Credit Scores

More recently, some insurance companies have been using credit scores to adjust premium levels.  Justification for using insurance credit scores is simply this - insurance companies believe that consumers with lower credit scores are more likely to file claims and collect money on their policies.

Lowering Car Insurance Costs

So now that we know what factors auto insurance companies might consider when determine policy premiums, it's time to discuss what can be done to lower the cost of your car insurance bills.  Here there are a couple of tactics you can use to help control costs.  The first tactic will probably save you the most money, but also place you at the greatest risk of loss - eliminate collision or comprehensive coverage.

Collision Waivers

Since collision and comprehensive cover the cost to repair damages to your car, you don't need to have this insurance.  We need to be careful with blanket statements like this because if you have a loan on the car or are leasing the car it is very likely that the company leasing you the car or lending you the money will require this subcategory of insurance.   Just remember, if your car is damaged and you don't have collision or comprehensive insurance, you will need to pay for all repairs to the car or buy a new one.

Raising Deductibles

You can also raise your deductibles to lower you car insurance costs.  By raising your deductible, you are essentially paying a larger share of any cost of damages.

Another way to lower cost is to see if the company that provides your homeowners policy or life insurance offers "umbrella" policies.  By consolidating all of you insurance needs through one company or broker, you may qualify for discounts.

Taking Advantage of Discounts

Finally, you might want to simply ask your car insurance company if you qualify for discounts.  Many companies offer savings to students with good grades or people that have taken approved defensive driving courses.  Some of the safety features of the car - anti theft systems, air bags, anti-lock brakes - are designed to protect the vehicle and its occupants, therefore, they should also lower the cost to insure the vehicle against these same types of losses.

About the Author - Car Insurance

Bill Sharlow is the Editor of Money-Zine.com.  Copyright © 2004 - 2007 Money-Zine.com

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