When Julie Eaton moved from Los Angeles to a small town in Kentucky, she was tasked to shop around for a new car insurance policy.
While comparing rates in both areas, Eaton was surprised to discover that overall, car insurance rates in her new stomping grounds were actually higher than living in one of the largest cities in the U.S.
After digging a little deeper, Eaton noticed her new town charges a tax that tacked on nearly 20 percent to her policy. “I wouldn’t have even looked at the breakdown unless I was shopping in both areas,” says the real estate broker based out of Newport, Kentucky.
It’s all about the details
You never know what nuances are folded in to car insurance. Not carefully reviewing the policy you’re buying could lead to not getting the proper coverage, or spending more than you need to.
If you’re in the market for an car insurance policy, while shopping around you may be drowning in a confusing pool of acronyms, jargon and host of different coverage options. It all makes it harder than it needs to be to figure out which policy to opt in to.
So, how does car insurance work? To help you understand the ins-and-outs of auto insurance and help you find the policy that’s right for you, we’ve got all the basics right here:
How does car insurance work?
You most likely know the gist of what auto insurance is: to provide drivers and passengers financial protection against the costs of damaged related to when you’re driving
The idea behind auto insurance is fairly simple: the driver or policyholder agrees to pay the premium, and the insurance company agrees to cover the losses as determined in the policy.
No matter which state you live, there are legal requirements for the minimum amount of insurance and types of insurance.
Depending on where you live, there could be mandatory coverage for medical payments, personal injury payments, or uninsured/underinsured coverage.
This is the amount you pay to have coverage. With a car insurance policy, you usually pay once a month, quarterly, or semi-annually. For more information check out this article on what is an insurance premium?
This is the amount you pay out of pocket before your insurance kicks in. Deductibles for car insurance are a set amount based on your policy, and are per accident. Typically the lower your deductible, the higher your premium.
We’ll get into the nitty-gritty on coverage amounts in just a bit, but generally, this is how much of a payment your insurer will offer per accident. There are different coverage amounts depending on the type of insurance.
Just like with other forms of insurance, such as homeowners insurance once the incident occurs, you file a claim. After a claim is filed, and the standard investigation, adjustment, and assessment will determine the payment amount.
Usually you go through the insurance company of whichever party is fault, as that insurer will cover the cost of damages (but keep in mind that no fault accidents can still impact your premiums).
What are the different types of auto insurance?
Under a basic auto insurance policy, there are several different types of car insurance:
Auto liability insurance covers the cost of damage you or household members listed on your policy cause to other people and their property while driving. So if you’re at fault for an accident and other people need medical attention or need to pay for vehicle repairs or other damaged property, liability insurance would cover this.
Required in virtually all states, liability insurance covers three main areas with different coverage limits:
- The maximum coverage per injury per person in an accident
- The total coverage for all injuries in an accident
- The maximum coverage for property damage in an accident
So if you see a liability coverage limit written as 25/50/15, this would mean:
- $25,000 per person injured
- $50,000 total for injuries in an accident
- $15,000 property damage coverage.
When shopping around for auto insurance, you may also come across two numbers. This refers just to bodily injury coverage limits.
Collision coverage covers anything that happens to you while you’re driving. For instance, an accident involving another car, an object such as a pole or tree, from flipping over while on the highway, or damage from potholes. This might also include replacing a cracked or shattered windshield.
Even if you’re at fault, collision coverage will pay for any costs linked to the incident, and cover costs up to the value of your car.
Collision coverage usually has a deductible from $250 to $1,000. The lower the deductible, the higher your premium.
While many drivers will get both types of coverage, there is a key difference between collision and comprehensive insurance. While collision insurance covers anything that happens when you’re behind the wheel and driving, comprehensive insurance takes care of everything else.
This includes natural disasters—earthquakes, windstorms, hail, floods, fires, falling objects and explosions. It also covers vandalism and damage during riots. If you live in or are driving through nature, it also covers contact with animals such as deer, bears, or birds.
Comprehensive insurance usually comes with a $100 to $1,000 deductible. Like collision coverage, comprehensive insurance covers costs up the value of your car.
Medical Payments coverage or Medpay
As you might’ve guessed, this pays for the treatment of injuries to the driver and passengers of the policyholder’s car. Medical payments coverage handles the cost of medical, surgical, or dental treatment, and funeral costs. It could also include ambulance transportation, hospitalization, or nursing care.
Personal Injury Protection (PIP)
This provides wider coverage. Besides medical costs, PIP covers therapy and lost wages. It also will pay for these expenses no matter who is at fault. Either PIP or Medpay is required in 16 states.
Uninsured and Underinsured Motorist Bodily Injury Coverage
While it’s illegal to drive without liability insurance, an estimated one in eight drivers goes without coverage. What’s more, the average cost of an uninsured motorist claim is $20,000.
If the driver has a very low level of injury coverage on their liability policy, their insurance might not cover the full amount of treatment that’s needed.
If that’s the case, Underinsured Motorist (UIM) Bodily Injury coverage could provide additional coverage on top of that driver’s liability limits. It could also cover hit-and-run accidents.
Uninsured or underinsured motorist insurance coverage is a requirement in 19 states, but in many other states this is standard on most policies.
Even if you live in a state where it is not mandatory, the impact on your premiums is pretty minor. It’s a pretty inexpensive way to protect yourself.
What coverage do you need—and how much?
As you might expect, it largely depends. First, you’ll want to check your state’s minimum requirements.
While each state has different requirements on the types of coverage and limits, all states require liability insurance, and 16 states require uninsured or underinsured motorists coverage.
That being said, you may want to get greater coverage than the minimum requirements. For instance, in New Jersey the minimum coverage limits for bodily injury is $10,000 per person per accident. However, the average claim in 2016 for bodily injury was $16,110.
When figuring out how much liability coverage you need think about the total value of your assets. This is because the job of liability insurance is to protect your assets from being seized or sold if your cause an accident and get sued.
When it comes to collision or comprehensive coverage, the big thing to consider is the value of your vehicle. Since cars lose their value pretty quickly, you may reach the point where the payout you would get from your insurance company to replace the car isn’t worth the premiums you would have to pay.
What factors affect your premium?
There are a bunch of different factors that affect your car insurance rate, such as:
The type of car you drive. Some cars have a higher sticker price, and cost more to repair. You can see how your car affects your premium by using Cover’s car insurance calculator tool.
The number of miles you put on your car. The more you drive, the higher chance of an accident. And thus, the higher your premium.
Your driving record. The cleaner the record, the less you’ll have to pay.
Where you live. Where your car lives affects your premium. Urban areas that are more densely populated tend to have greater incidences of theft and vandalism. Furthermore, medical and litigation costs vary from state to state.
Your age. The cost of auto insurance is higher for drivers under the age of 25 and those who are over 65. That’s because statistically, these two age groups along with new drivers pose a greater risk on the roads.
Gender. Typically males are considered a higher risk, are involved with more accidents, and thus tend to pay a higher insurance premium. However, men also tend to drive cars that cost more to insure, and drive more miles on average.
Credit history. The younger you are, the shorter credit history you have. And the shorter credit history you have, the higher your premium.
Marital status. If you’re married, you may have a lower premium. That’s because married folks statistically get into fewer accidents. Plus you could save on your insurance through a bundled package, or a household or multi-car discount.
Coverage and deductibles. The higher your coverage and the lower your deductible, the higher your rate.
Previous insurance claims. Any auto insurance claims of your past could affect your premium. This rings especially true if you were at fault.
Previous insurance. Insurance companies prefer those who have continuous insurance.
What you use your car for. If you use your car for business, you’ll need more coverage. And if you’re a rideshare driving, you probably need a separate rideshare policy.
Car insurance buying tips
Your rate varies widely depending on a host of factors. Here are some tips on making sure you’re getting coverage that fits your needs and situation:
For the best rates, shop around
Car insurance policies are usually from six months to a year. And just like with any subscription, rates change with insurers. And yes, your car insurance can indeed go up for no clear reason.
If you need to change policies because you’re moving, getting off your parents’ insurance, or are buying a new car, your current insurer may not be giving you the best coverage or rate.
Even if your situation hasn’t changed it could still make sense to shop around to make sure you’re getting the best price. There’s no single insurer that offers the best coverage and lowest rates across the board.
So what was a solid option for you in your previous scenario may not be best for your current one.
Cover is here to help make getting a great rate as easy as possible. We’ll scour up to 30 different companies and send you the best rate we can find.
Hunt for discounts
There a handful of discounts you may be qualified for. You may get a lower rate if you:
- Have a clean driving record
- Have low income
- Are affiliated with a school, employer, or with the military
- Are a senior
- Won’t use your car much and will have low mileage
- Are a homeowner
- Bundle auto insurance with other types of insurance through the same carrier
- Purchase a multi-car policy
- Pay in full instead of monthly
- Opt in to auto-pay or paperless billing
- Have anti-lock brakes or anti-theft feature on your car
- Buy a green car (i.e., eco-boost features) or hybrid
Give yourself some lead time
While you may be in the middle of shopping for a new car, and excited to drive off the lot with a new set of wheels, hit pause for a second. Take your time to do your homework and explore different choices. Because Eaton spent time comparing rates, she was able to knock $800 off the original quote.
The lowest plan isn’t always the best plan
You’ll want to make sure you get the coverage you need. Otherwise, you’ll end up running into additional hassles, or paying more out of pocket in the long run. Before signing up for a policy, go over the details to make sure you know exactly what the coverage is.
If you’re on the fence about optional types of coverage, consider opting for it with the highest deductible and lowest coverage amounts. That way you’ll have some coverage without paying more than you can afford.