Let’s get one thing out there. No one is especially psyched to get car insurance. You get it because it’s a financial safeguard against damage to your car or injury to you or others. (It also happens to be legally required in some form everywhere in the U.S., so there’s that.) Car insurance is complicated, and drivers often don’t know what to expect from the process. We’ll break down the basics so you’re better informed to find the right coverage for you.
1. Insurance: What Is It?
As a licensed insurance agent, I find that many people I talk to don’t quite understand what insurance is or why they need it. I get it. After all, insurance is rather abstract – it’s not a physical object you buy at a store. Further, if all goes well for you, you pay for insurance but don’t ever have to use it. So it’s often hard for people to see the value.
In the simplest terms, insurance is a promise from an insurance company to support you financially in the event that something unfortunate occurs which causes you financial loss or other damage. So you pay an insurance company money (your premium) for a policy which details your coverage (who/what are protected and to what dollar amount), and the insurance company is responsible for paying if something happens and you incur a loss (damage to your car, broken leg, etc.). Insurance companies do this by pooling risk among other people they insure, collecting premiums and using those funds to pay claims for those who need it. Of course, there are many layers to this definition, but we’ll keep it simple.
2. Different Types of Coverage
The type and amount of coverage each person needs varies, but these are the coverage basics you should know:
Liability coverage is legally required for all drivers in the U.S. It covers the other driver in a crash you cause, and includes injury or property damage. If you see numbers like 25/50/10 or 30/60/25, that shows the liability coverage limits for bodily injury per person/bodily injury per accident/property damage – each in thousands of dollars. For example, 25/50/10 means your coverage will extend up to $25,000 per individual injured in an accident, $50,000 for all persons injured in an accident, and $10,000 coverage for property damage. In no-fault states, you are required to carry coverage (normally personal injury protection or PIP) for your injuries regardless of who caused the accident.
Comprehensive + Collision = Full Coverage
Collision coverage, which covers damage caused in a crash, and comprehensive coverage, which covers damage from other events including weather (fire, flooding, etc.) as well as theft, are often collectively called “full coverage.”
Other coverages include uninsured motorist coverage, which protects you and your vehicle from damage caused by people who don’t have insurance, and medical payments coverage, which covers the injuries of you and your passengers when you are the driver at fault in a collision.
3. How to Get Car Insurance
You can easily go online, call a company or two, or even walk into a local insurance agent’s office to talk to them about getting coverage. But how do you know which company to contact?
Insurance companies spend billions of dollars every year on advertising, so my guess is that you could probably rattle off a few big car insurance brands you’re familiar with. But it’s important for consumers to know that not all insurance companies are the same. In fact, they all have different ways of pricing policies and are looking for certain types of customers with certain risk profiles to do business with.
This is why it’s more important than ever to compare car insurance quotes from as many companies as possible. Fortunately, you can now do that easily through The Zebra, which asks you the questions insurance companies need to know and gives you real quotes from hundreds of them based on your information. This way you know all your options and can connect with the company that best fits your needs right then and there.
4. Why You Pay What You Do
Insurance companies determine what you pay for insurance based on dozens of “rating factors” to do with who you are, where you live, what you drive, and other details of your driving and financial history. Everything is about statistics, and insurance companies assign certain levels of risk to each of these factors to gauge the likelihood that you will file a claim.
For example, teens are considered high-risk drivers because they have so little experience behind the wheel. Statistically they get in more crashes (and file more claims) than older drivers, so they often pay much more for their premiums. Other risk indicators include some obvious ones like your driving record and some less obvious ones like your zip code. There are also certain factors which only some states allow to used in determining your rate like your credit score (it’s prohibited in California, Hawaii, and Massachusetts).
5. How to Lower Your Risk and Your Rates in the Future
You can’t change certain insurance rating factors like your age, but you can make a few changes to reduce your risk in some of the other areas. A few tips:
- Drive safely and maintain a clean driving record
- Consider sharing a policy with someone you live with
- Bundle your renters or homeowners policy if you can
- Pay your premium in full at the start of your policy or sign up for auto-pay
- Maintain insurance coverage with no lapse between policies (even for a day)
Which brings me to…
6. When to Get Insurance
When should you get car insurance? The obvious answer is when you’re getting a car, but as we’ve learned, it’s critical that you don’t have a lapse in coverage between insurance policy terms. I highly recommend shopping around for car insurance before you begin the car-buying process, which also helps you account for your premium in your budget for car-related expenses.
Other times to switch could be if you get married, move, or have another big event in your life, if your rates increase for no apparent reason, or you add a new teen driver to your policy.
After that, it’s important to compare rates every six months to make sure you’re staying up to date on any changes that might occur if you move, get a speeding ticket, or even have a birthday. You’ll want to make sure your company is the right fit for you.
Originally contributed to Credit.com.