How Car Insurance Works

How Car Insurance Works

1. Introduction to How Car Insurance Works
2. Understanding Your Auto Insurance Needs
3. The Price of Auto Insurance
4. Car Insurance Deductibles
5. Lots More Information
6. See all Buying & Selling articles

Understanding Your Auto Insurance Needs

Just because your state requires a minimum amount of insurance doesn't mean that's exactly what you should purchase. In fact, most motorists purchase more coverage than their state requires so that they are covered for a variety of problems-not simply a fender bender. In order to better determine your auto insurance needs, consider these five guidelines:

To Know Your State Laws
Remember that forty-seven states require that you purchase liability insurance. Liability insurance is what pays for bodily injury and property damage that you cause another driver. Fifteen states including Florida, Maryland, Michigan, Massachusetts, New York and New Jersey also require that you buy Personal Injury Protection (PIP). This coverage pays for your medical expenses and lost wages in the event of an auto accident. Your insurance minimum will most likely be determined by state law, but many people are encouraged to purchase more than is required.

To Know Your Options
There are a lot of car insurance options; but knowing what you most likely will need is the key to making sure you are appropriately covered. Do you want coverage for a rental car if your car is damaged? Do you want an extended warranty to pay for parts and labor if your car breaks down? If your car is leased, you will probably need gap insurance which pays for the difference between what your insurer pays and what you owe on your lease if the car is completely totaled.

To Know How Much Money You Want to Spend
If you know your state laws and have examined your personal needs, now you can put together the different pieces of auto insurance coverage in one total policy. The first piece of the policy is almost always liability insurance. If you only have minimum liability coverage and you injure someone, their attorney can go after your personal assets. So, you need to know your assets and what you can afford to lose in the event of an accident. Many insurers feel that minimum liability is a gamble. In fact, that is why it is often only a little more money for more protection. After all, if you do get into an accident, it is much better for the insurance company to be responsible than for you to be personally responsible. Remember to run through various scenarios such as if I totaled someone else's car, will my insurance cover it? How much will I have to pay out of my own pocket? The answers to these types of questions will determine what coverage makes you feel most confident should an accident happen.

To Know Your Vehicle
If your car was totaled, would you be able to afford to replace it? If not, you will want comprehensive and collision coverage. The decision to buy this coverage is usually based on the value of your car. Guidelines usually suggest that if your car is worth less than $2,000, it won't be worth it to buy comprehensive and collision. If you own a $50,000 car though, it would most certainly be worth it to pay an extra $200 annually or so to insure that your car will be replaced if you get in a serious accident.

To Know About Your Other Insurance
Many people don't realize that other types of insurance including health insurance and homeowners insurance may pay for damages due to an auto accident. For instance, if you have comprehensive health coverage, you probably won't need more than the minimum required Personal Injury Protection (PIP). Make sure you know what insurance coverage you already have so that you don't purchase unnecessary coverage.

The best way to figure out your own auto insurance needs is to examine potential policies and know how much you are willing to gamble. For instance, it may not be worth it to you to purchase collision insurance if your car is not incredibly valuable and would therefore cost less to fix than to keep insured. Auto insurance is simply about how much you are willing to pay out of your own pocket versus how much you want the insurance company to cover. Once you decide this, you're all set to purchase your auto insurance policy.

The Price of Auto Insurance
There are several factors that affect the price of auto insurance. Of course, prices vary by company and you should compare prices thoroughly before you purchase a policy. The first thing that affects your policy's price is, of course, what kind of car you drive. For instance, a sports car costs more to insure than a family sedan. If you purchase a vehicle that has a high theft rate, your coverage will probably be more expensive. Essentially, though, your coverage will be based on the value of your car.

Other factor that affects auto insurance costs is where you live. If you live in an area where there is a high occurrence of accidents or vandalism, insurance will cost more money. For instance, since more cars are damaged in urban areas than in rural areas, you will probably pay more for insurance if you live in a city.

How often you drive will also affect your insurance costs. The more you drive, the higher the chances you will be an accident. Drivers who have long-distance commutes will pay more than people who live near their workplace. Meanwhile, if you only use your car on weekends, your insurance rates should be lower than someone who commutes to work daily.

The final factors that affect the price of auto insurance have to do with who you are. Your age, sex, marital status and driving record are all taken into account when you buy an insurance policy. Accident rates are higher for drivers under the age of 25, so if you are young, expect to pay a little more. Also, accident rates are higher for young males and single males. It doesn't seem fair, but if you are an unmarried 19-year-old male, your insurance rates will definitely be affected. If your driving record is impeccable, though, your rates will be lower. Obviously, drivers who are prone to traffic violations or accidents will have to pay more for insurance than safe drivers.

If these cost factors are beginning to scare you, don't worry. There are several ways to keep your insurance rates down.

Frequently Asked Questions

Why does my insurance go up if I have an accident or get a ticket?
Insurance companies charge higher rates to drivers with tickets and accidents because they are statistically higher risks. Claims statistics and studies by law enforcement agencies show that the chances of having an accident increases depending on how many tickets and accidents a driver has already had.

If I lend my car to a friend, is he or she covered under my insurance?
Most policies will cover drivers who have permission to use your auto. But check your policy, or ask your agent, to see if the conditions of your policy will change for drivers who are not regular operators of the car.

I have an older car whose value is very low - do I need insurance?
You should always have bodily injury and property damage. In most states you're legally required to carry a minimum amount.

Will my insurance cover my leased car if it is stolen or totaled in an accident?
Your insurance company should handle your claims the same way whether you own, lease or finance your car. But, make sure to check on your company's rules about leased cars.

What does my auto insurance policy cover when I rent a car?
It depends on your policy. The best thing is to review your policy or ask your insurance agent. For example, your policy may cover cars rented for pleasure, like vacations or special events, but not for business.