11 MIN READ
Think Your Car Insurance Has You Covered? This Might Make You Think Twice
If you’re like me and you’ve recently looked into auto insurance, you’re probably familiar with how confusing everything can be.
A premium? A deductible? What in the world is liability? Why are all these quotes so vastly different?
When it comes down to it, auto insurance can be one of the most important things you purchase all year. But do you really know what you’re buying?
Car Insurance 101: Defining the Basics
You might be saying: “Auto insurance? Easy. That means if I get in an accident, I’ll be covered!”
Not so fast! It depends on what types of coverage you have and how much your deductibles are!
Already feeling flustered? Well, here are some basic car insurance terms you need to know:
A premium is the amount you pay for your coverage, explains DMV.org, a privately owned website that’s not affiliated with any government agency and explains all things automotive law.
How often you pay your premium varies by insurance company and your preference. Some policies allow monthly or even semimonthly payments, but many offer discounts for paying upfront for the entire policy, which typically covers you for six months or 12 months.
A deductible is the out-of-pocket amount you must pay before your insurance starts paying for damage to your vehicle. Deductibles do not apply to damage you cause to other people’s property.
Say you hit a deer, causing $1,000 worth of damage to your vehicle, and your deductible is $500. You must pay the first $500 of the damage, then your insurance pays the remaining balance.
Since you have insurance, you won’t have to pay a penny, right? Wrong! Coverage limits are the maximum your insurance will pay, according to Allstate. Any damage that’s above these limits will be your responsibility, so make sure you’re aware of your limits when you purchase a plan.
For example, suppose you were at fault in a crash that caused another driver $50,000 of injuries. Your insurance has a $25,000 per-person bodily injury limit, so it pays out the first $25,000, but you are on the hook for the remaining $25,000.
A claim is filed when you or another person asks an insurance company to cover losses from an accident.
Let’s say you’re in a crash that’s your fault, and you cause $1,000 worth of damage to your car and $2,000 worth of damage to someone’s fence. You would file a claim with your insurer to have your car repaired. The fence owner would also file a claim with your insurance company to have their fence repaired.
What Factors Affect My Car Insurance Premium?
All insurers consider specific factors when they determine your premiums. What makes premiums vary so much from company to company? Some companies give different things more weight than others.
Here are the factors that affect insurance rates:
Your Deductible Amount
The higher your deductible, the lower your premium and vice versa. Be careful when choosing your deductible — be realistic about how much you can afford to pay out of pocket if you’re in an accident.
Where You Live
Where you live affects your insurance rates. For example, my insurance dropped $40 per month when I moved from Tampa, Florida to St. Petersburg, Florida!
Insurance companies consider multiple factors when rating locations, such as how many accidents occur per person, how many auto thefts there are, how many uninsured people are nearby and the average age in the area.
If your vehicle is worth a lot, you can expect to pay more for insurance. Size can also cause higher rates — the bigger it is, the more damage it can do. Other factors, such as the costs of repairing the vehicle, whether the model is frequently targeted by thieves and whether your car is new or used can also affect rates.
Credit rating is a standard factor for determining rates throughout the insurance industry because “there has been a correlation between a better credit rating and a better driving record,” according to Ryan Scruggs, an agent for Farmers Insurance in Arizona.
But there are a few states where basing insurance rates on credit rating is illegal. Massachusetts, Hawaii and California have banned this practice.
By evaluating your driving history, insurers are able to assess the risk of insuring you. Things such as tickets, DUIs and accidents can send your premium skyrocketing.
If you don’t pay your premium, you may face a penalty. This varies by insurer, so don’t forget to read the fine print!
Lapse in Coverage
Having a coverage lapse can also increase the premium on your next insurance plan. This is because some insurance companies see lapsed insurance as evidence that you’re a high-risk driver, making it costlier for them to insure you.
Generally, insurers see drivers under 25 years old and over 65 years old as higher risk, which means these drivers pay higher premiums.
Although the practice may seem discriminatory, DMV.org states that there is “solid evidence that these age groups, along with new drivers are more dangerous on the roads and therefore are a higher risk for the company to take on.”
Types of Car Insurance Coverage
Up to speed on the car insurance basics? Good job! Ready for the nitty-gritty?
Paying a premium means you are actually putting money toward certain amounts of coverage for various situations.
Here’s what you’re actually paying for with your premium:
You know those confusing numbers in your policy that are separated by slashes? They describe how much liability coverage you have in thousands of numbers.
Liability insurance protects your assets in the event of a crash. The more assets you have, the more you liability coverage you should carry to protect yourself.
That’s why getting the minimum amount of coverage your state requires isn’t always a smart money move.
Scruggs says liability insurance is the most important part of auto insurance.
A good rule of thumb is to have coverage that equals the total value of your assets, according to The Wall Street Journal. To determine this, add up the values of your home, car, savings and investments. In doing so, you protect yourself from using everything due to out of pocket costs.
On the other end of the spectrum, though, Scruggs recommends younger drivers without many assets keep high liability coverage. Younger drivers have high earning potential, and if they were to get in an accident and not have enough coverage, they could have their wages garnished until they pay off the damages.
Liability coverage has two components:
Bodily injury liability coverage covers you if you injure or kill someone while operating your vehicle. This coverage applies only to people, not vehicles.
Going back to those confusing numbers separated by slashes, suppose your policy lists the numbers 50/100/25. The first number means one person injured is covered up to $50,000; the second number is the limit for injuries to all people in the same accident ($100,000).
The third number ($25,000) is the coverage for property damage liability, which protects you if your car damages someone else’s property.
If something other than another vehicle damages your car — think a fire, flood, theft or animal — this covers the repair costs. This coverage requires a deductible, which is usually $100-$300, according to the Insurance Information Institute.
This pays for damage to your car when the accident involves another vehicle. Owners of older cars without much value can consider dropping this coverage because it “is normally limited to the cash value of your car,” according to Geico. This coverage requires a deductible that typically ranges from $250 to $1,000.
Uninsured and Underinsured Motorists Liability Coverage
This coverage pays for injuries an uninsured or underinsured driver may cause. Although most states require drivers to have coverage, driving without insurance is more common than you think: An Insurance Research Council study showed that about 1 in 8 drivers in the U.S. were uninsured in 2012.
If you don’t have this coverage and something were to happen at the fault of an uninsured or underinsured driver, you could end up paying for some or all the damage yourself because your insurer wouldn’t have another insurance company to recover money from.
Medical Payments, No-Fault or Personal Injury Protection
Medical payments coverage pays for medical or funeral expenses for you and your passengers resulting from an accident. It will help pay your health insurance deductibles and copays.
No-fault coverage kicks in when you get into an accident in the 12 states along with Puerto Rico that are no-fault states. In a no-fault state, anyone who’s injured in a car accident can file a claim for personal injury and related loss of wages with their own insurance company — even if they weren’t responsible for the crash. This coverage is intended to ensure prompt payment of medical claims, though critics say it increases fraud.
Usually, no-fault coverage includes personal injury protection (PIP). You can have PIP without no-fault coverage, mainly if you live in an at-fault state.
Travel and Roadside Assistance
If you lock your keys in your car, get a flat tire or need a tow, this coverage will help you pay for it. If you’re shopping for car insurance, you can skip this coverage if you have a motor club membership, such as AAA, you can skip this coverage because you’re already paying for these services. Also, newer cars sometimes have these included in their warranties; if you have a new car under warranty, be sure to check if it covers these before purchasing them through your insurance.
If you crash your only vehicle and need a rental to drive while it’s being repaired, this coverage will help pay for it. There are sometimes different coverage tiers for rental reimbursement, but you only need coverage that allows you to rent a car similar to yours.
Coverage for Ride-Hailing Service Drivers
If you drive for a ride-hailing service like Uber or Lyft, you have insurance through the company you drive for. But that insurance only kicks in when a customer is in your vehicle, according to Scruggs. Rideshare insurance protects you when you’re waiting for a rider or on your way to pick someone up.
How to Save Money on Your Car Insurance
It’s important to have enough coverage to protect yourself, but you probably don’t want to fork over a hefty sum each month for car insurance. Here are some ways to save when you’re shopping for car insurance.
Check your eligibility for common discounts. Most car insurance providers offer discounts for things like good grades or no accidents on your record. According to Bankrate, some insurers might even offer you a discount for taking a defensive driving course. To find out more about the discounts offered by your insurer, call and speak to an agent.
Don’t reduce your liability coverage. Scruggs says you should never adjust your liability coverage because it protects you in case of a serious accident.
Raise your deductible to make your monthly premium go down. Scruggs says you should be realistic when determining your deductible. If you’re willing to save up so that you can afford to pay a higher amount if your vehicle is damaged, a high deductible could be doable for you. If you can’t, though, you might want to take the lower deductible and higher premiums.
Ditch miscellaneous coverages. Roadside assistance and rental reimbursement should be the first ones you drop when trying to save.
Forgo comprehension and collision coverage on that older vehicle. If you drive an older vehicle that’s worth less than your deductible, you might skip comprehensive and collision coverage and save that money for a new car in case yours gets totaled.
Make sure you’re shopping for car insurance with a company that caters to your demographic. Scruggs says some insurance companies target specific groups of people. One company might focus on married couples with families, while others might market to students.
Because of this, some insurance companies may even try to price you out if you’re not in their preferred demographic.
Do your homework by asking yourself, “What company advertises to customers similar to me?” Once you find one, get a quote to avoid overpaying!
This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can't personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.
Kelly Smith is a junior writer and engagement specialist at The Penny Hoarder. Catch her on Twitter at @keywordkelly.