If you’re like me and you’re trying to figure out how to shop for car 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?
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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. But before we go any further, let’s cover some basic car insurance terms you need to know before you begin your search:
Premiums are the amount you pay for your coverage, and 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 or 12 months.
A deductible is the out-of-pocket amount you must pay before your insurance starts paying for damage to your vehicle — not 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.
Coverage limits are the maximum your insurance will pay. 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.
Claims are 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?
Auto insurance comparison site The Zebra reports that the average cost of car insurance is $1,426 per year, or $118.63 per month.
When shopping for car insurance, keep in mind that all insurers consider specific factors when they determine your premiums. It’s hard to say what makes premiums vary so much from company to company, because some companies give different things more weight than others.
Here’s what insurers take into consideration when deciding your rate:
1. 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.
2. 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! Then my premium increased by $60 when I moved to another area in St. Petersburg.
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.
3. Vehicle Type
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.
4. Credit Rating
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. For example, Massachusetts, Hawaii and California have banned this practice.
5. Driving History
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.
6. Late Payments
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!
7. 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.
To avoid this scenario, find out if your insurance carrier offers a grace period. There isn’t a standard grace period offered by all carriers, but it’s worth finding out whether you’d have three days or 30 to make a payment before your coverage lapses.
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:
1. Liability Coverage
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 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. Yikes.
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.
2. Comprehensive Coverage
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.
3. Collision Coverage
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.
4. 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 2015.
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.
5. 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.
6. Rental Reimbursement
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.
7. 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.
Choose the Right Auto Insurer for You
When it comes to car insurance, one size does not fit all. It may seem that way, because for so long, shopping for car insurance was all but seamless, so you signed up for a policy with a Big Name to get it over with — coverage is coverage, right? (Wrong.)
While you still have the option of making dozens of phone calls or working with independent agents or brokers, comparison shopping can be made even simpler by doing it online.
If you don’t know where to look, start your search with these carriers:
- Have you compared rates from the 20 largest auto insurers that do business in your area? Fortunately, a service called Gabi will do it for you, and you don’t even have to fill out any forms. Once you link your insurance account to Gabi, it will help you switch on the spot if it finds you a better rate. Gabi says it finds an average savings of $720 per year for its customers.
- The Zebra, an online car insurance search engine that offers “insurance in black and white,” compares your options from 204 providers in less than 60 seconds. Just enter information about your car and your coverage needs, and The Zebra shows dozens of side-by-side quotes from top insurance companies for free.
- With Root Insurance, the better you drive, the more you could save. When you download the app, you’ll take a two- to three-week test drive; it just runs in the background and tracks your acceleration, braking and other driving metrics. If you qualify, you’ll get an insurance quote from Root with a recommended policy. And you can customize the coverage to suit your needs.
- Find out if your car insurance company is the best fit for you, your car and the way you drive at Compare.com. Here, you don’t have to pay or commit to anything to get a true apples-to-apples comparison from many car companies. In about one minute, you’ll get a bunch of quotes that are zeroed in on your particular needs. When you find one you want, Compare.com lets you sign up directly with that company. Easy peasy.
- Don’t drive much? Car insurance companies don’t care. You’ll still get a hefty bill. But Metromile lets you pay by the mile. You pay a base rate, then a few cents per mile. If you drive less than 5,000 a year, you could save around $611 a year. Metromile is available in Arizona, California, Illinois, New Jersey, Oregon, Pennsylvania, Virginia and Washington.
- At Insurify, you can get personalized quotes from national companies — including all the discounts you qualify for — in just two minutes. It’ll even keep tabs on the rates and send you an email to let you know when a better one is available.
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.
To avoid paying more than you have to, here are some ways to save when you’re shopping for car insurance:
Shop and compare rates twice a year.
According to The Zebra’s 2019 State of Insurance report, consumers just aren’t doing this. And car insurance rates keep increasing.
“Not only can a lot of circumstances in your life and your car (mileage, age) change in that time, but insurance companies may be changing their pricing as well, and you want to be sure you’re getting the right coverage, service and of course pricing to suit your changing needs,” says Alyssa Connolly, the director of marketing insights at The Zebra.
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, visit their website or 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.