The Basics of Car Insurance Policies
Auto insurance protects both the drivers and occupants of a vehicle in case of a mishap as well as drivers and other occupants of vehicles that may be involved in the accident. It also insurers operators against damage to public and private property that may result, as well as providing liability insurance against claims made against the operator.
Car insurance can also cover damage or loss with one’s vehicle when not operating it, such as theft or damage from the forces of nature or other means.
One can also elect to be covered for such things as obtaining a rental while your vehicle is getting fixed, towing it away after an accident, and even gap insurance which can cover the difference between the assessed value of the vehicle and what you may owe on it on a loan you have taken out to buy it.
Anyone who operates a moving vehicle on the road is subject to the risk of causing damage to one’s own vehicle, to oneself and others, and to the property of others as well. As a general rule, the party who is deemed to be responsible for causing the accident is held liable for any damage caused, which includes damage to one’s own vehicle, person, and occupants of one’s own vehicle.
In some areas liability isn’t assigned to particular drivers, by way of legislation, so called no fault insurance, where all claims are settled by one’s own insurance company. Insurance companies aren’t that fond of this, as they prefer that the driver held to be at fault bears the responsibility, as this allows them to price the risks involved more efficiently.
So if the person who is found to be at fault in a car accident bears the liability, this allows for more predictability for insurance companies and more effective pricing of auto insurance policies. For instance an insurance company may want to give a driver with an excellent driving record lower premiums, since they are less likely to cause accidents, but if another driver with another company causes one, and it ends up costing them money, then they can’t provide the same kind of discount to good drivers.
This does violate one of the most fundamental principles of insurance pricing, that the cost of insurance be priced as closely as possible to the actual risks involved that are being insured against. In most areas though, first party liability does apply, which does look to assign fault when possible and therefore have bad drivers paying more and good drivers paying less, according to the risk they are seen as representing.
A big reason why no fault insurance has emerged is it being used as a tool to manage what are seen as excessive legal settlements, although there are other ways to approach this, placing caps on these settlements and the like, without fundamentally interfering with the way insurance is normally offered, and in a way that is fair to policy holders.
Things that Auto Insurance Covers
There are a number of things an insurance company looks at when offering auto insurance policies. The first thing is what sort of coverage is being sought, and the more coverage one purchases, the more expensive the policy will be.
There are two main things that auto insurance protects against, which are damage or loss to one’s own vehicle, and coverage for damages and liability to others, including other persons, other people’s property, as well as damage to public property.
When you leave the road for instance, you may damage part of the roadway, hitting a guardrail for instance, and someone has to pay to get that repaired. If you caused it, you will have to pay, and this is one of the things that people get insurance for.
You may also damage private property as well this way, where your vehicle may enter the property of another and cause damage, hitting a structure on it for instance. The property owner will not expect to pay for this damage out of their own pocket if you caused it.
Other vehicles are often involved in auto accidents, and if you’re at fault and damage the vehicle of another, you’re expected to pay to restore them to their original position as closely as possible, which involves monetary damages. You will pay to repair the vehicle or give them the fair value of it should it be irreparable or cost more to repair than the vehicle is worth.
Personal injuries that are caused by car accidents are the biggest potential liability, especially in areas such as the United States which do not have public health care coverage. Under private health coverage, they may have insurance but if they get injured by you they will expect you to pay for their health care, not them.
With public health care on the other hand, everyone receives this without any payment being required, so this is less of an issue, but one may still sue for things like lost wages or loss of quality of life as a result of the mishap. One may also be killed in the accident and the person’s heirs may sue for the loss.
So third party liability is very important to protect others that may be involved in these accidents, and therefore in many areas this type of insurance is mandatory to be allowed to drive. Proof of insurance then becomes required to register a vehicle to be used on the road, and this insurance must be maintained to continue to do so.
So in addition to the police asking for your license and registration, they will also ask for proof of insurance, and not having it is deemed a criminal offense. This is because this sort of coverage is that important to public safety, as uninsured drivers represent what is seen as an unacceptable risk to the welfare of others and the public in general.
Losses to one’s own vehicle are often covered by these policies, although this is always optional, and whether or not it is wise to purchase this insurance depends on several things, most notably the value of the vehicle.
If your vehicle is not worth that much and can be replaced without too much trouble, then it generally does not make sense to take this type of insurance. The idea behind insurance is to pay more than you expect to get back so that you don’t have to bear financial burdens that would create too much of a hardship, so being put in a position to be in a hardship is really required to get value out of insurance.
In many cases though, one may be subject to quite a bit of hardship should they suffer substantial losses to their vehicle, major damage to it or it being stolen for instance, and therefore insuring it against these losses can make a lot of sense. In cases where one puts the vehicle up for collateral for a loan, the lender will most often require this, to protect themselves as well as you.
Pricing of Car Insurance
The cost of auto insurance policies does vary quite a bit among insurance companies, and it always pays to shop around before deciding on a particular company, even if you’ve been dealing with this company for some time.
Auto insurance is a highly individualized matter, and some companies may price certain types of risk differently, so prices can vary quite a bit among companies.
As is always the case though, the higher the risk involved, the higher the premium will be. So your driving record, your age, the amount of time you’ve been driving, where you live, and other demographics are going to play a big role in the pricing of this insurance.
Insurance companies calculate probabilities of claims based upon quite a few factors, including the type of car you drive, and some cars get into more accidents than others. For instance a sports car will generally cost you more to insure than a sedan, all other things being equal. Even the color of the vehicle can matter, where some colors see more accidents than others and insurance companies are always looking to make these distinctions.
Should you be looking for full coverage, including insuring the vehicle itself from loss or damage, the more expensive the car is, the more there is to protect, so the higher the cost will be to protect it. It is always a good idea to get quotes on cars you are considering buying before purchasing them, to help prevent surprises.
How much you drive is a very big factor, since the more you drive, the higher the chance you will be in an accident that requires a claim. Living in densely populated areas also puts the price up, because there is a greater chance for accidents as well as theft. Each area gets scrutinized though and you pay in accordance with the specific risks involved.
There are a number of options that clients can select which can add or reduce the price of the policy, for instance choosing to pay a deductible. So if you have an insurable incident, you pay the first portion of it out of your own pocket, an amount that you may be able to handle, with the insurance company covering the rest, the amount that would represent the hardship to enough of a degree that you prefer to pass it off to them.
So insurance companies will ask a lot of questions when putting together a quote for you, and also will provide a number of different options. Once everything is decided and assessed, they will provide you with a price.
The idea behind insurance is to protect against losses one is not able to bear easily enough oneself, and losses of various types involving operating a motor vehicle certainly qualify here, in all cases actually. Unless you are very wealthy, the prospect of having to pay six or even seven figure sums out of your own pocket is certainly something you will need help with.
Auto insurance not only provides a valuable service to individual insurers, it also benefits society at large, better insuring that damages that may arise on the road be borne and allowing more people to be properly compensated for the harms that can arise on the road. This is something that everyone who drives needs to get, and if you are smart about this and shop around enough, you can get both the coverage you want at a competitive price as well.
Auto/Car Insurance FAQs
How do I get insurance for my car?
There are many car insurance companies out there that compete for your business. Many people just visit a local agent for a company or an insurance broker, but more and more are doing research and applying for car insurance online, which allows for more comparison.
What is the best and cheapest car insurance?
There are a lot of factors that go into pricing car insurance, and a company that may offer the best rates in one area may not be the best in another. Best and cheapest aren’t the same thing either, as the quality of the coverage and the reliability and service levels of the company matter as well.
How can I lower my auto insurance?
Shopping around and doing so every year is a big way to seek to lower your auto insurance payments, to ensure you are taking advantage of the best deal. Avoiding accidents, maintaining a clean driving record, driving an older car, and choosing less expensive options can all lower your rates.
How do I choose car insurance?
People usually focus on price a lot, and comparing similar coverage among various providers can serve to compare them on a cost basis. You also need to ensure that you are requesting the coverage that you need, while not adding additional coverage that may not be needed.
How do I purchase car insurance?
You can either visit an insurance agent or broker face to face, although this isn’t very efficient given that you should be shopping around more. Insurance companies also offer quotes over the phone and many also offer online quotes, and the goal should be to get several of them first.
Is it better to pay car insurance monthly or every 6 months?
Insurance companies often charge you a fee to pay monthly, and if so, you need to consider this additional cost versus paying it in a lump sum and avoiding the fee. If you need to borrow the money or forego making payments on other debt, the monthly fee with the insurance may be lower.
What should car insurance cost?
Car insurance pricing takes a lot of factors into account, which is the reason why all quotes need to be individualized. Your given situation will determine what prices companies are willing to offer you, and this can vary quite a bit and is why shopping for car insurance is so important.
How do I get cheap car insurance?
How much coverage you seek will determine in large part how cheap your car insurance will be. Selecting cheaper options can go a long way in reducing your car insurance premiums, provided you still get the coverage you need. Comparative shopping also helps in getting the best rates.
How car insurance premiums are calculated?
Car insurers seek to determine what sort of risk that a given insurer will pose to them, as they need to get back enough from the insurer to cover this risk and still make a profit. These calculations tend to be complicated and involve a lot of factors, but it really does come down to how risky they see you.
What documents are needed for car insurance?
You always need to show your driver’s license to get car insurance, as well as proof that the car is registered to you and that it is up to date. Your insurer may also require other documents such as proof that you are eligible for certain discounts as well as banking information.
Does credit score affect car insurance?
Your credit score is felt to be the single most important factor in determining your car insurance premium. This may seem strange, but what they do is categorize overall insurance risk by credit score, and those with higher scores tend to represent a lower risk and are afforded discounts.