Understanding the basics of auto insurance
You may go through your entire life and never have a car accident. But the odds are against you. Auto insurance protects you from potentially disasterous costs of such accidents. If you are buying your first car, you must understand how car insurance works and why you need it.
Laws in most states require that drivers have at least a minimum level of liability insurance – repeat, liability insurance – not collision or comprehensive, although lenders and lease companies may require full coverage, including liability, collision, and comprehensive.
Types of insurance
An auto insurance policy might include one or more of the following types of coverage:
Liability – Protection from costs associated with personal injury and property damage you cause in an accident. Legal actions against at-fault drivers is becoming more common and more expensive. . For this reason, liability coverage is the most important part of car insurance — and the part required by law.
Comprehensive – Protection from the cost of non-collision damages, vandalism, theft, weather-related damage, or natural disasters. Comprehensive coverage typically pays for the cost of repairs, or in the case that the vehicle is totally destroyed or stolen, the cost of a replacement vehicle – at “cash value” of the old vehicle. A deductible lessens the amount you are paid.
Uninsured Motorist – Protection from costs associated with an accident caused by another driver with insufficient liability coverage — or no coverage at all.
Collision – Protection from the cost of repairing or replacing your own vehicle if damaged in an accident. A deductible lessens the amount you are paid.
Medical – Pays medical costs to you or other parties for accidental injuries associated with an accident. There are limits specified in your policy regarding maximum amounts paid for each incident.
Towing and Labor – Pays cost of towing your damaged or disabled vehicle. Maximums usually apply.
Rental Reimbursement – Pays cost of renting a replacement vehicle after an accident. You’ll need this unless you have other cars you could use if your own vehicle is not available for a while.
Gap Coverage – Pays the difference between the amount owed on a loan or lease and the “cash value” paid by your insurance company in case of theft, fire, or accident. A gap waiver or gap insurance is usually provided with most leases, but not loans. If you are going to be “upside down” on your loan, it’s good coverage to have.
Manage your insurance costs
Beyond the minumum auto insurance requirements of your state laws, you can determine the kind of coverage you want, how much, what deductible, and what add-ons you want.
If you buy with a loan or lease, the finance company may dictate minimum coverage requirements. They may even dictate the maximum deductible you can choose. This protects them, and you, in case your vehicle is damaged or destroyed before your loan or lease is completed.
You can add higher liability coverage, beyond the outdated minimum requirements of your state laws, which can be a smart thing to do in these days of muti-million dollar lawsuits. If your auto insurance policy doesn’t cover the full cost of a large settlement, you may be personally responsible for the remainder. Additional coverage in the form of an “umbrella” policy can be purchased at little cost. One million dollars coverage is recommended.
You can increase your deductible amount. If you have sufficient cash available, you can set a high deductible, which can significantly reduce your premium. However, many people who set high deductibles really can’t afford to pay and take a chance that they will never have to. Not very smart. Set your deductible only as high as you can pay.
Dropping collision and comprehensive coverage is another opportunity to save money. You should only do it, however, if you can afford to buy a replacement vehicle or pay for repairs from your own pocket. This strategy is only recommended if you have an old car that that doesn’t justify the coverage – as long as you can afford to fix or replace it if you have an accident.
Improving your credit history can lower your insurance cost. Many insurance companies now look at your credit score and offer lower rates to people with high scores. They have conducted studies that show that people who manage their finances well have the lowest claim rate. You should know your FICO® credit score before you begin shopping for insurance.
The best way to get the lowest car insurance rates is easy. Having the Internet makes it simple to get multiple rate quotes from different insurance companies. This way, you can compare rates and go with the company you like best.
You can get free auto insurance quotes from NetQuote.com. They work with all the major insurance companies and can find the one that has the best rates for you. You are not obligated to accept any of the offers. It’s a great fast way to shop for insurance.