Do you have the right car insurance? Do you have enough coverage? While most people know whether they have liability, collision and/or comprehensive coverage, few people pay much attention to their insurance coverage until after they've been in an accident. Shopping for car insurance is a financial planning topic that is often overlooked, since most teenagers are added to mom and dad's insurance policy when they first get behind the wheel, and then later shop for the least expensive policy when they have to the pay the bill on their own. In this article, we'll go over car insurance coverage and give you some tips to help you get the most for your money.
The Basic Types of Coverage
Protecting your assets and your health are two of the primary benefits of car insurance. Getting the proper coverage is the first step in the process. These are the basic types of coverage with which most people are familiar:
- Liability: This coverage pays for third-party personal injury and death-related claims, as well as any damage to another person's property that occurs as a result of your automobile accident. Liability coverage is required in all but a few states.
- Collision: This coverage pays to repair your car after an accident. It is required if you have a loan against your vehicle because the car isn't really yours — it belongs to the bank, which wants to avoid getting stuck with a wrecked car.
- Comprehensive: This coverage pays for damage incurred as a result of theft, vandalism, fire, water, etc. If you paid cash for your car or paid off your car loan, you may not need collision or comprehensive coverage, particularly if the blue book value of your car is less than $5,000.(For additional reading, see: Pros And Cons Of Leasing Vs Buying A Vehicle.)
In addition to the coverage listed above, other optional coverage types include the following:
- Full Tort/Limited Tort: You can reduce your insurance bill by a few dollars if you give up your right to sue in the event of an accident. However, giving up your rights is rarely a smart financial move.
- Medical Payments/Personal Injury Protection: Personal injury protection pays the cost of medical bills for the policyholder and passengers. If you have good health insurance coverage, this may not be necessary. (For additional reading, check out Fighting The High Costs Of Healthcare.)
- Uninsured/Underinsured Motorist Coverage: This option provides for medical and property damage coverage if you are involved in an accident with an uninsured or underinsured motorist.
- Towing: Towing coverage pays for a tow if your vehicle cannot be driven after an accident. If you are a member of an automobile service, or if your vehicle comes with roadside assistance provided by the manufacturer, this coverage is unnecessary.
- Glass Breakage: Some companies do not cover broken glass under their collision or comprehensive policies. In general, this coverage is not worth the long-term cost.
- Rental: This insurance option covers the cost of a rental car, but rental cars are so inexpensive that it may not be worth paying for this coverage.
- Gap: If you demolish that $35,000 sport utility vehicle 10 minutes after you drive it off the lot, the amount the insurance company pays is likely to leave you with no vehicle and a big bill. The same thing applies if your new set of wheels gets stolen. Gap insurance pays the difference between the blue book value of a vehicle and the amount of money still owed on the car. If you are leasing a vehicle or purchasing a vehicle with a low, or no, down payment, gap insurance is an excellent idea.
Factors That Impact Your Rates
In addition to the specific coverage options that you select, other factors that affect your auto insurance rates include the following:
- Deductible: This is the amount of money that you pay out of your own pocket if you get in an accident. The higher your deductible, the lower your insurance bill. In general, a deductible of at least $500 is worth considering, as damage to your vehicle that comes in at less than $500 can often be paid without filing an insurance claim.
- Age: Younger, less experienced drivers have higher insurance rates.
- Gender: Men have higher rates than women.
- Demographics: People living in high-crime areas pay more than those living in low-crime areas.
- Claims: Accident-prone drivers pay more. If you want to keep your rates low, keep the number of claims that you file to a minimum.
- Moving Violations: Speeding and other moving violations all have a negative impact on your insurance bill. Obey the law to help keep your rates from rising.
- Vehicle Choice: Sports cars cost more to insure than sedans, and expensive cars cost more to insure than cheap ones do. Looking into the cost of insurance before you purchase that new car could help you save a bundle on your car insurance.
- Driving Habits: The number of miles that you drive, whether or not you use your car for work, and the distance between your home and work all play a role in determining your rates.
- Theft Deterrent Systems: If you have an alarm on your car, you'll pay less to insure your vehicle.
- Safety Devices: Air bags and anti-lock brakes both work in your favor by keeping you safer and lowering your insurance bill.
- Accident Prevention Training: Some companies offer discounts if you take a driver's education training course.
- Multiple Policies: If you have more than one car and/or also have homeowner or renter's insurance, keep in mind that many insurance companies offer discounts based on the number of policies that you have with them.
- Payment Plan: Some insurance companies offer discounts based on your payment plan. Paying your entire yearly bill at one time, instead of in installments, may lead to a discount.
- Credit Score: Good credit lowers your car insurance rates. Bad credit increases them. (To learn more about this process, see Insight Into Insurance Scoring and The Importance Of Your Credit Rating.)
When you're in the market for car insurance, careful shopping is a must. Prices, features, and benefits vary widely from company to company. Minimum coverage requirements vary too. In Florida, for instance, the minimum coverage requirements are $10,000 for personal injury protection and $10,000 for property damage.
In the personal injury department, $10,000 doesn't buy much in the way of medical services should an operation or prolonged stay in the hospital be required. The same is true when it comes to personal property, as there are many sport utility vehicles and luxury cars that are priced well above $30,000. Therefore, protecting your financial assets in the event of an accident is likely to require far more coverage.
Comparison shopping is always a smart thing to do, and there are many websites designed to help consumers compare insurance policy prices. Insurance agents can help too. Independent agents often offer policies from multiple carriers and can help you find the policy best suited to your needs. Before you eschew an agent in favor of an online provider, think carefully about who you are going to call after you have an accident. Your agent has an incentive, in the form of your repeat business, to provide good service, while an online service may come up short.
Before you buy a policy, research your policy provider - regardless of who it is. Numerous firms rate the financial health of insurance companies, and your state also has an insurance website that rates firms based on the number of complaints they have received. (For a comprehensive list of state insurance regulators, visit the Federal Citizen Information Center.)
The Bottom Line
Shopping wisely can help you protect your health, your assets, and your wallet, so put forth the effort to determine the type and amount of coverage that you need. Also, make sure that you review and understand your policy before you sign on the dotted line. If you plan well, you'll be pleased with the results, should you ever find the need to put your policy to the test by making a claim.
(For related reading, see Wheels Of A Future Fortune.)