Car insurance is a contract between you and an insurance company that helps protect you financially in case of car-related accidents or incidents. In this beginners guide to car insurance, I will cover the basics of how car insurance works and what is involved in getting car insurance. I’ll explain what the important terms are that you need to know to get the most out of you car insurance policy. The more you know about car insurance, the more prepared you will be to decide what type of plan you need to insure your vehicle.
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How Car Insurance Works: A Beginners Guide of Basic Terms
Here are some basic car insurance terms and their meanings:
- Policy: The policy is the actual contract between you and the insurance company. It outlines the terms and conditions of your coverage, including the types of incidents covered, the limits of coverage, and the premium you need to pay.
- Premium: This is the amount of money you pay to the insurance company for your car insurance coverage. It is usually paid on a monthly or annual basis. The premium amount is determined based on various factors such as your age, driving history, type of vehicle, and coverage options. Read my tips below on how to lower your cost.
- Deductible: A deductible is the amount you agree to pay out of pocket before the insurance coverage kicks in. For example, if you have a $500 deductible and file a claim for $2,000 in damages, you would pay the first $500, and the insurance company would cover the remaining $1,500.
- Liability coverage: This is the basic type of car insurance that covers damages or injuries you cause to others in an accident. It includes two components:a. Bodily injury liability: Covers medical expenses, lost wages, and legal fees of other people injured in an accident where you are at fault.b. Property damage liability: Covers the repair or replacement costs of other people’s property (such as their vehicles) that are damaged in an accident where you are at fault.
- Collision coverage: This type of coverage pays for the repair or replacement of your own vehicle if it is damaged in a collision, regardless of fault. Collision coverage is typically subject to a deductible. When you get comprehensive and collision coverage it is frequently called “full coverage.” Full coverage generally means both your vehicle and the other driver’s vehicle are covered in the event of an accident if it is your fault. Whoever was found to be “at fault” for the accident usually has to have their car insurance cover the other person’s car repair or replacement.
- Comprehensive coverage: Comprehensive coverage protects your vehicle against non-collision incidents such as theft, vandalism, natural disasters, or falling objects. It also covers damages caused by hitting an animal. Like collision coverage, comprehensive coverage is also subject to a deductible. If you do not own your car and are still making payments, you are likely required to have full coverage/ comprehensive and collision insurance.
- Uninsured/Underinsured motorist coverage: This coverage protects you if you are involved in an accident with a driver who doesn’t have insurance or has insufficient coverage to pay for your damages or injuries.
- Coverage limits: These are the maximum amounts the insurance company will pay for a particular type of coverage. For example, if your liability coverage limit is $50,000, the insurance company will pay up to that amount for injuries or damages you cause to others.
How can I lower my car insurance rate? There are a few ways to lower your cost.
- You can choose to have a higher deductible, say $1,000 instead of $500. Remember, a deductible is the part you pay when you file a claim, so make sure you can afford to do this. For example, let’s say you had a car accident that was your fault, so now you have to file a claim with your car insurance company to repair or replace your car. If your car insurance company decides that the damage amounts to $1,500, you are responsible for the deductible first, so if your deductible is $1,000, you will only receive $500 for that claim from your insurance company. $1,500 – $1,000 deductible = $500 Having a good emergency account of at least $1,000 will not only give you financial peace of mind, but it can also serve to be there should you ever need to have that $1,000 deductible.
- You can choose just the basic car insurance coverage required by your state. Where I live, basic liability car insurance is required by law.
- Drive safely. If you avoid car accidents and speeding tickets, your cost will be lower.
- Pay your car insurance premium in full instead of monthly. Usually car insurance companies offer you a discount if you can pay your 6 month premium at one time instead of paying monthly.
- Check for auto draft discounts. Some car insurance companies will give you a discount if you sign up for automatic payments where your bill is paid via bank draft automatically on the same day each month.
You can read more Car Insurance Tips For New Drivers here.