7 Basic Car Insurance Facts

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If you’re ever hurt in a vehicle accident, you may end up filing a claim with your own insurance company, or someone else’s to cover the damages. 

If you file a claim with your insurance company, it’s a first-party claim. If you caused your own accident and subsequent injuries, you might need to file a first-party claim. If someone else caused the accident and you’re filing against their insurance, it’s a third-party claim

It’s a good idea to proactively have an understanding of how insurance works in case you do ever find yourself in a situation where you have to deal with your company. 

The following are seven basic but critical car insurance facts to know. 

1. Determining Price

Every insurance company has a formula it uses for calculating the prices of premiums. While there are some potential differences, the basic factors tend to be the same between companies. There are the most obvious factors, like the make and model of your car, your driving record, and how often you drive. 

Your marital status, gender, and age can be relevant. Younger and male drivers are more likely to have accidents, while married drivers are less likely to file a claim. 

If you live somewhere with a lot of crime or traffic, your premiums might be more expensive because you’re perceived as a bigger risk than someone in a rural area. 

In a lot of states, an insurer can also consider your credit scores when it calculates your premiums. 

2. Collison vs. Comprehensive Insurance

A survey conducted by InsuranceQuotes recently found that 68% of Americans don’t understand how the comprehensive part of their car insurance policy works. The survey respondents said they believed their comprehensive coverage covers damage from a collision. 

In reality, comprehensive insurance covers theft and damage from incidents other than collisions. This might include vandalism, hail, a falling tree, or hitting a deer on the road. 

Collision insurance is what provides reimbursement for damage that is the result of an accident with another vehicle or an object when you’re at fault. Collision can also cover damage if you roll your car or hit a pothole. 

Both are optional. 

Liability insurance, by contrast, is legally required. Liability coverage is for the costs associated with injuries, damage, or death caused to another vehicle or someone’s property caused by you when you’re driving. 

3. The Most Important Coverage Can Be the Cheapest

Liability insurance is usually the most expensive, along with being what you’re legally required to buy. Common limits for coverage can mean that your insurance carrier ends up having to pay hundreds of thousands of dollars if you do damage. 

Other types of coverage are usually capped based on the value of your car. 

Comprehensive insurance is usually the most expensive optional coverage, but it’s only around half the cost of collision coverage and a third of liability. 

Uninsured motorist coverage can also be extremely important, and it tends to be inexpensive. If you add roadside assistance, gap coverage, and uninsured/underinsured, you can get a high level of protection but only see a fairly small price increase. 

4. How It Works

Car insurance works in a way that’s fairly similar to other types of insurance. You buy a policy. That policy will detail the types of coverage you’re purchasing and the amount of coverage. Your car insurance policy will typically need to be renewed every six months. 

Once you buy a policy, you pay your premiums. You’ll probably have the option to pay upfront for six months and get a small discount, or you can pay monthly. 

If you’re in an accident, you submit your claim to your insurance company. You pay any required deductible. Once you pay the deductible, your insurance carrier should pay whatever expenses are left. 

Your deductibles will usually reset with every claim rather than annually. 

5. Coverage Requirements

States have their own insurance requirements. Most do require liability coverage, including bodily injury and property damage liability.

These are third-party types of coverage that we have to buy the protect other people. Liability means you’re responsible for someone else’s injuries and damages. 

You’ll usually see coverage written as something like 50/100/25. The first two numbers are the amount of bodily injury coverage you have. The first is the coverage if one person is hurt. The second number is the total paid if multiple people are injured. The third number is for property damage liability. 

The minimum you have to buy varies from state to state, but the most common coverage is 25/50. This means $25,000 for injury to a person and $50,000 total. The most common liability minimum for property damage is $25,000 per incident. 

Some states require you to get uninsured motorist coverage as well. As briefly mentioned, this is coverage providing protection if you’re hit by someone who’s uninsured. 

A few states require personal injury protection or PIP, which is a first-party coverage. PIP covers you if you sustain injuries, no matter who’s at fault for an accident. You’ll hear it known as no-fault insurance or coverage. 

If you’ve recently moved or don’t know what’s required in your state for any other reason, you can search online and find out quickly. 

If you don’t own your car and you have financing on it, or you’re leasing it, you’re going to be required to maintain comprehensive collision coverage—otherwise, it’s optional. 

6. Gap Insurance

Gap insurance is a type of coverage that would cover the difference between what you owe on your vehicle and what insurance will pay if it’s totaled. 

There is often a downside to gap insurance that may not make it worth it, though. 

The problem is that gap insurance has low loss ratios. This means that what insurance companies pay compared to the premiums they receive is low. It’s not a good product for most consumers. 

7. There Are Ways to Pay Less

You can find ways to lower what you pay for car insurance. One option is to reduce coverage. You might, as an example, stop your comprehensive coverage on an old car. You can also raise your deductibles but only do this if you can afford to pay more out-of-pocket. 

Finally, insurance companies often offer a variety of discounts for things like having multiple cars, being a safe driver, or not driving often.