Buying a Car: Auto Insurance

Insurance is as much of a necessity of owning a car as gas. You just can't do without it. As a matter of fact, most states won't even let you register a car without it. Which is just as well. You're probably a fantastic driver. But there are plenty of people out there who are terrible drivers. And if one of them hit you, you'd be glad if that person had insurance to cover the damage. And if somehow you caused the accident? Well, you'd be even happier to have insurance. Insurance isn't about what you can afford. It's about what you can't afford.

What is insurance?
Insurance is almost a reverse gambling. You keep putting money in a pot to avoid hitting the big jackpot - an expensive accident settlement.

An insurance company adds up all the accident claims it expects to pay, and divides that amount between all the people that pay into the insurance. Of course, each insurance customer isn't charged equally. Your rates are determined by how likely you are to have a claim. That is determined, fairly or unfairly, on basic demographic and driving statistics - statistical risk factors.

Where do rates come from?
Your rates depend on three things: who you are, your driving history, and how extensively you want to be covered. More specifically, the following factors have a great influence on your rates:

Gender
Men have more accidents on the road than women. It may be that men are more aggressive drivers. Or maybe they drive more than women. Insurance companies don't care why. They just look at the claims data. If your gender gets in fewer accidents, you pay less.

Age
Drivers under 25 (and, for some insurers, under 30) are considered at higher risk of having an accident. So get older and lower your rate!

Marital Status
Married drivers tend to have fewer accidents than single drivers. Maybe it's because they have another person to think of. Maybe it's because there's a spouse complaining about poor driving habits. Again, it doesn't really matter. If you're single, you'll pay.

Personal Driving Record
Years of driving experience, accidents, speeding tickets, and drunk-driving offenses are all factors in determining how much of a risk you pose as a motorist. Some think that if you've had an accident, you pay more to pay for your claim. However it's actually that statistically those who have been in an accident are more likely to get in another accident.

Vehicle Use
Commuters are at greater risk than those who only drive for errands or recreation. Those who use their car for business pay higher rates.

Type of Vehicle
Larger, heavier vehicles are considered at lower risk than smaller, lighter ones. More expensive cars are costlier to repair than economy models. Sports cars are more at risk than other cars.

Size of your Deductible
Bigger is better. The bigger your deductible, the lower the chance that the insurance company will need to pay out a claim - and the lower your rate.

Type and Level of Coverage
There are many different types of coverage and coverage limits. The fewer claim scenarios that are covered by your insurance, the lower the rate.

Types of insurance
There are so many variables with insurance that the best way to find out which is right for you is to ask your agent. But if you understand the basic coverages, it will help you work together with your agent.

No-fault Insurance
Some states are no-fault states and some are fault states. You don't have a choice on this one - it depends where you live. No-fault insurance bypasses the conventional legal procedure that finds fault in an accident. No lawyers, no court, no judge, no jury to prove the accident was the other person's fault. It saves on taxpayer legal bills and helps keep rates down because it reduces the amount of legal fees an insurance company pays. If you are in an accident, your insurance company compensates you. They will go after the other driver if possible. Claims over a certain dollar amount, however, automatically initiate legal action.

Fault Insurance
If you live in a fault state, you will be required to prove that you have "financial responsibility" - you're able to pay for any damage or injury that you may cause. Either fulfill minimum insurance requirements or have proof that you have the financial means to pay for such amounts.

Uninsured Motorists and Underinsured Motorists
If you are involved in an accident with someone who can't pay for the damage or injury caused, your insurance company will pay all your claims or the difference between your damages and what the other person's insurance covers. These policies protect you against damage costs including lost wages, medical bills, pain and suffering.

General Liability
This is the coverage you want everyone else to have. If someone causes damage to your property or causes you injury, that person's insurance will cover it. It covers damage you may cause to other people's property and injuries to the people themselves. It offers protection from lawsuits. But often state minimum standards are much lower than you would actually need. If someone is seriously injured, medical bills can be in the hundreds of thousands. Consider getting higher liability coverage to prevent being underinsured.

Collision
Collision insurance will reimburse costs related to repairing damages to your car due to an accident. It usually covers you even when you drive a rental or someone else's car. Often this type of coverage is required to lease or get a loan for a car.

Comprehensive
Incidents other than collisions are covered by comprehensive. That usually means fire and theft, but can also include natural disasters, riots, explosions or falling objects. This is also required for a lease or a loan.

Medical Payments Insurance
If you're in an accident and need to be taken to the hospital immediately, you're covered for hospital and doctor bills or, if it was a very serious accident, funeral expenses. This overlaps with health insurance, so ask your insurance agent exactly what you need.

Personal Injury Protection
PIP policies cover medical charges not covered by the Medical Payments Insurance - lost wages, child care that you are unable to perform, etc.

Other Coverages
There are many other types of coverage you may or may not want including towing, labor, temporary replacement vehicles, etc. Talk these over with your insurance agent to see which are right for you.

Ways to save on insurance

Comparison Shop
Price can vary by hundreds of dollars from company to company. Ask your friends about their insurance agents. Research rates on the Internet. Get at least three different quotes before you choose an insurance company.

But insurance is more than price. You also want excellent service. Ask agents what they can do to lower your costs. If they lower it a lot, they're probably very customer-service oriented.

Raise your Deductible
Your deductible is the amount you pay out of your pocket before insurance kicks in. So if you had a $500 deductible and someone slashed your tires, you probably wouldn't claim that since the cost of replacement is less than your deductible. Higher deductibles on collision and comprehensive (fire and theft) will reduce your rate considerably. But be careful not to set your deductible so high that you can't afford to pay it when you have a claim.

Drop Collision and/or Comprehensive on Old or Cheap Cars
If your car is worth less than $1000 or so, you'll be able to save the $1000 to replace your car in no time by not purchasing collision or comprehensive insurance.

Buy a Car That's Not in Demand
If thieves have a special interest in the type of car you buy, the rates will be much higher for that car. Pick a car that gets stolen less often and you'll get a much lower rate.

Take Advantage of Low Mileage Discounts
This one's simple. Drive less, pay less. Take the bus. Get a job near your home.

Move Out of the City
The city has more congestion (chance of accident) and crime (chance of theft). Reduce the risk and reduce your rate by moving to the suburbs or a rural area.

Equipment Discounts
Some equipment in a car can reduce the risk of accidents and lower the amount of claims. So if you purchase a car with automatic seat belts, airbags or anti-lock brakes, you'll save money on insurance.

Multiple Insurance Discounts
If you have other insurances, such as home or life insurance, with the same insurance company or multiple drivers on the same insurance policy, you could qualify for a discount.

Inquire About Other Discounts
Some insurers offer discounts for such things as no accidents in three years, drivers over 50 years of age, driver training courses, anti-theft devices and good grades for students. Talk to your agent to find out what special discounts may apply to you.