Buying Car Insurance: How Does It Work?

Shopping for insurance is almost as important as shopping for the car itself. There are good deals and not-so-good deals, not to mention different types of coverage. To get the best deal for you, you need to do some research — and to follow some basic hints:

Get real. Before you begin shopping, you need to be realistic about your driving record and the number of "points" you have (or don't). If you have had any accidents within the past five years -- or more than three or four minor moving violations -- it's going to be difficult to get a good price on a policy, irrespective of the company. Many insurers will not even write new policies for people who have more than a certain number of tickets, or an accident of any significance in which they were found at fault.

Don’t be SR-22. It’s even worse if you’ve been convicted of anything along the lines of driving while intoxicated (DWI/DUI), attempting to elude police, or reckless driving. In those cases, you'll probably have to go with what's known as SR-22 "high risk" insurance. These are policies issued to motorists with poor driving records — and typically cost $2,000 or more per year.

Settle on coverage. Assuming you have a pretty good driving record, the next step before going shopping is to work out the type and amount of coverage you need. Many states have what are called "mandatory minimums" for bodily injury, property damage and "uninsured motorist" — but you can (and often should consider) opting for more. These days, for example, a "mandatory minimum" of $25,000 or $50,000 may not be sufficient, even though it's legal. Should you be unlucky enough to have an accident in which you are held to be at fault, and the damages either to property or people exceeds the mandatory minimum — not out of the question in an era of $60,000 luxury cars and SUVs — you may have to cover the difference out-of-pocket. Check your state's requirements and compare them to the mandatory minimums listed by potential underwriters; you can always adjust the coverage upward.

Figure out your comfort level. Another big question to ask yourself is whether you want basic collision, comprehensive (also known as "full coverage") or a liability-only policy.

Comprehensive policies, as the term implies, cover the cost of physical damage to your vehicle, and other vehicles involved in an accident -- as well as the medical costs, if anyone is injured. Such a policy will also take care of damages arising from theft, vandalism or something along the lines of a branch falling down on your car while it's parked outside.

This is the kind of coverage most people have, and which will be required if your vehicle is not completely paid off. You are "fully covered" in the event of an accident, theft or other damage, with your only out-of-pocket expenses being your deductible. Your vehicle will be repaired, or, in the event it is damaged beyond economic repair, the insurance company will settle with you for the car's estimated retail value and cut you a check with which you can go shopping for a replacement vehicle.

The next step down is basic collision coverage, which will pay for damages incurred to your car or truck as a result of an impact with another vehicle or object -- as well as pay for damages to other vehicles and property, etc. However, the policy may not pay for theft, vandalism, or damage arising from such things as trees falling on your car while it's parked outside, or hail stones, etc. You take the extra risk in return for a less costly policy.

If you live in a low-risk area (e.g., not a major city) and park the car indoors in a secure garage, it's much less likely your car will be stolen or vandalized. In this case, skipping the extra coverage is a safe bet -- and will save you some money. On the other hand, if you park the car on a public street, or drive in a major metropolitan area, the risk of theft and damage is higher and the full comprehensive coverage makes more sense, even if it is a bit more expensive on the front end.

Liability-only policies are the least coverage you can get. They do not cover the cost of physical damage to your own vehicle in the event you get into an accident, or reimburse you for theft, vandalism or other damage. That means the cost of repairing or replacing the vehicle will be your problem entirely, though the policy will take care of any damages you cause to another person's vehicle, property or person. Liability policies allow you to operate a motor vehicle legally, and will pay for damages you happen to cause others, but leave you to take care of your own damages "out of pocket." Though it may sound risky, a liability-only policy can make good financial sense if you own an older car or truck that isn't worth very much.

The downside is that even in a fairly minor accident, the insurance company is more likely to "total" an older vehicle than agree to spend money repairing it. A low speed hit at 15-20-mph can easily incur $2000 in body damage. And once estimated repair costs exceed 70 percent of the car's estimated retail value, it's not likely repairs will be authorized.

Go for the affordable deductible. The next variable to consider is the deductible, the term for the amount of money "out of pocket" you agree to pay in the event of a claim. Most insurance companies will adjust their policy quotes up or down depending upon how high (or low) the deductible is. If you are in a good position financially, and can afford to pay a high deductible, it could significantly reduce your annual premium. Of course, you will have to come up with that big deductible if there's a fender bender -- and the deductible may be just barely higher than the total cost of the repair. As with so many things in life, you're taking a gamble. If you never have to file a claim, you'll have money in your pocket. If you tap someone's bumper in the parking lot, you'll have to open your wallet.

Don’t make a last-minute decision. Finally, never wait until the last moment to shop for insurance. The best time to look for a new policy is when you have the luxury of time to make applications, fill in forms, talk with insurance companies and wait for the best deal. It can take several days for an insurance company to offer a firm quote. Don't let your old policy lapse while you are looking for a new one. And don't put yourself under pressure to get coverage before the end of the week.

Five Insurance Facts to Know

What you drive matters: Sport cars, luxury cars with powerful engines, SUVs -- and vehicles with poor crash test scores (see the Insurance Institute for Highway Safety's ratings, available at tend to cost more to insure -- because statistics show they tend to be involved in more accidents, or cost more to repair. It's a good idea to check with your insurance company before buying any new vehicle to get an estimate.

Age matters: Accident and loss data indicate that teens, single males under the age of 35, and older people 55 and up, tend to be involved in more accidents than average. You can sometimes mitigate the "surcharge" that often comes with being a certain age by maintaining a good driving record or by taking road safety/driver education courses approved by the insurance company, and which entitle you to a discount or reduced rate upon successful completion.

Location matters: Some areas of the country are viewed as higher-risk than others; for example, Washington, D.C., and New York City have astronomical insurance rates for some vehicles. More cars get stolen and damaged in these places than in more rural areas and the rates reflect this fact.

Who drives matters: Most insurance companies assess rates based on more than just the driver of record's record. If your spouse has racked up several tickets or accidents, it will affect your policy even if you have a perfect record yourself and haven't had a ticket in 20 years. The same applies if there are youthful drivers in the home. Do not risk a future problem by misleading your insurance company, like failing to mention that you are married, or that there are other drivers in the household. Should there be an accident and a claim filed, it could cost you much more than a higher annual premium.

Discounts matter, too: Some insurance companies will reduce the amount they charge for insuring your car if you already have a policy with them for another vehicle you own, or if the company happens to be the same that issues your home insurance policy, or if you have a lot of safety equipment. Ask, demand, and go elsewhere if need be. Shopping around is very important -- but you may be able to get a better deal with your current insurer on the basis of your pre-existing relationship.

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