When the first U.S. auto insurance policy was purchased in 1898, there were barely 100 cars nationally. Horses and carriages ruled the roads and the main concern for both insurers and auto drivers was any injury those noisy new machines might do to horses.
Today, auto insurance is the most widely purchased of all property-casualty insurance, yet few drivers are familiar with the details of their particular policy.
Though this guide does not represent the provisions of any particular policy, it should serve as a starting point on your road to finding the best policy for your needs.
Auto Insurance 101 Questions and Answers
- Why do I need auto insurance?
- What are the different types of policies and what do they cover?
- Why and how are policies priced for different drivers?
- What steps can I take to reduce my rates?
- How does adding drivers to my policy affect my rates?
- Do I always need to buy insurance when I rent a car? Am I not covered by my own policy?
- What happens when I loan my car to someone? Is that person covered by my policy? Am I still covered?
- Am I covered for natural disasters or “Acts of God?”
Why do I need auto insurance?
Your car is likely one of the most expensive things you own. Insurance protects your investment and guarantees you a way of coping with the expense of accidents, vandalism or theft. It also secures your financial responsibility to the institution lending you money to buy your vehicle.
When you drive, you are responsible for the safety of your passengers, your fellow drivers, other people’s property, pedestrians and yourself. Insurance helps ensure your ability to cover the costs of potential damages or injuries.
You are also required to be financially responsible by state laws, which are best satisfied through your insurance coverage. In most states, insurance is a prerequisite to registering your car. As a result, if you want to drive your own vehicle, you must be insured.
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What are the different types of policies and what do they cover?
Auto insurance is divided into several types of coverage:
-General liability covers damage you cause to other people’s property and injuries to the people themselves.
-Collision covers damage to your own vehicle in an accident.
-Comprehensive (i.e., fire, theft and other non-collision damage) covers fire damage to your vehicle, break-ins, vandalism or theft, as well as natural disasters (earthquake, hail, hurricane, flood, etc. – unless the vehicle is overturned, then it is considered a collision).
-Medical payments insurance, usually in the range of $5,000 to $10,000, covers medical expenses for injuries. This “good-faith” coverage guarantees immediate medical payments for you, your passengers, and other parties, regardless of who is at fault. It also covers you and members of your household in any accident involving an automobile, whether you are on foot, on a bicycle, or in a friend’s car.
-Uninsured motorist (UM) and underinsured motorist (UIM) coverage protects you if you are injured in an accident with others who themselves carry insufficient or no liability insurance.
-Extra coverages include expenses for towing, labor, temporary replacement vehicles, etc. These are generally defined as add-ons or “endorsements” to your policy.
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Why and how are policies priced for different drivers?
Drivers are grouped according to the level of risk each one poses – i.e., the amount of loss incurred by insurers within categories of policyholders. For various reasons, drivers are categorized by the following:
Sex – Men have more accidents on the road than women.
Age – Drivers under 25 years (and, for some insurers, under 30) are considered at higher risk of having an accident.
Marital Status – Married drivers tend to have fewer accidents than single drivers.
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.
How You Use Your Vehicle – If you commute by car during rush hours, you are at greater risk of having an accident than if you only drive for errands and recreation on the weekends. Drivers who use their own vehicles for business also are considered to be at greater risk.
Type of Vehicle – The value, size, weight, age of your vehicle, even the cost of replacement parts, are essential to determining the price of your insurance. Larger, heavier vehicles are considered at lower risk than smaller, lighter ones. Plus, more expensive cars are costlier to have repaired than economy models.
The cost of your insurance policy is based on the average cost of covering actual losses, spread out over your particular “rating group” as a whole. Of course, you may never have an accident or have your car stolen and therefore will never need to be compensated. However, others in your category may not be so lucky. Your premium will help to pay for their losses, just as their premiums would help to pay for yours.
For example, if you are a 23-year-old man and you park your new sports car on a downtown street in a large city, you will likely pay more for insurance than a 37-year-old woman who parks her four-wheel-drive in the suburbs simply because, based on average losses, you have a greater chance of having an accident or being the victim of auto theft.
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What steps can I take to reduce my rates?
Insurers often discount their rates for good drivers and for those who take safety and security precautions. Depending on the insurer, you can often lower your rates from 5 to 35 percent.
Sometimes the investment you make in your vehicle is worth the discount, and sometimes it is simply worth some peace of mind. For example, the purchase of anti-lock brakes merits a discount from nearly every insurer, but the discount probably will not pay for the brakes during the normal life of your vehicle.
Insurers generally offer discounts for:
Safety Features – Anti-lock brakes, air bags, and passive restraint systems (i.e., automatic seat belts).
Defensive Driving – Clean violation record, drivers education courses for teenagers, and defensive driving or accident prevention courses for adults (insurance discounts for the latter are required in some states).
Security Systems – Alarms, electronic locks, and disabling devices.
Changing Driving Habits – Commuting by public transit, using a company vehicle for work-related travel, and car-pooling.
Formal Agreements Not to Drink and Drive – The availability of a discount for signing such an agreement varies among insurers and states.
Buying Home Owners and Auto Policies from the Same Company – If you own a home and an automobile and you are insured by two different companies, check into the cost of carrying both policies by one insurer. Our agents can give you information about which insurers offer discounts.
You can also lower your insurance rates by requesting higher deductibles (the amount of money you pay before you make a claim). Increasing your deductibles on collision and comprehensive coverage from $100 to $250, or even $500 will bring your rates down.
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How does adding drivers to my policy affect my rates?
The more people you allow to drive your vehicle on a regular basis, the greater the chances of your vehicle being in an accident. Teenagers are especially expensive to insure because they are the least experienced drivers.
A drivers education course can help ease the burden of insurance costs since it teaches your teenager defensive driving techniques. If your child’s high school does not offer drivers education, try to find one offered by another school or a private firm in the area. After all, the cost of driver’s education could be cheaper than the extra cost of your insurance. Many insurers offer “good student” discounts as well.
An adult’s driving experience can also affect your rates significantly. Do not assume that every adult you know has been driving since age 16 or is a competent driver with a clean record. Again, taking a defensive driving course is a good way for adults to prove they are responsible drivers, thus lowering their risk and their insurance rates. This is a great solution for new couples who are jointly insured but are unmatched in their driving skills or experience.
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Do I always need to buy insurance when I rent a car? Am I not covered by my own policy?
If you have fully insured your own vehicle, including collision and comprehensive coverage, and rent a vehicle for pleasure only (while on vacation, for example), you do not need to buy extra insurance from the rental company. In fact, in most states, your basic rental fee by law will include liability coverage for damage or injury to others. However, different rules apply when you rent a car for business purposes, so check with one of our agents for details.
If you do not have your own insurance, be aware that many car rental liability policies cover you only at the state’s required minimum. Also, you should buy the collision and comprehensive coverage offered by the rental company for your own protection. Plus, do not buy a collision damage waiver (CDW) from the rental company assuming it is insurance. A CDW simply releases you from financial responsibility if you damage the vehicle you are renting, provided you comply with the terms of the rental contract. However, those terms can vary considerably, and CDWs are not state-regulated, which means they are technically not insurance.
It is always a good idea to review your policy before renting a vehicle and, if necessary, contact your agent for clarification.
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What happens when I loan my car to someone? Is that person covered by my policy? Am I still covered?
Yes. Liability and coverage for physical damage (i.e., comprehensive and collision) always follow your car. So, if a friend borrows your car and has an accident, you are still protected against the cost of damages or injuries. Plus, if the driver of your car is insured, his/her policy will also be available to cover the cost of damages and injuries.
The same rules apply when you borrow someone else’s vehicle. Your own insurance follows you no matter whose car you are driving. However, the vehicle owner’s policy is the key coverage if you have an accident.
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Am I covered for natural disasters or “Acts of God?”
Comprehensive insurance, which covers you for fire and theft, generally covers you against damage by flood, earthquake, hail, and other natural perils, except when your car is overturned (which is technically considered a collision). If you have special concerns about the safety of your vehicle in the face of Mother Nature’s wrath, contact your agent for information on catastrophic coverage.