Guest Post: Everything You Need to Know About Auto Insurance
This is a guest post by Michael Bock, a junior at the University of Texas. Aside from school, Michael is also a staff writer for Lifed. There he writes about life hacks, health, finance and productivity tips.
Auto insurance: It’s something that nobody really wants to buy. After all, in a world consumed by instant gratification, its benefits aren’t instantaneously, if ever, seen. Yet it’s legally mandated in all 50 U.S. states, with only the minimum/maximum limits sometimes differing among them. Let’s break down what car insurance really is, and how you can get a BETTER deal on it.
Components of Auto Insurance
These provisions (each individually contributing to your total premium) exist in virtually every full-coverage policy:
Bodily Injury Liability: Say you get into a serious accident. The person(s) in the other vehicle are severely injured or, God forbid, killed. Bodily injury coverage, in a roundabout way, gives you legal protection if the other party sues and keeps the court from seizing your personal effects.
Property Damage Liability: if your vehicle damages another individual’s vehicle. It’s also about the best legal defense you’ll have should the other individual/party sue you.
Uninsured/Under-insured Motorists Bodily Injury: This one is virtually a must-have. It covers (depending on your policy and state of residence) medical bills incurred from injuries to you or your passengers, as well as damages to your auto, in the event an uninsured driver hits you (and you’d likely be shocked at how many people drive without insurance).
Personal Injury Protection: Available in many states, personal injury protection (a.k.a. ‘no-fault’ insurance, depending on your state and provider) typically covers medical expenses and may insure against lost wages and other things. In cases where PIP is labeled “no-fault”, this is usually indicative that the insurance of the insured person or claimant will not increase due to a no-fault claim.
Personal injury protection may also insure against emotional distress (usually requires ‘negligent infliction of emotional distress’ rather than ‘intentional’, defamation, or libel. Note that this is how PIP contrasts with bodily injury insurance. PIP is required coverage in Delaware, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania, Texas, Utah, and Washington (state).
Medical Payments: Not to be confused with bodily injury. Say that you and/or your passenger are injured in an accident. Medical payments (‘no fault’) coverage pays yours and your party’s medical bills, up to the maximum dollar amount specified in your policy.
Comprehensive: Covers any damage (e.g. fire, flooding, vandalism, etc.) or loss (by theft, for example) of your vehicle that’s not caused by a collision.
Collision: Comprehensive coverage’s complementary brother: It covers actual collisions (and the resultant property damage), regardless of who hit who.
Uninsured/Under-insured Motorists Property Damage: Sometimes abbreviated ‘UM/UIM’, this provision covers you if the other, at-fault motorist doesn’t have insurance or is under-insured. Basically, the insurer pays will pay your medical bills should an uninsured party cause an accident, and then deal with the at-fault party as they see fit. Uninsured motorist coverage is extremely important and is often overlooked. Although many providers do provide UM/UIM in an umbrella policy, it’s best to make positively sure that it’s on your policy.
Accident Forgiveness: This relatively new type of coverage, seen on many providers’ advertisements, basically gives you a free pass in the event of an accident. Considering this: Insurers are notorious for raising premiums by a staggering 30% on customers who have an accident—many times even when they are not the at-fault party. Accident forgiveness is exactly what it sounds like, insurance that is guaranteed not to increase when (and if) you have your first accident.
Rental Reimbursement: This one is often optional, but sometimes a standard type of coverage under the collision or comprehensive provision. It simply reimburses you (typically around $20-$30/day, so you won’t be getting that big Cadillac, unfortunately) for using a rental if your insured vehicle has been decommissioned by one or more of the causes acceptable under your policy.
Towing & Labor: Towing and labor coverage is generally an add-on type of coverage with many insurance companies, although some offer it standard under full-coverage policies. Should your vehicle need towing and/or working-on by the side of the road, the insurance provider will pay up to a pre-defined maximum. Most towing and labor policies don’t, however, cover any parts that may be necessary necessary to get you back on the road; they only pay for the labor required. Take note: If you already have (or are planning to get) T & L coverage through a third party (AAA is a very prominent one), save some money by opting out of it (if possible) on your car insurance.
Gap Insurance: (Guaranteed Auto Protection insurance) is typically worked into your insurance premium. It works like this: Whenever you experience a total loss—as normally determined by the provider’s third-party appraiser)—the difference between the cash value of your car, minus all perils deductible (if applicable), liens, and the lease/loan payout. GAP is commonly applied to new or ‘newer’ vehicles, with some providers and/or financial lenders mandating it. For older cars that have seen a lot of depreciation, GAP is rarely necessary.
If it’s an older car with high mileage, think carefully about possibly not getting collision/comprehensive coverage. Your car’s residual value may not justify paying the extra premium.
Caveat Emptor: Remember that the optional components, as well as the level of coverage you choose, significantly affects your rates. However, be careful before gutting your coverage, as you may end up paying for it later. Think it over well and be honest with yourself about the kind of and how much coverage you need.
Additional Factors & Discounts That May Affect Your Premium
Usually there are up to a dozen or more factors that contribute to your premium amount, prominent ones including (this not being, by any means, an exhaustive list):
Deductible: Naturally, choosing a higher deductible almost always lowers the premium. Get as high of a deductible as possible, but take heed: Taking a $1,000 deductible, for instance, will most likely net you much lower monthly premiums. Before doing this, though, ask yourself “will I for sure have $1,000 on me or set aside to pay out-of-pocket if I have an accident and, worse, injure or kill someone?”
Sex: Sorry men, ladies almost always get a slightly lower rate just for their sex. Like many of the other factors here, insurers base this bias on statistics.
Age: You’ve probably heard it before: Those under 25, especially with marks on their DMV records, will often pay substantially more.
Geographic location: Where you live. Is your community a hotbed of criminal activity, specifically in auto thefts? How often does it experience accidents compared to other areas?
Credit score: Increasingly popular because it is, to a degree, indicative of an individual’s responsibility (or lack of, therein)—at least according to almost all insurance companies.
DMV report: Any marks on your driving record that are within 3-5 years old—including traffic violations, wrecks (sometimes even regardless of fault), the severity and/or circumstances of wrecks or incidents, and so forth—will usually jack the premium up significantly. No explanation necessary.
Your marital status: Yep, it matters to many providers. Since married individuals are statistically more likely to drive responsibly than the younger generation, they often get discounts; it just depends on the company.
Your general usage of the vehicle: Is it primarily used to commute to work and back?-type of questions
Defensive Driving Course: If you haven’t already, consider taking a Defensive Driving Course by an insurance company-sponsored or -affiliated organization. Most insurance providers will give you a discount (can be small or large) for completing one of these courses.
Billing Frequency: Pre-pay your entire premium, of typically a six- or 12-month term, if possible. This alone may save your checkbook an additional 3-4%, since many—if not most—insurance providers tack-on extra fees for financing auto insurance.
Safety/Security Features: ‘Safety equipment discounts’ are frequently offered on cars that have features like air bags, traction control, an alarm system, and anti-lock brakes. Why? They greatly reduce the risk of bodily harm and, therefore, can significantly save the insurer on medical costs. Guess who those savings get passed on to.
Multiple Policies: Many insurance providers give significant discounts to those who let the company cover multiple items, such as their auto, home, and need for personal-liability coverage . Additionally, multiple cars being insured will often get discounts.
Kids: If you have children that drive, you may be able to save on premiums if they get good grades and/or attend school more than 100 miles away and do not commute the long distance from home to school.
Affiliations: Aka group discounts. Insurers often award group discounts to low-risk customers that are affiliated with certain groups—for instance, membership in an employee group, an employer-sponsored pension fund, or an alumni group. These group discounts are often called ‘affinity discounts’ and should be inquired about for often-substantial discounts. Also note that many credit unions offer these group discounts.
Just don’t assume that the group rates you’re quoted are actually ‘discounted’. Sometimes they’re actually higher. Don’t get suckered: Get multiple quotes.
Occupation: Auto insurance is fundamentally a game of statistics and trends. Insurers put vast resources into determining who and who doesn’t generally get into accidents. From this data, they notice specific trends. For instance, engineers are a lot less accident-prone. But why? It’s anyone’s guess, but somehow, engineers are just lower risk behind the wheel. Since our example group here is statistically a better bet, insurers charge engineers less. Same goes for teachers and astronauts (Space Shuttle insurance, seperate!). It just depends on the provider. Ask.
Lapses in Coverage: Driving while your insurance has lapsed? Know that even the shortest lapses in coverage greatly decrease your chances of getting discounts. Insurers notoriously jack up premiums because customers let their coverage lapse. Pay your premiums on time, and when (and if) you switch insurers, never cancel your previous coverage until the new policy is active.
Vehicle Being Insured: In the market for a new or used car? Know that the make, model, and/or year of your new ride will be heavily considered in calculating your premium. Contrary to conventional wisdom, certain cars, even some some of the inexpensive and fairly mainstream ones, just cost more to insure than others.
Be aware that—while most small, inexpensive cars (and the like) are cheap to insure—some ‘practical’ cars aren’t so practical in terms of insurance after all. Newer-model Minivans, on the other hand, tend to get their owners almost dirt cheap premiums. See “List of Top 10 Least and Most Expensive Autos To Insure” below.
Moreover, choose a car whose insurability statistics are favorable. Choose one that has a long, proven history of reliability and good safety ratings. The IIHS is a great place to research recent crash-test data.
Most Frequently Stolen Automobiles* (as of 2011)
- 2009 Toyota Corolla
- 2002 Ford Explorer
- 1994 Acura Integra
- 1994 Chevrolet S/10 Pickup
- 2000 Dodge Caravan
- 2004 Dodge Ram
- 1997 Ford F-150
- 1992 Toyota Camry
- 1995 Honda Civic
- 1994 Honda Accord
The Least and Most Expensive Automobiles to Insure (2010/2011)
Top 10 Least Expensive
- Toyota Highlander/Compact SUV
- Ford Escape/Compact SUV
- Toyota Sienna/Minivan
- Honda Odyssey EX/Minivan
- Jeep Wrangler Unlimited Sport/SUV
- Nissan Murano SL/SUV
- Honda Odyssey LX
- Toyota Sienna LE
- Toyota Sienna I-4
- Chrysler Town & Country LX/Minivan
Shocked that not one sedan/coupe made the cut? Yours truly is.
Top 10 Most Expensive
- Mercedes-Benz SL65 AMG Convertible (on average, $3,600 per six-month policy)
- BMW 750i/Luxury/Sport Sedan
- BMW 750Li/Large Luxury Sedan
- Mercedes-Benz SL63 AMG/Luxury Sportscar
- Mercedes-Benz S65 AMG/Large Ultra-Luxury/Sport Sedan
- Aston Martin DB9/Coupe
- Mercedes-Benz CL600/Luxury coupe
- Porsche 911 Carrera S/Sportscar
- Aston Martin DB9 Volante Convertible/Sportscar
- Mercedes-Benz G55 AMG/Luxury-Sport SUV
Choosing an Auto Insurance Company
- In addition to everything else presented here, choose an insurer for its proven financial strength, rates, quality of customer service, number of consumer complaints and so forth.
- ConsumerSearch is a good bet for insurance company reviews.
- Use common sense.
- Take advantage of the myriad online websites that can automatically retrieve quotes for you from multiple insurers.
- Our recommendations: USAA and Amica Mutual. Both are consistently ranked high among customers, J.D. Power, and ConsumerSearch. (Note: USAA insurance is only offered to military members and their family.)
Additional Facts About Auto Insurance in the U.S.
- Per Insure.com, in the states of Louisiana, Michigan, Oklahoma (and Washington D.C.), you’re likely to pay more for auto insurance than in any other state—and that’s excluding all of the aforementioned factors.
- Not every policy covers theft of property from inside the car. Before leaving that camera or those pricey gifts in the car, make sure your policy covers this kind of theft. Or better (and wiser) yet, just don’t leave valuable things in the car!
- Be aware that in some states, in addition to insurance being mandated, you may need to have a certain, minimum amount of it. Yes, there are places where you can even be ticketed for being under-insured. Know your state’s automobile insurance laws.