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Breaking Down Car Insurance

Car insurance is a necessary evil. If you own a car, this is something that you are absolutely required to have, both for your own piece of mind...

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Car insurance is a necessary evil. If you own a car, this is something that you are absolutely required to have, both for your own peace of mind and by your state’s law. Of course, adding another expense to your already stretched budget is never fun. Even though you may resent this expense, it can save you thousands of dollars in the future.

What’s the cheapest and best car insurance?

Every car insurance policy’s premium is affected by many factors, most of which are unique to you – the location where you keep the car, car’s make and model, intended usage (Commuting? Driving the kids to school?), your age, accident and traffic violation history, and so on.

And then there are actual policy coverages to consider, which of course affect the final premium as well. Do you need rental coverage? Comprehensive and collision? What about the deductibles? Answering these questions will help determine the best policy for you. Insurance is a type of product where you truly get what you pay for. Get the cheapest policy now and you may very well pay for it if an accident happens.

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I remember my first time buying a car in my early twenties. The keys in my hand were a symbol of freedom and a sense of pride. Whether you are buying your first or fifth car, it’s easy to get caught up in excitement. However, before you start making grand plans of where you’ll go to celebrate the purchase, I urge you to think of a more practical matter; namely – car insurance.

Everybody wants to get the best car insurance possible for the cheapest price. After all, nobody likes having one more monthly expense to cover.

Factors that affect the pricing

In a perfect world, you’d be able to buy a dirt cheap car insurance policy that covers you against mostly everything you may encounter as a motorist. Unfortunately, reality is not like that.

Just as when you buy any product, it’s essential to make sure that this product fits your unique needs. Let’s take jeans as an example – the fit, price, color, size, and style all make a difference. You wouldn’t buy your jeans just based on price. What if they are too big? Or look outdated? Your perfect pair will fit all your unique needs. And once you found your perfect jeans, the price becomes less important as long as it’s reasonable.

Car insurance policies are the same. Many factors need to come together to build your perfect policy, just like a puzzle. There are a few auto policy coverages that you need to be aware of (more on that below) and decide whether or not you need them. Also, there are factors unique to you that affect the final premium of the policy.

Your particulars that affect the premium

First, let’s take a look at the main factors that affect your premium: 

  • Your age and how long you have been licensed.
    • The younger and the more inexperienced the driver, the higher the chance of them causing an accident.
  • The location where you keep the car.
    • Based on actuarial analysis, some zip codes present a bigger risk for a car being stolen, for example, so those would increase your rate.
  • The car’s make & model.
  • The usage.
    • The more and longer distances you drive, the higher the probability to get in an accident.
  • The deductibles and coverages selected.
    • The deductible is the amount you pay before your policy kicks in. The higher deductible you pay, the lower your premium, since high deductible reduces the likelihood of the insurance company having to pay out anything on small claims.
  • The claim history.
    • The more accidents and claims that you have been involved in – the higher the risk that you will be involved in another one which drives your premium up. 

Car insurance coverages to be aware of

This portion of the blog post is the most important. Armed with the knowledge of what each coverage is, you can make sure that you understand exactly what the insurance company is proposing on the quote document. 

Liability – This is the coverage that pays to the other party in an accident that was your fault. It will cover the damage to their car, medical bills, etc. This coverage is mandatory in any US state. Most states specify the minimum liability that you are required, which costs the least. However, I always advised my clients to purchase higher limits. You never know the accident that you would find yourself in. Imagine a chain accident of 3-4 cars. If you are deemed responsible, then the damages for all vehicles and potential health damages to passengers will well exceed your low limits. 

Collision and Comprehensive – When people who are not from the insurance industry talk about “full coverage” on a car, they refer to the Comprehensive and Collision coverages. 

Collision covers damages to your car in the case of an at-fault accident. It could involve another vehicle, or you could lose control, for example, and crash into a tree.  

Comprehensive covers damages to your car caused by any other covered event such as theft, hitting a deer, a tree falling on your vehicle during the storm, and so on. 

We see most people purchase these coverages for newer cars. If you have a beater that is not likely to survive longer than a couple of years – save the money you would have spent on the comprehensive and collision coverages toward a new car.

~ Pro Tip!

Both of these coverages carry a deductible. The higher the deductible you choose the lower your premium. It’s important to choose a deductible that you are comfortable paying as a very high deductible will effectively eliminate your ability to submit many smaller claims (since you’ll be paying for them yourself through the deductible).

Uninsured / underinsured motorist – This covers the damages to your vehicle in case the other driver was at fault but had no insurance or his insurance was not enough to cover the damages.

Rental & towing – This is where you can save a little bit of money, especially if you have other reliable modes of transportation such as AAA service.

If your car has aftermarket parts they need to be scheduled separately. Make sure to mention it to the carrier’s representative or your insurance agent.

~ Pro Tip!

Fit your needs

As you can see, a car insurance policy is not a one-size-fits-all type of product. There is also no clear cut answer as to which company will provide the best coverage at the lowest price.

There are many companies on the market and they all have the ability to provide the coverages explained above. Progressive has cheaper rates (compared to other companies) for those drivers who are young, haven’t been licensed long, and/or have an adverse accident history.

AAA is known not only for their memberships but also for their auto insurance services. They can often be cheaper than their competitors if you qualify for a “good driver” discount.

Geico and Esurance work great for those who want to do all their communications and quotes online. When selecting and comparing your quotes, don’t look at the premium alone as tempting as that might be. Saving a few bucks a month sounds great until you are involved in an accident and faced with an uncovered or under-covered claim.

Actionable Steps


1

Review coverages

Familiarize yourself with the coverages described above and analyze your situation. Do you drive an older car? Do you really need towing and rental car coverage? How high of a deductible are you comfortable with?

2

Research AAA membership

AAA membership gives you many benefits such as road assistance, car rental, ID theft monitoring, travel assistance and discounts, and more. Depending on the cost it may make sense to purchase AAA membership and decline rental and towing coverage.

3

Request quotes from the major car insurance carriers (or call an agent)

The major players in the Auto Insurance arena are Geico, Esurance, Progressive, State Farm, and Farmers. Companies such as AAA and Liberty Mutual are also worth looking into.

4

Compare quotes

Once you receive the quotes, compare them carefully. Don’t just look at the premium. Make sure that the coverages are comparable as well as the policy term. Some insurance companies like to quote a whole year while others provide terms for 6 months only.

About the Author


Olga Fawcett

Olga Fawcett

Insurance Broker

As a former insurance broker for over 10 years, Olga has deep knowledge of insurance concepts and policies. She is passionate about helping others understand the insurance policies they are purchasing and find policies that suit their unique needs.
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