Buying Auto Insurance
What You Need To Know
A review of the types of auto insurance, the effect of your credit score on rates, how much coverage you need and where and from whom to buy.
What You'll Find Here
- Factor In the Cost of Insurance
- Car Insurance and Your Credit Score
- Types of Insurance
- How Much Coverage Do You Need?
- Buying Auto Insurance
Factor In the Cost of Insurance
As you may know, insurance rates are not the same for all new cars. To that point, it's important to find out - before you buy - what you're new car is going to cost you in insurance premiums. To find out the rate, you need only call your insurance agent or check one of the on-line sources listed below. For your information, these were the 10 cheapest cars in 2006.
- Chrysler Town & Country
- Chevrolet Cobalt
- Dodge Caravan
- Chevrolet Impala
- Ford Taurus
- Ford Econoline
- Jeep Grand Cherokee
- Chevrolet Malibu
- GMC Sierra Pickup
- Toyota Corolla
Source: Reuters News Service
Auto Insurance and Your Credit Score
Many car insurance companies now use your credit score to determine what you pay. Why? Because they say studies show that customers with poor credit histories are more likely to be in accidents and file claims. They claim that customers with bad scores are higher risks and it's only fair that those customers pay more for their policies.
Insurance companies use a secret formula to calculate a customer's "insurance score" that is not quite the same as the more familiar FICO score from credit reporting agencies such as Equifax, Transunion, and Experian. Although the score itself may be different, the end result will nearly always be the same. If a customer has a poor FICO score, he'll almost certainly have a poor insurance score.
What can you do?
Get a copy of your credit history and FICO Score. Check for mistakes and old outdated information. Some studies have shown that 8 out of 10 reports have errors. Obviously, anything you can to do improve your credit score will also improve your ability to get less expensive car insurance. Even if you have an average score, it will be worthwhile to make improvements. Since it takes time to change your credit history, don't expect short-term results.
Types of Auto Insurance
An auto insurance policy might include one or more of the following types of coverage:
Liability
Protection from risks associated with property damage and personal injury. Legal action against at-fault drivers is becoming more common and more expensive. Multi-million dollar legal settlements are not unusual. Without insurance, a single accident could easily ruin an unfortunate family's life. For this reason, liability coverage is the most important part of such a policy.
Comprehensive
Protection from the cost of non-collision damages, vandalism, theft, weather-related damage, or natural disasters. Comprehensive coverage typically pays for the cost of repairs, or in the case that the vehicle is totally destroyed or stolen, the cost of a replacement vehicle - at "cash value" of the old vehicle. A deductible lessens the amount you are paid.
Collision
Protection from the cost of repairing damages to your own vehicle. A deductible lessens the amount you are paid.
Medical
Pays medical costs to you or other parties for accidental injuries associated with your automobile. There are limits specified in your policy regarding maximum amounts paid for each incident.
Uninsured Motorist
Protection from costs associated with an accident caused by another driver with insufficient liability coverage - or no liability coverage.
Towing and Labor
Pays cost of towing your damaged or disabled vehicle. Maximums usually apply.
Rental Reimbursement
Pays cost of renting a replacement vehicle after an accident.
Gap Coverage
Pays the difference between the amount owed on a loan or lease and the "cash value" paid by your insurance company in case of theft, fire, or accident. A gap waiver or gap insurance is usually provided with most leases, but not loans. Some auto insurance companies offer it and some do not. If you are going to be "upside down" on your loan, it's good coverage to have.
For a more extensive glossary of auto insurance terms, click here.
How much coverage do you need?
State laws may dictate what and how much liability coverage is required, and whether no-fault coverage is required. If you buy with a loan or lease, the finance company may dictate minimum coverage requirements. They may even tell you the maximum deductible you can choose.
Beyond the requirements of your state laws or finance company, you have some ability to determine kind of coverage you want, how much, what deductible, and what add-ons you want.
For example, you can add more liability coverage, which can be a smart thing to do in these days of mega-million dollar legal settlements, especially when medical costs are involved. Many policies only cover $50,000 or less. If your auto insurance policy doesn't cover the full cost of a large settlement, you are personally responsible for the remainder.
You can also adjust your deductible amount, within limits. If you have sufficient cash available in case of an accident, you can set a high deductible to reduce your premiums. However, many people who set high deductibles really can't afford to pay but bet on the chance they'll never have to. Not a good move.
Buying Auto Insurance
There are essentially four ways to purchase auto insurance...
- From an employed representative of an insurance company
- From an independent agent
- From an online broker
- Directly from an auto insurance company
From an Insurance Company Agent
Some national or regional auto insurance companies employ agents who are commissioned sales and support people, and who work directly for the insurance company from small offices located around the country.
From an Independent Agent
This type of agent is an independent business person or company, often called a broker or agency, that represents a number of different insurance companies. This is the most common way that auto insurance, and other types of insurance, are sold in the United States.
From an Online Broker
Many brokers offer their services online. New and larger national brokers also set up shop and began to offer insurance comparison shopping and other services online. These companies all offer coverage from major insurers such as Hartford, GMAC, Travelers, and many others. Some companies, such as Insurance.com, offer instant free insurance quotes. Many of these sites allow you to compare companies.
Direct from Auto Insurance Provider
Many companies provide web sites that make it easy for customers to do research, get quotes, buy coverage, and even submit claims right from the web site. Buying directly from an insurance company wasn't very practical until the Internet came along.
