Kime needs to buy a car so that she can commute to her sunny LA office. She’s watched our first two videos “Cars: Buy or Lease?”, and “How to Finance a Car”, so she knows exactly how to get a great auto loan at a great price. However, she’s still confused about one part of the car-buying process: car insurance everything from what it is to how to get it. What should she do? Well, her first step is simple:
Understand car insurance Like most insurance, car insurance reduces the costs associated with a specific risk, in this case the risk of a car accident, in return for a monthly fee called a premium, which is based everything from your credit score to your driving record. As for how car insurance actually works, it operates through four components, typically bundled together. The first, and most important coverage is liability coverage, which is required by law and covers any injuries or property damage Kime causes behind the wheel. For example, let’s say Kime’s liability coverage limit is 25/50.
That means her insurer will cover up to, but no more than, $25,000 in total injuries and $50,000 in total property damage per accident. While that may sound good, liability coverage has a flaw: it only covers the expenses Kime causes the other driver, it does nothing to pay for her own. That’s why Kime will probably need the second component of car insurance: collision & comprehensive coverage, which is required by almost any auto lender, though oddly enough not the state. So how does it work exactly? Well, the “collision element” covers collision damage to your own car, while the “comprehensive element” covers basically everything else: ranging from theft to natural disasters.
As for the nitty-gritty of how they both work, they both operate through a deductible and limit. A deductible is simply the amount of money Kime must pay per accident before her insurer pays the rest, while the limit is the maximum they’re willing to pay, generally up to the market value of the car. For example, let’s say Kime’s insurance plan has a $500 deductible and she recently got into an car accident that caused $5,000 of damage to her car. Under the terms of her policy, Kime only has to pay the first $500 of her bill; her insurer will cover the rest. Pretty cool right? The third major component of car insurance is uninsured motorist coverage.
This also works a series of limits, much like liability coverage, and covers your injuries and property in the event that you get into an accident with someone who is uninsured or underinsured. Finally, we have the fourth component, personal injury protection, also known as PIP. PIP covers the medical expenses of both you and your passengers, regardless of who is at fault, and operates through a series of limits, like liability coverage. And while you may think PIP may seem somewhat redundant, especially if you have good health insurance, PIP does cover the uninsured passengers in your car, plus is still a legal requirement in 15 states.
Hopefully you and Kime now have a better understanding of how car insurance works. Be sure to check out our next video, where you’ll learn how to actually get car insurance, and be sure to check out our website, where you can find more educational material and free car insurance recommendations.
Meet Kime. Kime is about to become a first-time car-owner. Kime has watched our video “Car Insurance 101”, so she understands the importance of car insurance. However, she has no idea how to actually get it. What should she do? Well, her first step is simple: she should shop around for the best car insurance plan. To do this, she can either go online and manually get quotes from a bunch of insurers, contact a local insurance agent, or use our prefered website to easily compare insurance quotes from the best providers. Finally, now that Kime understands how car insurance works and how to get it, as long as she follows these ten rules she should be set for the future! Rule 1: Choose a car insurance plan with the highest deductible you are willing to pay.
The higher your deductible, the lower your monthly premium. Rule 2: Before getting any car insurance plan, be sure to carefully read its fine print. Rule 3: Be sure to shop around for a new car insurance plan at least every three years. Depending on your circumstance, you may qualify for lower rates.
Rule 4: Once you purchase the car, be sure give your agent a quick call before you drive the car. That way, you can be sure that your insurance is active, especially if the car you bought was different than the one you had planned to.
Rule 5: If you can, try to drive less each year.
The less you drive, the lower your insurance premiums will be. Rule 6: Purchase the safest vehicle you can and take a defensive driving course. Both will lower your insurance premiums and keep you safe.
Rule 7: Understand how much your car is worth, ideally using free website Kelly Blue Book. If you find out your car is worth less than 10x your premiums, consider forgoing collision and comprehensive insurance. Of course, if your car was bought with an auto loan, your lender likely won’t let you forgo this coverage.
Rule 8: If someone else drives your car frequently, consider adding them to your policy. Otherwise, should that person get into an accident with your car, your insurer may deny your claim.
Rule 9: If you’re a parent with a newly licensed teen driver, try to add them to your own plan. This will generally be cheaper than getting your teen their own policy.
Finally, Rule 10: If you’ve been in an accident, immediately collect the contact and insurance information of each party involved, and then call your insurer. They’ll then walk you through what you need to do next, including how to file an insurance claim. Congratulations! You have finished the car insurance basics curriculum! If you want to see our free recommendations for great car insurance plans, or just check out more educational material, be sure to check out our website!