Every driver is mandated by law to have auto insurance, but the requirements vary based on where you live. There are plenty of car insurance options to choose from, so it’s helpful to understand the different forms of coverage. This can help serve as a beginner’s guide to car insurance and point you towards coverage that will fit both your driving style and your lifestyle.
What is car insurance, and what does it do?
Car insurance is a product designed to protect you, the driver, your vehicle and any parties involved from costs primarily associated with car accidents. Your monthly cost and coverage will depend upon the type of car insurance you purchase, among other factors. Your car insurance should be based on an evaluation of your lifestyle and your profile as a driver, which may include your age and driving record. These factors combined will help determine the quoted rate that companies provide. If you’re a younger driver, for example, you may be considered a greater liability than a more experienced driver, and you will typically be charged a higher rate. Keep in mind, paying more for car insurance doesn’t necessarily mean you have better coverage. Just like a loan, you should shop around for the best rates. It’s important to get both the optimal coverage for your circumstances and a rate you can afford.
Car insurance terms to know
If you’re dealing with car insurance for the first time, there are a lot of new terms to learn. Here are some of the most common car insurance terms to help give you a head start:
- Deductible. Your deductible is how much money your insurance company deducts from the amount they give you for an accident or other claim. For example, if you have a $500 deductible and get into a car accident with $10,000 repairs, they will give you a check for $9,500, while you pay the $500 for repairs. In general, the lower the deductible, the higher the rate of your premium.
- Premium. Your premium is the cost of your car insurance. Most people pay monthly, while others pay twice a year or annually.
- Coverage. Your coverage, or what is considered a covered incident, is simply what your insurance policy will pay for. Your coverage will be outlined in the policy you choose so you know what your insurance will cover.
- Quote. Before signing on to a policy, you can get what is called a “quote” from various insurance companies. This is an estimate of how much you’d pay for a given policy with them and will be based on the information you provide about yourself, your driving record and credit, and other circumstances.
- Additional insured. Additional insured refers to other drivers covered on your policy and are usually members of your household.
- At-fault. “At fault” refers to the person who caused and is responsible for an accident. The “at fault” party in an accident relies on insurance to help pay for any damage or must pay for it out of pocket.
- Claim. A claim is when the insured person requests payment or assistance from the insurer in connection with a covered accident or other event.
- Declarations. The declarations page is home to the most important details of your policy, including your coverage, the insured parties, your vehicle identification number (VIN), address and more.
- Limit. The limit indicates the limitations of your policy regarding the maximum amount your policy will pay in the event of an accident or other event.
- Primary use. The primary use is what the car will be used for. Are you commuting to work? Using it for pleasure? Business use?
- Underwriting. Underwriting is the insurance company's process of assessing a driver's risk and therefore determining their rate.
What to look for in a car insurance policy
When you’re shopping for a car insurance policy, there are additional factors to look at when applying for a policy.
- Claims process. When you report a claim, you’re reporting an incident to your insurance company in the hopes that you can use your policy for partial or full coverage. The claims process is what it may look like when you file the claim. Is it over the phone or online? What is the usual response time? These are all things you’ll want to consider before signing up for a plan.
- Additional drivers. Make sure you include people who will be driving your car regularly.
- Fees. These may vary depending on how frequently you’d like to pay, and other factors. For example, some insurance companies will charge you a fee for paying monthly.
- Type of coverage. There are many types of auto coverage. You’ll want to know the exact breakdown on your policy. For example, some policies will help cover your car's damage even if the accident was your fault, while others will only cover the damage on the other car.
- Courtesy cars and breakdown coverage. What happens if your car is in the shop for days at a time or your vehicle breaks down on the side of the road? Check to see if your policy comes with a courtesy car or roadside assistance.
Of course, there is a lot more to cover, but as a beginner’s guide, we wanted to get you familiar with the basics of auto insurance. Hopefully now you’re a little less mystified by all the jargon when you shop around for your next policy.