Auto Insurance: What you need to know
Insurance rates (the cost for insurance premiums) vary widely and depend on a number of factors. One of the primary factors is the profile of the driver. Before entering into an agreement with a new client, an insurance company will assess the likelihood that the new client will make a claim against the policy (in other words, formally request that the insurance company pay for damages to the driver, to his or her vehicle, or to a third party). If the company determines that a client is likely to make a claim, the company will charge more money for the policy. If the person appears to be too great a risk, the company will not sell him or her a policy. The chief factor in assessing the risks associated with insuring a prospective client is the client’s past driving record. If the person has been in a number of accidents or received a number of traffic tickets, the insurance company will regard him or her as a greater risk than a person without any prior accidents or tickets.
Aside from the client’s driving record, insurance companies base their determination of risk on several other factors. Insurance companies make these determinations based on close analysis of statistics from traffic accidents and past claims made on insurance policies. For example, young drivers aged 18 to 25 are a greater risk than older drivers, and they are therefore charged higher rates. In the 18-to-25 age range, male drivers are a greater risk than female drivers. Single drivers are a greater risk than married drivers. Where the car will be most frequently driven also affects the premium. For example, it costs more to insure a car that will be driven in a densely populated urban center than it costs to insure a car that will be driven in a rural area.
There are many different types of car insurance. Liability insurance covers bodily injury to others and damages to other drivers’ vehicles. The extent of liability insurance is usually listed as a series of three numbers that show how much money, in thousands of dollars, an insurance company will pay if it is determined that a policyholder is at fault in an automobile accident. For example, in the event of an accident a 100/300/50 liability insurance policy will pay up to $300,000 of bodily injury coverage to the injured parties (other than the policyholder) not exceeding $100,000 to any individual and $50,000 for property damages to third parties. Although laws in most states require substantially less liability coverage (15/30/5 in California, for example), most experts recommend that a driver purchase 100/300/50 worth of liability insurance.
Since injuries and damages caused by car accidents can be extremely costly, victims of accidents often sue the people they believe to be responsible for the damages. These lawsuits can cost millions of dollars. To limit the number of lawsuits, 12 states in the United States have adopted what is called “no-fault insurance.” No-fault insurance policies require drivers to purchase personal injury insurance (PIP) for their own protection and limit policyholders’ ability to sue other drivers for damages. In a no-fault system, a policyholder’s insurance company will cover injuries to the policyholder regardless of who is at fault. Meanwhile, the other driver’s insurance will cover his own injuries. Only one party in the accident will be permitted to sue if an arbiter determines that the personal injuries were excessively severe and that the fault lay with the other driver.
Other types of insurance include collision insurance and comprehensive insurance. Collision insurance covers the policyholder’s vehicle in the event of an accident in which the policyholder is determined to be at fault. This sort of insurance includes a deductible, or an amount of money that the policyholder must pay before the insurance company will begin to cover expenses. For example, if a driver holding $10,000 worth of collision insurance with a $500 deductible is at fault in an accident that causes $3,000 worth of damage to his vehicle, the policyholder will pay $500 for the repairs to his vehicle and the insurance company will pay the remaining $2,500. Comprehensive insurance covers damages to the policyholder’s vehicle caused by incidents that are not considered to be collisions. Such incidents may include theft, fire, hurricane damage, or vandalism.