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Course: Financial Literacy > Unit 6
Lesson 7: Car insurance options and costWhat is car insurance and why do you need it?
Car insurance provides financial protection for drivers in case of accidents, theft, or damage to their vehicles. It covers various expenses, including repairs, medical bills, and legal fees, depending on the type of coverage chosen.
Social media posts on car insurance
At some point in your life, you might come across a social media post like this:
| 6.1k Views | 5 Quotes 460 Likes 6 Bookmarks |
|---|---|
| 🥰 | I am only paying |
| 🤠 | Mine is |
| 😇 | Mine went down. I am paying |
You might see some people who pay less for car insurance than you do. Sometimes, this can make you feel upset, like you're being overcharged. But you shouldn't get too upset. There's a lot of things you don't know from just looking at a post. Maybe the person who is paying
To really understand whether you're paying too much, you need to learn about how car insurance works and what things make it cost more or less.
What is car insurance?
Car insurance is a contract between a vehicle owner, or driver, and an insurance company. The insurance company agrees to protect the vehicle owner, or driver, from financial losses related to an accident, theft, vandalism, or another event involving a vehicle. In exchange, the vehicle owner, or driver, pays a premium or fee to the insurance company.
Do I need car insurance?
There are a few good reasons to have automobile insurance:
- It's required by law in most states, so you want to make sure you meet the minimum requirements. If you don't have insurance, it might mean that you get a ticket and in certain states the police might even take your car away.
- It can protect you and others from the cost of repairs, expensive lawsuits and medical bills if you cause an accident.
- It can help repair or replace your car if it's damaged or stolen.
Types of coverage
There are different types of coverage you can purchase for your car insurance. Let's look at a few:
Liability coverage
This covers the cost if you cause an accident and someone else gets hurt or their property is damaged. It does not cover your own injuries or damage to your car. This is the most basic form of car insurance and is required by most states.
Coverages below are not required by most states, are optional, and are examples of what people mean when they say they have "full coverage". Full coverage includes:
Collision coverage
This helps pay for repairs to your car if it's damaged in an accident, no matter who's at fault. It does not cover damage from things like theft or vandalism.
Comprehensive coverage
This covers damage to your car from things other than accidents, like theft, vandalism, or natural disasters. It does not cover damage from a collision with another vehicle.
Uninsured/underinsured motorist coverage
If you're in an accident with someone who doesn't have enough insurance or doesn't have any at all, this coverage helps pay for your medical bills and car repairs. It does not cover damage caused by you.
Medical payments coverage
This helps pay for medical expenses for you and your passengers if you're injured in an accident, no matter who's at fault. It does not cover property damage.
There are some extra things that you might be able to get with your car insurance. For example, you might be able to get help if your car breaks down on the side of the road, or a rental car if your car is in the shop. Not all insurance companies offer these things, and some of them only give them to people who have certain kinds of insurance policies.
Let's check the understanding
How much does car insurance cost?
The cost of automobile insurance is influenced by a variety of factors, which contribute to the overall premium you pay. These factors include:
- The make, model, and year of your vehicle: Different cars have varying risk levels and repair costs, which can affect the price of insurance. For example, a luxury sports car may have a higher premium than a family sedan due to the higher cost of repairs and greater likelihood of accidents.
- Your age and gender: Statistically, younger drivers and male drivers tend to be involved in more accidents, which may result in higher premiums. As you gain more experience and maintain a clean driving record, your insurance rates decrease.
- Your driving history: A clean driving record with no accidents, speeding tickets or other violations can help lower your insurance costs. On the other hand, a history of accidents or traffic violations can lead to higher premiums.
- Your deductible: The deductible is the amount you agree to pay out of pocket before your insurance coverage begins. A higher deductible usually results in lower premiums, while a lower deductible leads to higher premiums. It's important to select a deductible that balances affordability with the level of financial protection you desire.
- Your coverage: The more coverage you want, the more you will generally have to pay. Some people may only want the minimum amount of coverage required by law. Typically, this is liability-only coverage, and it is the cheapest form of insurance. Other people may want more coverage in case they get into an accident and have to pay for a lot of damages. This will usually be more expensive.
- Your geographical location: Where you live and drive can have a significant impact on your insurance rates. Factors such as local crime rates, weather conditions, and the frequency of accidents in your area can all influence the cost of your insurance premium.
How do I choose the best policy?
When choosing the best automobile insurance policy for one's needs, it's important to consider one's budget, risk tolerance, and insurance needs. Here are a few tips:
- Determine the minimum amount of coverage required by state law.
- Consider the type of vehicle and how it will be used.
- Decide on the amount of coverage desired, considering the deductible and policy limits.
- Compare quotes from multiple insurance companies before making a decision.
- Review and update the policy periodically to ensure it remains adequate.
Real life scenario
Sam is a young man who just bought his first car. He needs car insurance, but he doesn't know where to start. Here's how Sam might go about choosing the right policy:
- First, Sam will find out the minimum amount of coverage required by his state. In his state, drivers are required to carry liability insurance with minimum limits of
- Next, Sam will consider his vehicle and how he'll be using it. He's driving a used car that's worth about
- Sam is thinking about all the things that could go wrong with his car. For example, he might crash it, or someone could steal it. Since Sam really needs his car, he wants to make sure he can get another one if something bad happens. He decides to add collision and comprehensive coverage. But since his car isn't worth a lot, he's only getting the smallest amount -
- Finally, Sam will compare quotes from multiple insurance companies to find the best rates and coverage for his needs.
Conclusion
While it might be tempting to just choose the cheapest insurance policy you come across, it's important to take a step back and really think about what you're getting. Insurance policies can differ greatly from one another, and you want to make sure you're choosing the one that's right for you. This means doing some research and educating yourself on how insurance works.
Understanding the different policies, coverages, and limits will help you make an informed decision. So remember: don't just look at the price tag; consider all the factors when choosing your insurance policy.
Want to join the conversation?
In the example with Sam, when it says $25,000 per person for bodily damage and $50,000 per accident for bodily injury. What is the difference?(9 votes)
One accident may involve several people. So, if in a single accident, three people are injured, not one of them will receive payments that exceed $25,000, and when the expenses for all three of them are combined, the total amount will not exceed $50,000.(13 votes)
If the Liability coverage covers the damage to the other person's car, would that person who suffered the accident (not the one who caused it), in the case that he would be having the "Collision coverage", be paying for it without meaning? Because the damage done to the car will be paid by the other person's insurance (who caused the accident).(2 votes)
Insurance companies will increase both parties' insurance if someone is hit by another car. Whether or not you were the victim, insurance companies deem the accident a worthy reason to believe you have a greater chance of being in another accident.(5 votes)
I just got a brand new Ford Model T. How would I find out how much insurance would cost for it?(2 votes)
Try asking different Insurance companies! Different companies have different pricing options. I hope you figure out which insurance works for you!
- SnowyRawrGamer(1 vote)
What’s the best type of car insurance?(1 vote)- This depends. Is your car valuable? If not, you might only need liability insurance to cover any damage you might do to someone else or their property in an accident.
But, if your car is valuable, you might want to insure for damage repair, replacement, towing, and stuff like that.
The best kind of car insurance for you is as much as you need, given the value of your car.(2 votes)
If I'm in a no-fault state, would it matter if I had a car cam recording an accident and showing strong evidence that it was the other driver's fault? I've never been in an accident, but I'm curious about it.(1 vote)- In a "no fault" state, there's no need for that.(2 votes)
- if you have medical insurance and got into a car accident where you got hurt would the car medical insurance cover it or would the general medical insurance cover it?(1 vote)
- Let's think of the part of the car insurance that deals with your injuries as "accident insurance". That should pay the medical bills associated with an accident.
Health insurance might get involved if, during your time in the emergency room to get your broken leg attended to, it was discovered that you also had pneumonia. Treatment for the leg would be paid from the accident insurance, and for the lungs from the health insurance.(1 vote)
- very interesting but how does that work(1 vote)
- You buy insurance to cover bad things that might happen. If something bad DOES happen, your insurance pays. That's how it works.(1 vote)
In the example with Sam, when it says $25,000 per person for bodily damage and $50,000 per accident for bodily injury. What is the difference?(1 vote)- OK. There's a car accident. Let's imagine that three people are hurt. The insurance policy says that not one of those persons can receive more than $25,000 from the insurance company, and when all 3 persons' bills are combined, the insurance company will only pay $50,000 combined.(1 vote)
why is people gay(0 votes)- Why, Ethan, do you ask this in a lesson about car insurance?(4 votes)