Driving without car insurance is like skydiving without a parachute — a risk you definitely don’t want to take. A car insurance policy is required in every state except New Hampshire. It’s a necessary protection that can save you thousands of dollars if you have to file a claim. While you are required to have auto insurance, you aren’t required to work with a specific insurer. Shopping around can help you find car insurance policies that offer the most protection at an affordable price. This guide covers what you should know when looking around for car insurance.
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Table of contents
Why does insurance matter when buying a new car?
Car insurance plays a big role when you own a vehicle, especially a new car. Before buying a new car, it’s important to consider how insurers will assess your vehicle and assign premiums. Insurance providers will use a car’s specifications, history, zip code, driving record of insured drivers, mileage, and value of the car to determine premiums.
It’s good to remember that some auto insurance companies use a credit-based insurance score, which is different from your FICO score. A credit-based insurance score is used to predict if a consumer will potentially file insurance claims that could cost the company more money than they’d collect in premiums.
Your state laws, lenders’ policies, and how you obtain the vehicle (buying it outright or leasing it) impact the type of coverage and the premiums.
Make, model, and year
The make of a car is the company or brand that makes vehicles. Toyota is one of the many car brands available. The model is a vehicle product, such as a Toyota Highlander. To narrow down the specifics even further, you’d need to provide the insurance company with the year of the car.
A brand-new luxury two-door sports car will have a higher insurance premium than a used four-door sedan with good safety ratings. The luxury car would cost more to fix or replace if it gets stolen, damaged, or involved in an accident. Therefore, the liability is higher for the insurance company to cover, resulting in higher premiums.
It’s also worth noting that vintage or classic car insurance can carry high premiums. Despite its age, a classic vehicle’s value could be higher because of its rarity, make, model, year, or collector appeal. These vehicles could come with high maintenance costs and low safety ratings.
Car history
A car’s history reveals key details about a vehicle. Most dealerships will provide you with a car history report before you make a purchase. You can pay for a report when dealing with owner-sellers. Companies like Carfax or AutoCheck make it easy to find a car’s history.
A report provides a vehicle’s history about past ownerships, accidents, title status, mileage, fire or flood damage, and more. Having a list of services performed and maintenance details will give you a better idea of how well the vehicle was taken care of.
A vehicle’s history impacts your insurance premiums and financing. Red flags in a vehicle’s history can lead to higher insurance premiums, and lenders also take these into account. Some automobile lenders won’t finance the vehicle if the report has concerning information. This includes high mileage compared to the year of the car or multiple engine and transmission replacements.
Driving history
Like a car’s history, your driving history is important as well. Multiple accidents and a history of tickets could lead insurance companies to view you as a higher liability, and you’ll likely have a higher premium. Practicing safe driving habits and having a clean record can make your insurance policy more affordable. Your insurance policy should get more affordable as you continue to drive safely. If your premiums don’t decrease over time, you might be overpaying for your car insurance.
Amount of coverage purchased
Insurance coverage requirements vary by state, whether you’re insuring a financed, leased, or outright purchased vehicle. Buying more coverage may result in higher premiums, while opting for less coverage could lead to lower premiums. However, less coverage can become problematic if your vehicle gets involved in an accident.
Financed vehicle
Generally, most insurance companies require comprehensive coverage and collision coverage when the vehicle is financed. Here are some of the common types of auto insurance coverage.
Comprehensive insurance
Comprehensive insurance pays for the replacement or repair of your car if it is stolen or incurs non-collision damage. Comprehensive insurance, also known as “other than collision” coverage, includes protection against fire damage, vandalism, and damage from falling objects like hail or trees.
Your auto loan lender or leasing company will likely require this type of coverage. If you own your car outright, some auto insurance companies allow you to choose this coverage as an optional coverage on your policy.
You will have a deductible for this coverage. The deductible is a set amount you’re required to pay when you make a covered claim.
Collision coverage
Collision coverage is when the insurance company pays for the replacement or repair of your car if it’s in an accident with another vehicle or object or a single-car accident like a rollover.
This coverage includes a deductible, the amount you pay out-of-pocket before your insurance company helps you pay your claim.
Lower deductibles result in higher premiums, and the reverse is also true. Collision coverage comes with a limit, and it’s typically the cash value (minus depreciation) of your car.
If you get in an accident with another car and your deductible is $500, you’ll pay $500 towards the repair or replacement costs. If the car is totaled, the insurance company will give you a check for the depreciated value of the car minus the $500.
Gap insurance
Gap insurance helps pay off your loan if your car is totaled or stolen. Gap insurance pays for the amount between the depreciated value of the car and the remaining amount you owe on the loan. For instance, if you have a $40,000 loan, and your car is worth $25,000 due to depreciation, this policy covers the $15,000 gap. Many lenders require gap insurance if you lease a car or until you pay off the loan.
Liability coverage
In most states, auto liability coverage is required by law. It means that if you cause a car accident, you’re liable for the accident, and your liability coverage pays for the other person’s expenses. The two forms of liability coverage are bodily injury liability coverage and property damage liability coverage, and most states require both.
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Leasing
Leasing a car is like renting a brand-new vehicle from a dealership. While it might be a better option for someone with lower credit, dealerships want their vehicles fully covered with the best insurance. Due to the coverage requirements, leased vehicles often come with higher insurance premiums.
Call your auto insurance provider first
If you know the exact specifications of the vehicle or vehicle identification number (VIN) you intend to buy, give your insurance provider a call and get a quote. At this point, you can shop around for quotes or look for a better car deal that has better insurance rates.
What can I afford?
Aspiring car buyers should assess their monthly income and expenses to gauge how much car they can afford. Some people buy a car outright and only have to worry about the monthly insurance premiums. While this is the best-case scenario for protecting your monthly budget, many consumers have to finance their vehicles or get leases.
Some drivers look for a car that equals anywhere from 15%-20% of their income. For instance, if you earn $6,000 per month, you may want to keep your auto expenses between $900-$1,200 per month. You may have to add more years to the back of your auto loan to give yourself enough room with the monthly loan payments.
Knowing how much you can afford also impacts your insurance strategy. If you don’t have much room for error, getting a cheaper insurance policy by purchasing a modest car or having a lower deductible can trim your costs. Buying a used car instead of a new vehicle can also minimize your costs, but you should consider the pros and cons before committing to either type of vehicle.
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Getting the Right Insurance for Your Car
Buying a new car can be exciting, but your new vehicle requires an insurance policy. If you have had the same insurance for a while, it may be a good time to review your insurance policy to see if it still serves your best interests. Approaching your car insurance with a plan can help you reduce costs and get the coverage you seek.
FAQs
Can I switch my car insurance provider?
Yes. You can switch your car insurance provider.
How can I lower my car insurance premium?
You can lower your car insurance premium with several strategies. Driving safely, shopping around for policies, and requesting a lower deductible are some tactics that you can use.
Do I need car insurance if I don’t own a car?
You do not need car insurance if you do not own or lease a car.
