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Auto Insurance

Certain types of auto insurance are required in order to legally operate a car.

Most states require that drivers have auto insurance. [©Shutterstock, 2010]
©Shutterstock, 2010
Most states require that drivers have auto insurance.

Auto Insurance

Auto insurance is an essential part of owning and driving a car. It protects both drivers and passengers involved in a vehicle accident from financial losses. Collision and comprehensive are the most common types of auto insurance. Bodily injury coverage that protects the driver, passengers and passengers of other vehicles is required in most states. There are other types of insurance that may or may not be necessary.

Insurance companies determine the risk of certain drivers and vehicles. Factors such as the drivers location, age and gender, as well as the vehicles make, model and safety features affect insurance premiums and cannot be controlled by the driver. There are, however, other factors that affect insurance costs that the driver can control, such as driving record, driving habits, credit history, number of vehicles and history with a particular insurance company.

Collision and Comprehensive Auto Insurance

While almost every state within the United States requires some form of auto insurance, collision and comprehensive insurance are not necessarily mandatory. However, vehicle lenders typically require proof of both types before financing a vehicle loan. Collision and comprehensive insurance cover the cost of vehicle repairs or the market value of the vehicle, less the deductible amount. For this type of coverage, higher deductibles result in lower premiums.

Collision auto insurance covers the physical damage to a policyholder's car if it hits another object, such as a car, building or streetlight. Many drivers find this type of insurance to be expensive.

Comprehensive auto insurance covers losses due to reasons other than accidents. It covers theft, vandalism or collision with an animal. It also covers losses due to damage from natural disasters, such as earthquakes, flood, fire or hail. Comprehensive coverage even covers a smashed or cracked windshield.

Coverage for Other Vehicle Damage

While collision and comprehensive insurance may be the most commonly known types of vehicle coverage, uninsured motorist coverage and property damage liability are other options. Uninsured motorist coverage pays for damages when a vehicle is hit by someone who does not have auto insurance, as well as providing coverage for a hit-and-run situation. This type of insurance may be important because, according to the Insurance Research Council, there is a one in seven chance that the driver at fault is uninsured.

Another option, property damage liability, takes care of damage that the policyholder's vehicle causes to another person's property, such as a car, a fence, lamp poles and buildings.

Coverage for Bodily Harm

Not to be confused with uninsured motorist coverage, underinsured motorist coverage assists when the driver at-fault in an accident does not have enough insurance coverage to pay for injury to the other vehicles driver or occupants. It does not pay for any vehicle damages.

When responsible for accident injuries or death to another person, bodily injury liability insurance comes into play. Anyone listed on the policy is covered when driving another individual's vehicle, as long as that person has permission to drive the vehicle. Typically there are state-required minimums for this type of coverage. A driver who does not have enough coverage could be sued.

Whether responsible for an accident or not, personal injury protection coverage pays for any medical treatment, as well as lost wages, for those injured in a policyholders vehicle.

Demographics That Affect Insurance Costs

There are a number of factors that influence the cost of auto insurance, including a policyholder's address. More accidents occur in heavier-populated areas of the country, which increase the costs of collision as well as liability coverage for drivers living in those areas. For instance, according to the National Association of Insurance Commissioners, North Dakota ranked as one of the lowest with an average expenditures for auto insurance of $554. The District of Columbia ranked as one of the highest with a cost of $1,182. Laws enable insurance companies to figure insurance rates based on home address, regardless if the driver is commuting to more rural or urban areas on a regular basis.

Most studies concur that drivers under the age of 30, as a group, have more accidents per mile driven than the general population. Therefore, teenagers and younger drivers pay higher rates, as well as families with such drivers in their households. Young males have the highest rates because they are in more accidents per the number of miles driven than other groups.

Vehicle Factors That Increase Costs

A typical rule for policyholders to keep in mind is that a more expensive car will cost more to insure. High-performance automobiles and sports cars tend to be involved in more accidents, have a greater chance of being stolen and cost more to fix; therefore, they cost more to insure. Commonly stolen vehicles also cost more to insure.

A policyholder may have a lower insurance cost if there is an anti-theft device installed on the car. Enhanced safety features on the vehicle, such as antilock brakes, air bags and daytime running lights, result in lower costs as well.

Driver Behaviors That Affect Insurance Costs

In addition to demographics and vehicle factors, driving records and history of insurance claims affect insurance cost. Drivers who have traffic violations or have been in an accident may be charged a higher rate. In addition, filing more claims against a policy drives up rates.

Even if someone has an excellent driving record, auto insurance rates go up the more miles driven in the vehicle. People who own cars used to commute to work on a daily basis have a greater risk of being in an accident.

More and more insurance companies use credit records to assist in pricing auto insurance coverage. The rationale is that drivers with longer, more consistent credit records are likely to have less accidents and are, therefore, cheaper to insure.

Tips for Lowering Insurance Premiums

When looking to lower auto insurance premiums, increasing the deductible amount on the policy is one option. According to the Insurance Information Institute, a deductible increase from $200 to $500 could lower collision and comprehensive insurance costs by 15 to 30 percent. A switch to a deductible of $1,000 could save 40 percent.

In order to save money and reduce the overall premium paid for auto insurance, policyholders may opt to reduce the amount of coverage on older vehicles. Comprehensive and collision insurance may not be cost effective when a car is valued at less than 10 times the insurance premium.

Finally, there are several discounts that may result in lower insurance premiums. Policyholders should inquire about discounts for insuring more than one vehicle, having a membership at a discount store such as Sam's Club, holding auto and homeowner policies with the same company, being a student who has good grades, and being a customer with the insurance company for an extended period of time.

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