Car insurance is a contract between a car owner and an insurance company that protects the car owner against financial loss in case of a loss (accident). Car insurance contains various coverages that can be purchased depending on the car owner’s needs and wants. As agreed, the car owner pays a given premium, and in return, the insurance company agrees to pay for some expenses in case of any losses as defined in the policy.
Reasons for car insurance
Car owners need car insurance for three main reasons:
- To protect their assets: car insurance can provide property damage coverage and bodily injury for accidents that happen to others for which the car owner is responsible. This also ensures that the car owner’s attorney is paid in case the car owner is sued. Car insurance can also cover the cost incurred due to accident-related repairs, as well as accident-related bills.
- To comply with state laws: Most states in the United States and other countries have car insurance requirements. In case a car owner drives without car insurance, the owner can be fined and the vehicle impounded.
- To satisfy the lender: In case a car owner obtained the car through a loan, the lender may require that the owner obtain car insurance to protect their interest in the vehicle.
Types of car insurance
Car insurance has several types of coverage, which may be compulsory or optional. A car owner must decide which coverage best suits their needs. The car owner’s policy may include the following types of coverage:
- Bodily injury liability: This coverage applies to injuries that one’s car can cause to someone. The car owner as well as their family may also be covered when driving the car.
- Property damage Liability: This coverage pays for losses or damage caused to someone else’s property or car resulting from the insured’s car.
- Collision: This coverage pays for losses or damages caused to a car due to a collision.
- Medical payments: This pays medical expenses for treating injuries to the car owner or passengers.
- Uninsured coverage: This coverage pays a car owner in the case an uninsured driver hits the insured’s car.
- Comprehensive: a comprehensive coverage offers several types of coverage in one package. These include flood, theft, windstorm, fire, hitting animals or hailstorms. This coverage ensures that a car owner is compensated in case of losses or damages that can result from several risks.
Determining a car insurance premium
In car insurance, many factors affect the amount of premium that car owners are required to pay. Insurance companies use different techniques to come up with the amount of premium that car owners are required to pay, but the most common include the following.
- Driving record: an insurance company can determine the premium based on the car owner’s driving record or those of his/her family members. A better driving record can mean low premiums while a bad driving record can mean a higher premium.
- Credit-based insurance score: Car owners with better credit scores often pay low premiums while those with bad scores pay high premiums. This is because research shows a correlation between this score and the possibility of filing a claim.
- Type of vehicle: expensive vehicles will be charged a higher premium.
- Safety: the location of the car owner. A secure location often means a low premium.
