How Does Car Insurance Work?

Every car out on the road needs insurance by law for protection in the event of an accident, should this occur. Not only does it cover you financially, but depending on the type of insurance you choose, it can also cover injuries to your passengers, pedestrians and other drivers, as well as their property.

Read on to find out how each policy works, what happens if you claim on your insurance and how to get your car covered in this guide.

What is car insurance?

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Car insurance is a legal requirement for every vehicle driven or parked on public roads.

There are four main types of cover available, and each one has its own level of protection which can extend to you, your car, passengers, other drivers and their car, as well as pedestrians and their property.

These four policies are:

  • Third-party only – often the cheapest but least amount of cover, which only protects other drivers and their property in an accident.
  • Third party, fire and theft – basic protection for others and their property, plus some added for you if your car is stolen or destroyed in a fire.
  • Comprehensive – the highest level of cover which has third party, fire and theft protection plus protection for you, your passengers and your car.
  • Telematics/‘black box’ insurance – this can be an affordable option for young and new drivers, as a telematics device is fitted to your car which monitors your driving behaviour and lowers your premiums the safer you drive.

Each of these insurance policies are offered by providers (or ‘insurers’), of which there are currently 340 authorised companies in the UK that are recognised by the Association of British Insurers.

How are insurance prices calculated?

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Pricing for insurance is always about risk, which each individual insurer will measure based on a huge number of things. But the main considerations are:

  1. Your individual details and whether they mean you’re more at risk of making a claim (e.g. your address, how/where your car is parked overnight, how old you are, how long you’ve been driving for etc.)
  2. Which vehicle you’re insuring (for example, faster and more powerful cars tend to fall under higher insurance groups and are generally more expensive to insure).
  3. Driving convictions – from speeding tickets to more serious convictions such as drink driving, these will lead to higher premiums.
  4. Mileage – statistically speaking you’re more likely to be involved in an accident and make a claim on your insurance if you’re driving more miles each year.

How can I make my insurance cheaper?

There are a number of ways you can reduce the cost of your insurance premiums without sacrificing the level of cover you get.

In fact, contrary to what some people believe, comprehensive insurance can work out cheaper than third-party only and third party, fire and theft policies. This is mainly because providers tend to see those who take out the latter two types of cover as higher risk cases that are more likely to make a claim.

Remember: You should always shop around online for insurance quotes using your personal and vehicle details before settling on a policy. This way, you can get the right price and level of protection you need.

Here are four ways you can make your insurance cheaper.

1. Drive fewer miles

By stating on your insurance policy that you drive less miles than average (for example, 6,000 miles per year instead of 8,000) then you’ll see a significant difference in the price you’re quoted.

Of course, it’s important that you don’t deviate from what you tell insurers in order to get a better price, otherwise you risk invalidating your insurance entirely.

2. Pay for the year

When it comes to paying for your car insurance, you’ll have the option to either pay monthly as a direct debit or pay it off in one lump sum.

Because of the convenience attached with spreading the costs over 12 months, there will often be additional interest when you choose this method of payment.

While insurers tend to point out that this difference isn’t much, it can certainly make a big difference to drivers between the ages of 18 and 25 who, according to figures from MoneySuperMarket, could save between £175-£640 by choosing to pay in one go.

While these savings are great on paper, you should only choose to pay annually for your insurance if you have enough saved up and can afford to.

3. Choose a smaller, safer car

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Insurance providers will want details about your car when you’re looking for a policy quote, and most of the time this can be done by simply entering your registration number into their system.

Cars which have less powerful engines and a good amount of basic safety features (e.g. anti-lock braking, electronic stability control, tyre pressure monitoring etc.) are seen by insurers as less of a risk of being involved in an accident than more powerful sports cars.

Each vehicle and its trim levels belong to an insurance group ranging from 1-50 (1 being the least expensive to insure, 50 being the most expensive). This information is available in various places online and can help you decide which car to choose next in order to reduce running costs.

4. Build up a no claims bonus

Each year you’re insured and drive without making a claim, you’ll add to what is known as a no claims bonus (NCB).

In the first 3-5 years of keeping a NCB is where the biggest savings can be made, with around a 22-24% reduction in your premiums taking place over this time.

Some insurers offer accelerated NCBs where you can earn a bonus in 10 months instead of 12, which can be useful for younger and inexperienced drivers to reduce their premiums sooner.

Remember: Each claim made on your car insurance where you’re at fault can mean you lose some, if not all, of your NCB.

How to insure your car

Insuring your car is a relatively quick process and you can be covered in a matter of 20-30 minutes. Unlike life insurance, for example, there isn’t an enrollment period whereby medical examinations are needed, which can take some weeks.

The most popular way of getting insurance is by using a comparison website such as MoneySuperMarket, GoCompare and Confused.com, which allow you to compare insurance policies from various providers in one place.

However, there are also specialist insurers out there which can offer better prices for certain demographics. For example, Marmalade does this for young, learner and student drivers, while Age Co is known for its good over 50s policies.

Regardless of which company or provider you go to to insure your car, you can follow these simple steps to insure your car.

1. Enter your details into a comparison website

Comparing insurance offers

The most convenient and hassle-free ways to find car insurance is to use one of the numerous comparison websites online or on the phone. It’s also one of the best ways to ensure you get a good price as you’ll often be presented with a list from the cheapest to the most expensive cover based on the information you put in.

Information you’ll need to have to hand includes:

  • Car registration number
  • Driving licence number
  • Vehicle details (make and model, annual mileage, how long you’ve had it and any modifications).
  • Personal details (age, address, occupation, any previous motoring convictions etc.)

Remember: If your car is on finance such as a lease, PCP or HP contract, you’ll need to state that you don’t own the vehicle and provide information of the finance company which it belongs to.

2. Compare prices and policies

Once you’ve inputted your details, the comparison website will show you all the offers from its providers which have been matched to you.

If this isn’t your first time taking out insurance for your car, then your previous provider will have been in touch in the weeks leading up to your renewal date. A new price for your next year’s insurance will be quoted, along with how much you were paying the previous year, so you can decide from this whether you would like to renew (this will be done automatically if left) or look to another provider for a different policy/price.

Remember: Renewal quotes for car insurance won’t always be the best price, so you should take the time to go through the process of finding a new policy in order to get the best price possible.

3. Consider any extras

Depending on which insurer and policy you choose, you may be able to get a good price on useful extras on top of your standard policy, often at a discounted rate too.

Only do this if you think you’ll need it, otherwise you can end up spending way more money than you need to. Also, check to see what your insurance cover includes to avoid spending more unnecessarily.

For example, you may want to add the following:

  • Cover for driving abroad (most policies cover you for third-party only when driving abroad, whereas this extra will give you fully comprehensive insurance).
  • Breakdown cover (very few policies include this).
  • Legal cover – financial protection for any legal expenses following an accident which wasn’t your fault.

4. Decide how you would like to pay

As we mentioned before, when it comes to paying for your new insurance policy, you’ll have the option to do this for the year in one lump sum, or monthly.

A lot of comparison websites tell you how much you’ll save if you decide to pay in one go, but you should consider what you can afford as opposed to being persuaded straight away by the number that an insurer quotes you.

Which insurance policy is right for me?

Choosing the right car insurance policy will not only give you peace of mind while you’re out and about driving, but it will ultimately mean you’re better off financially too.

To help you decide which of these car insurance policies is right for you, it’s important that you first understand how they work in terms of the level of cover offered.

Comprehensive insurance

The average fully comprehensive policy covers:

  • Personal injuries following an accident, whether you were at fault or not.
  • Fire damage, theft and vandalism.
  • Accidental damage not caused by a collision.
  • A payout for a replacement car if yours is written off.
  • A courtesy car if yours is being repaired.

Comprehensive insurance policies won’t include:

  • Damage/injuries caused by driving under the influence of alcohol/drugs.
  • Invalid insurance.
  • Wear and tear.
  • Misfuelling (putting the wrong fuel in your car).
  • Stolen items or theft of the car if proper security isn’t in place (e.g. windows open or the doors unlocked).

When this cover might be for you:

  • If you’re leasing your car – the finance company is the registered owner and keeper of the car and won’t want to risk it being damaged or written off.
  • Your car is an expensive model that isn’t cheap to repair.
  • You have a family or carry passengers regularly.

Third party, fire and theft

The average third party, fire and theft policy covers:

  • A replacement car if yours is stolen.
  • Any damage caused by attempted theft.
  • Any damage caused by a fire (includes accidental fires and arson).
  • Any damage to another person’s car.
  • Any damage to another person’s property.
  • Injury to a passenger or driver in another car.

Third party, fire and theft policies won’t include:

  • Damage to your car following a collision or if your car was parked on the road and is damaged.
  • A payout for a replacement car if yours is written off.
  • Cover for any injuries to yourself following an accident.

When this cover might be for you:

  • Your vehicle is an old model which is inexpensive to replace/repair.
  • As well as the above, it may be suited to you if you don’t drive often, and when you do it’s always on your own and involves short distance commutes.

Third-party only

The average third-party only policy covers:

  • Injury to a passenger or driver in another car.
  • Any damage to another person’s car.
  • Any damage to another person’s property.

Third-party only policies won’t include:

  • A replacement car if yours is stolen.
  • Any damage caused by attempted theft.
  • Any damage caused by a fire.

When this cover might be for you:

  • Your vehicle is an old model which is inexpensive to replace/repair.
  • If you’re considered a high-risk driver who is likely to claim for damage caused while driving.

How black box insurance works

Black box insurance is different to the other three types of policies because it’s specifically designed for inexperienced and young drivers, as well as those who have a motoring conviction.

Your premiums will be decided based upon your driving habits and whether you’re deemed as safe behind the wheel. An insurer will gauge this in a number of ways, which includes looking at the following:

  • What times you drive – a lot of driving at night or rush hour periods can be seen as riskier and your premiums may increase.
  • Driving behaviour – speed, braking and how you steer can influence what the price of your insurance is.
  • How often you drive – more time driving improves your chances of being involved in an accident, so your premiums could increase here.
  • Driving locations – regular driving on busier roads and motorways can impact how much you’re charged for insurance.

When you go to take out a black box insurance policy, you can choose between third-party only, third party, fire and theft or fully comprehensive cover.

Extra fees

Not all telematics insurance policies require a black box device to be fitted to your car by an approved professional. Some insurers will send you a simpler device which can be plugged into your cigarette lighter/charging port, while others require you to download an app on your smartphone which you then activate before each journey.

However, the black box type of cover is one of the most common types of telematics insurance, and there are a few additional fees involved with it that you need to be aware of.

The price of the box and its installation will often be included in your monthly premiums, but you will need to make sure that you’re available at the time when a professional can come and install it. Likewise, your car must be in an area which is deemed ‘accessible’ in order for it to be fitted, otherwise you’ll face a £50 charge to reschedule.

If at any point you want to remove the black box before the end of your policy, this will also cost around £100 but doesn’t apply if you see out your cover, in which case it’s removed for free.

Are you in the market for a new car? Then check out our latest special offers on lease deals for brand-new vehicles.

Want to find out more about car insurance? Then head over to our guides page for more information.

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