Different Types of Car Insurance

3rd party car insurance is non-negotiable

Insuring your vehicle is a necessity, not a luxury. Even before you talk to your insurance broker, if that's the route you're going, and especially if you are going to deal with an insurer yourself directly, you need to know what types of car insurance there are and understand the implications of choosing one over the other for your specific circumstances.

In this overview of car insurance, we're also going to look at the concepts of excess and vehicle value. Your vehicle's value will determine your premiums and excess and in turn may well be the element that sways your decision between quotes from different insurance companies.

Some insurance types are cheaper than others, others are more comprehensive; which one you choose depends entirely on your personal circumstances. So, let's take a look at your personal circumstances first.

Some questions to ask yourself:

Do you own your vehicle?
What is its value?
Is it financed?
Is it "souped up"?
Does it have custom accessories?
What (approved) security features have you installed, including where your vehicle is parked overnight?
Are you the sole driver?
Do you use your car for business?
Under what type of driving conditions does your vehicle operate?
Where do you live?
Off the top of your head, what comes to mind as to what you really feel you'd like to be covered for?

Now we can look at the three basic types of car insurance: comprehensive, limited liability (also known as third party, fire and theft) and third party only.

The most important, in fact non-negotiable, cover you need is protection against claims made for any damage you cause to other people or property. If you drive an old car and have a set-to with a Porsche, you don't want to be paying damages in installments for the rest of your life. The type of car insurance that covers this is called 3rd party. But this in mind when you start investigating different types of auto insurance; it's the bedrock of the cover you select and is included in more comprehensive packages. You can also select it as the sole cover you choose for your vehicle. In some countries 3rd party insurance it is not mandatory; it should be.

Comprehensive:

This is the most common and most sensible option for full coverage of your car, covering you in an accident and if your vehicle is stolen, hijacked, damaged, or destroyed by fire. This cover does not include mechanical damage. The question asked above as to whether you own your vehicle is important because if a bank is financing your car, you are required to have comprehensive motor insurance. This policy will also cover any damage you cause to other people and/ or their properties (i.e., includes 3rd Party coverage). It also covers many accessories and add-on features, e.g., sound system equipment.

Limited liability:

Also known as 3rd Party, Fire and Theft, this policy covers you in the event of fire, theft or third-party claims. If you have that extra one for the road and wind your vehicle around a lamp post, the cost of fixing your car is up to you, so you'll be drinking at home over the next few years. To many people, particularly teetotalers, this is probably sufficient cover. If your car is not particularly expensive, you don't do the school run in the morning, you live in a relatively secure area and you rarely go bundu-bashing, this cover may be just the ticket for your needs.

Third-party:

This is the cheapest type of car insurance. It protects you only from claims against you for damage to other people and property. 3rd party cover gives you instant peace of mind. It may be cheap cover but 3rd party cover is essential. If you have a car you feel is not worth rescuing if written off and you don't owe anything on it, you probably won't need comprehensive cover, but you will most assuredly need 3rd party cover.

While you're mulling, let's take a look at a couple of other essential car insurance definitions you need to understand. For instance, we talked earlier about the value of your car and why this may influence the choice of insurance you decide to take. For instance, if you drive a rent-a-wreck candidate, 3rd party insurance may be sufficient; so you need to know about the concepts of "insured value" and "excess".

Insured value

An important factor in calculating the terms and costs of your policy is the value of your car. There are two primary values you need to take into consideration - market value and replacement value. Trade value and retail value are terms often bandied about but if you understand market and replacement value, you'll generally understand what the value of your car means is realistically in the real world rather than just to you.

In brief, market value (market price) is the amount you could reasonably have sold it for before it was stolen/ damaged. Replacement value is what you would pay to buy a similar car today. Frankly, if I were to go out and replace my car, I would struggle to find something similar. In fact, I would just be exchanging one set of problems for another; if I tried to sell my car today, I'd get half of what I think it is worth.

You can decide whether you want to insure your car at its market value or its replacement value. The latter will cost you a little more; more importantly, insurance companies often stipulate they will replace your car only in the first year or two. After that, as you can understand, it becomes too expensive for them.

Very important:

When you insure you car, you must keep adjusting your premium in accordance with the changing value of your car. If you start out with a new Mercedes Benz and pay an exorbitant premium for this top of the range car for a number of years, you may find down the line that the market value of second hand Mercs has dropped dramatically and it would have been worth your while rather to bank those hefty premiums.

Excess

Excess is the amount an insured person must pay before the insurance company starts paying the rest of the cost associated with an accident or in the event of theft. If you are offered a lower premium at one company, you may find they require a higher excess to cover their risk.

If and when you make a claim, you must also weigh up whether it is worth your while to claim or whether it is better paying the cost yourself and maintaining your no-claim bonus status, if you have one. This will result in lower premiums and is the reason one of the questions insurers ask you how many claim-free years you've had in the past.

Now you need to go and associate answers and figures with the points brought up in this article. This will provide a skeleton on what YOU need when you start comparing insurance policies from different insurers, directly or through a broker. Also, speak to your broker about top-up insurance, mechanical insurance and car insurance.