Choosing a car insurance policy
Buying a car can be an exciting time. Thinking about what sort of car you want and where you'll be driving it is probably more exciting than thinking about car insurance. But you do need to make decisions about car insurance and it’s important to do this early.
There are many different types of car insurance available in the market. Some basic car insurance is compulsory when you register your car. Extra insurance can help cover the costs of any damage to your car (and the other person's car) if you're in an accident, or if your car is broken in to.
What kind of cover do you want?
There are four common types of car insurance policies:
| Compulsory third party (CTP) insurance | This is compulsory throughout Australia. You pay for CTP when you register your car. It covers injury and death to people in car accidents. In some States, (e.g. Victoria) it covers injury to you, but in others (e.g. NSW) injury to you as the driver is excluded. Payments for compensation and medical expenses for people injured in car accidents costs millions of dollars each year, so governments have made it illegal to drive a car without this type of insurance. |
| Third party property insurance | This covers damage caused by your car to other people’s property, as well as your own legal costs. It does not cover the cost of repairs to your own car or the replacement of your car if it is stolen. |
| Third party, fire and theft insurance | This covers damage caused by your car to other people’s property and limited cover for loss or damage caused to your car due to theft or fire. It does not cover the cost of repairs to your own car if it was damaged in an accident. |
| Comprehensive insurance | This gives you the most cover but it is also the most expensive type of car insurance. It covers damage to your own car and damage to other people’s property if your car is in an accident (including fire). It also covers theft. There may also be optional extra covers such as a replacement vehicle while yours is being repaired. |
Your car will either be insured for an agreed value (stated in the policy) or for the market value of that make and model of car, based on the going rate for that type of car and the condition of your particular car.
If you purchase your car with finance (i.e. a loan), your finance provider may require you to have a certain type of insurance.
The diagram below shows the different levels of car insurance available. You need to imagine that you own the blue car (on the right hand side of the diagram) and the red car (on the left hand side of the diagram) is owned by a 'third party', who we'll call Bob.
The law protects Bob from an accident caused by you because you must have compulsory third party insurance. However, it's up to you to decide what else to protect in case of an accident or incident. Ask yourself if you can afford to take on the risk?
Exclusions - What the policy won't cover
Generally, policies are similar in the way they describe the events covered by the policy. The differences are in what the policy doesn't cover, often referred to as exclusions.
Most policies do not cover loss or damage resulting from:
- mechanical, structural or electrical failure
- depreciation, wear and tear, and rust
- the cost of repairing faulty or burst tyres
- lost wages or income because you cannot use your car
- unauthorised modifications to the car.
Also, most policies will not cover loss or damage if you drove your car when it was in an unroadworthy or unsafe condition, and this contributed to the accident.
| TIP! | Read the policy carefully to make sure your expectations match the policy's terms. |
The costs of car insurance
There are two main costs associated with car insurance:
| The premium | The amount of money you pay the insurer for insurance cover. |
| The excess | The amount you have to contribute if you make a claim. Sometimes an excess may be compulsory (e.g. for young drivers). In other cases you can choose to pay a higher premium to reduce or remove your excess. |
Generally, the higher the excess you're willing to pay, the lower your premium. Always shop around for the best deal and the best cover for you. It's a good idea to review your cover annually when it comes time to renew your policy.
A number of things can affect the cost of your car insurance, including:
- Whether your car is insured for agreed value or market value
- Type of car - age, make, model & body style
- Previous claims (or no claim discount)
- Where you live
- Whether the car is parked on the street or in a garage
- Any modifications or accessories (e.g. spoilers or large speakers)
- Whether you own the car or have a loan
- The level of excess you agree to pay
- Your driving record
- The number of additional drivers
What about insurance as part of a car loan?
Sometimes insurance policies are sold as part of a package with a car loan. In this situation, you deal with an agent (such as a car dealer) rather than the insurer. With your car loan, you may be offered comprehensive insurance and/or:
| Gap (or security shortfall) insurance* | If the car is a write-off, this insurance pays the balance of the loan after the comprehensive insurer makes a payment to the credit provider. |
| Mechanical breakdown insurance* | This insurance pays for the cost of some types of mechanical problems with your car. |
| Consumer credit insurance* | This insurance meets some of the payments under the loan if you become unemployed, sick or die.
Read FIDO's answers to 5 common questions about consumer credit insurance |
* These types of insurance are all optional. Only buy them if you want this kind of cover - don't be pressured into buying insurance you don't need!
| TIP! | Before you take out insurance with your loan, be sure that you are getting the best deal and always shop around. |
More information
Warren's story: a 20 year old chooses car insurance
Car insurance homepage
Insurance homepage
Borrowing money to buy a car
FIDO Website: Printed 09/07/2010
