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Most areas of insurance are left to your own discretion and, of course, your attitude to risk. But some – such as car insurance – are mandatory. The law requires that all drivers are insured against damage to another car or injury to another person whilst in charge of a vehicle.
Types of car insurance
Third party
As the minimum legal cover required, third party is the cheapest kind of insurance by a long way. True to its name, the policy will only pay out to the ‘third party’ in the event of any accident or injury. It can make sense to opt for this type of cover if your car is old and of less value than the cost of fully comprehensive cover over a year. In this case, in the event of an accident or scrape, you would perhaps choose to scrap the car rather than replace or repair it anyway.
Third party, fire and theft
This adds on two extra layers of protection that are surplus to the legal minimum requirement. In addition to paying out to a third party, this type of policy will cover you in the event of fire damage to your vehicle, as well as its theft – or damage as a result of attempted theft. Logically, then, this type of cover is slightly more expensive.
Fully comprehensive
The most thorough and expensive cover you can buy for your car is called fully comprehensive insurance. This will pay out in the event of damage or injury to both you and to a third party. Fully comprehensive insurance is the most popular. This is partly because many cars are bought with a loan or credit agreement and, without fully comprehensive insurance, in the event of a loss or accident you would have to continue paying the finance despite having an immobile car!
How is my premium calculated?
Insurers’ premiums for car insurance will all vary according to their position in the market and the value for money offered. But the price you are quoted will hinge predominantly on the risk you pose to the insurer. This risk is worked out according to its own claims statistics – whether it seems fair to you or not. Statistics will vary between insurers but, as a benchmark, your premium will be assessed on the following:
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Your gender: Women can often get better deals than men, as statistically they make fewer claims.
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Your age: If you are very young or very old this is likely to increase your premiums.
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Your previous claims: If you appear to be a high-risk customer from claims made prior to your car insurance application, it will be reflected in your premium.
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Where you live: Some postcode areas generate a greater number of claims than others. If you live in one of these areas, your premium will be loaded to reflect this.
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Your profession: Some insurers may class you as a higher risk if you work in a certain profession, for example an entertainer or a fire-fighter.
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Your health: Drivers who suffer from certain conditions, such as epilepsy or even sleep disorders, are likely to be quoted a higher premium.
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Where the car is kept: Logically, your premium will be lower if you can park your car off the road – and lower still if it is kept in a garage overnight.
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Other named drivers: It will cost more to put someone else on your car insurance – and their personal circumstances will also be evaluated.
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The car itself: The higher the value, performance and cost of replacement parts of the car, the higher your premium will be.
No Claims Discount
This is a discount from your premium that grows each year that you do not make a claim – it is therefore often referred to as a No Claims Bonus. Typically you will receive a 30 per cent discount after a year of making no claims, which could rise to around 65 or even 70 per cent after four or five years.
But not all claims will spell an end to your No Claims Bonus. If an accident was not your fault – provided your insurer can recoup its entire costs from the other party – your bonus may stay intact. You can even ‘insure’ your bonus by paying slightly extra on your premium, which will allow you to make a set number of claims regardless. However, although your No Claims Bonus might be protected on claiming, there is nothing to stop the insurer putting up your premiums instead!
How do I pay for my insurance premium?
An insurer will quote you an annual and a monthly insurance premium – but if the annual one seems less than 12 times the monthly you haven’t done your sums wrong. Although they don’t draw attention to the fact, insurers will charge interest if you choose to pay monthly. The level of this will vary but, as a benchmark, it costs around 10 per cent more to pay for your insurance monthly than it would if you paid an annual premium upfront. Nevertheless, in order to spread the cost, most drivers choose to pay their premium monthly.
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