How Does Car Insurance Work?

Oh, the joys of insurance. It honestly feels like insurance companies can't resist finding excuses to get us to splash our cash on policies, "just in case". Just in case your house catches fire in a freak thunderstorm. Just in case your wordly possessions are sucked into a sinkhole below your home. Just in case your car turns into a transformer and runs off to fight in a civil war on planet Cybertron. Think of any eventuality with an expensive outcome, and there's an insurance policy you can take out for it.

Under the Road Traffic Act of 1998, it is illegal to drive your car on the road in the UK if you don't have insurance for it. The consequences are not light. You can face a wallet-crushing £1000 fine or have your vehicle seized and painfully destroyed. It doesn't even matter if you're not the one driving the car - if you own it and it's uninsured on the open road, you're the one facing the chopping block. You can find out more about the consequences on the government website.

Don't be scared into action and sign up for the first insurance policy you see. There are loads of things you need to brush up on to make sure you're getting the best deal and the best coverage.

Here's our bumper guide to the world of car insurance: how does it all work?

How does car insurance work?

Car insurance is basically an agreement between you and your insurance provider that protects you from the hefty fees that may rack up in the event of an accident or vehicle theft. You pay a monthly premium and your insurer will pay out for damages (and sometimes other things depending on your policy type) when you make a claim.

how does car insurance work

In what instances will the insurer pay?

Say you find yourself in a collision and it's your fault. You would make an insurance claim to your own insurer who would then fork out for the other person's damage expenses. On the flip-side, if they were at the root of the incident, they'd get their insurer to give you a wad of cash.

In general, only the policyholder is insured to drive the car. If you let your pal take it for a spin down your street and they wrap it around a lamp post, the insurance company won't even want to hear about it. The only time they'll pay out is if the incident involves the policyholder or a "named driver" who is someone you add to your policy (at an extra cost). This is good for households where multiple people will use the car regularly.

What do they pay for?

Your pay out won't necessarily cover your full fees. For example, if your car is wrecked beyond repair, your insurer won't splash out on a brand new car for you. They're only liable to pay up to the current market value of the car. So, that snazzy Audi TT might have cost you a pretty penny three years ago, but you won't be getting that full amount of cash back today to buy another top spec model. It will all depend on your particular policy, but you generally get what the car is currently valued at, accounting for depreciation.

Any extra bits and pieces you added to the car, like shimmering custom alloys or that silky paint job, won't be covered by most insurance policies either. You'll get the modern day base value of your car without all of your aftermarket added extras taken into account. You'd have to look for other additional coverage to protect these.

Most insurers have a compulsory excess which means they set a minimum amount of money that you would need to pay yourself when you make an insurance claim. For example, if you need £500 of repairs and your compulsory excess is set at £100, your insurer would pay out £400, leaving you to make up the difference.

what do you insurers pay for

How does car insurance work when you're leasing?

Car insurance works pretty much the same way when you're leasing, but you do need to be careful you're not caught out because you don't actually own the car yourself.

Say you were leasing your trusty Ford Focus. You take out third-party insurance and you get into an accident. Your insurance company will pay for damage to the third party - but what about your car? It's a complete wreck and there's no insurance pay out for you. Your finance company are breathing down your neck - "Where is our money!?"

If you owned the car yourself, you could just sit and take the financial hit. You've invested in this car, you've lost it, you get no money to compensate for it. But it's different when it's on a lease. The finance company won't just forget about the car. You need to pay them back, and out of your own pocket.

Because of this, leasing companies generally require you to take out fully comprehensive insurance to cover you for all eventualities. Even with this, however, you might find yourself a little short on cash. Since the insurer pays out current market value, you could be left with a big gap to cover yourself. 

Your Ford Focus would have cost £20,000 brand new. As soon as you started revving the engine for the first time, its value plummeted to £12,000. If you crashed just a few months into your lease, you won't have come even close to paying off this £8,000 gap. But the finance company will still want it.

To plug in this hole, you can also seek out GAP insurance (and you can opt for this even if you're not leasing). We've done a deep dive into this in another article.

leasing car insurance

What types of car insurance are there?

Motor insurance comes in many shapes and forms, so it's worth doing a bit of investigating to find out what the best available car insurance policy deals are. Insurance rates will differ depending on the type of insurance coverage, so you should sit down and work out exactly what you need. Here's an idea of what's out there:

Fully comprehensive insurance

This is the big daddy of car insurance. It covers pretty much everything you'd need or want, including:

  • The cost of car repairs to your own car or another person’s car which was involved in the accident.
  • Medical treatment costs for bodily injury to yourself or other drivers.
  • Protection against the cost of theft, fire and damage by weather conditions.

Comprehensive insurance coverage doesn't cover you for general wear and tear, so don't expect a big payout when you spot a few scratches on the paintwork or your seatbelts become frayed. It covers you for bigger vehicle repairs, particularly in the case of an accident.

Fully comprehensive car insurance gives you protection when you're driving in the EU too and sometimes when you're driving someone else's car, but this coverage is likely to only be at Third Party level.

This is obviously the most expensive type of insurance coverage but well worth it if you dread the thought of splashing out big bucks in an already stressful situation.

Third-Party insurance 

A third party auto insurance policy gives you a very sparse protection package. Essentially, it only covers the cost of damage to another person's (third party) car.

The cost of repairs for your own car isn't covered, nor are any of your medical expenses or any property damage.

Third-Party, Fire and Theft

The clue being in the name, this policy pads out the coverage offered in the basic Third Party offering. Again, it covers the cost of damage to a third party's car but not your own, unless it was caused by a fire. It also covers your car if it has been stolen.

Additional Coverage

These are the top car insurance choices but there are others you can opt for depending on your particular needs. These include:

  • Learner car insurance, for the budding learner motorist.
  • Multi-car insurance to cover the whole family fleet.
  • Black box insurance which bases your premium off of your driving behaviour recorded with a black box (see the technology section coming up).
  • Taxi insurance if you're wheeling people from point A to B all day.
  • Short term insurance if, obviously, you only need to be insured for a short period of time.
  • Gap insurance, which bridges the gap between your insurer’s payout and the cost of replacement/repairs/finance payments you owe.

Some car owners might require specialist insurance depending on the type of car they have. Mainstream insurers view these cars as too risky to cover. Amongst these car types are older cars, classic cars, performance cars, or cars imported from abroad.

On top of your ordinary insurance policy, you might choose to take out additional protection. These add-ons can include cover from breakdowns, potential legal fees, key replacement, windscreen protection and a guarantee of a courtesy car should yours be taken off the road temporarily.

third party fire and theft

How much does car insurance cost?

"Yeah, yeah, yeah, I get the gist of the insurance policies out there. How much is this gonna cost me?" I hear you say. Well, again, there's no simple answer to this question as it very much relies on the type of car you're insuring, the type of driver you are, and a bunch of other variables. Sometimes it feels like the number has been plucked out of thin air, but there is some calculation behind it.

Your Car

Let's look first at how your car affects your insurance rate. 

There are 50 insurance groups which your car can be categorised under and this categorisation determines how bulk your monthly premium will be. These groups are listed on Parkers if you want to take a glance. There is some method to this categorisation. Your car is assigned to one of these groups by taking into account its predicted repair costs and times, its performance, security, and safety features, as well as its new car value.

You

Now onto how you as a driver affect your policy. 

Your age, length of driving experience, your location, job, and status of your no claims bonus all influence it. Younger drivers are seen as riskier, so they fork out more. Same goes for drivers with less experience. If you're in a busy suburb in London, expect to pay more than you would in a quiet village just north of Aberdeen. If you're a courier or a private hire driver, you're on the road more so you're seen as a higher risk, so up go the rates. And if you've claimed on your insurance before? You get the picture. 

Sorry all 18-year-old, newly-passed drivers working as Amazon couriers in South London - it's looking pricey.

Your Policy

Your policy type will impact your overall insurance cost - but not in the way you might expect it. 

Despite the lack of coverage with Third Party, it often comes up as the most expensive policy type. This is because high-risk drivers tried to cut corners to save some moola by going for the traditionally cheaper and more basic Third Party policies. But the car insurance companies cottoned on to this when they noticed the striking number of claims coming from these motorists. Uswitch has a fantastic illustration of price differences for insurance policies which shows that it was 84% more expensive for younger drivers to go for the third party than comprehensive. For older experienced drivers, it was cheaper by around 1%.

And of course, your policy add-ons contribute to your insurance cost.

how much does car insurance cost

How can I get a lower car insurance quote?

Car insurance premiums shoot up when insurers view drivers as a risk. They see them as quite or highly likely to make a claim so they want to squeeze as much money out of them as possible. You can make significant savings on your car insurance quote by presenting yourself as less of a risk, as well as by following some of these other tips:

Tip #1 - Don't insure young drivers on your policy

When you put a young driver, fresh out of their L-plates, on your policy, you’re practically inviting the insurance company to charge you like there’s no tomorrow. Insurance companies see young drivers – especially boys – as being a high-risk group, more prone to accidents, so they’ll up their prices accordingly. Whilst it might be cheaper for the young driver, it certainly won’t be cheaper for you.

Although it can seem pretty unfair, keeping young, inexperienced drivers off of your policy is one way to reduce the cost of it.

Tip #2 - Protect your no claims bonus with your life

Despite seeming slightly counter-intuitive, not claiming on any accidents that you have can actually help reduce the cost of your insurance in future years – a no claims bonus can make your insurance significantly cheaper. 

Although you’ll have to cover the cost of any repairs to the other person’s car yourself, you can often end up spending less than you would have to pay in insurance if you didn’t have a no claims bonus. So, by paying for the repairs yourself and not claiming, you can still end up saving you money in the long term in some circumstances.

Tip #3 - Forget the optional extras

Unless you really can’t live without that personal injury cover or guaranteed hire car, a lot of the time, there’s little need to add all those optional extras to your policy. They’re kind of like sweets at a checkout in a shop – just an extra way to get more money out of you when you’re in a spending mood. Those extras usually don’t come cheap, and you might be better off just paying for them independently if an accident happens, rather than through the insurance company. 

Do you really need that courtesy car coverage or will you be survive getting the bus to work for a week or two?

Tip #4 - Pay all in one go

When you take out an insurance policy, you’ll be given two options for paying: you can pay for it upfront or you can pay for it in monthly instalments. It normally works out cheaper if you pay for everything upfront rather than over the course of the year. When you pay monthly, you'll be charged interest, with some insurers charging 30% APR. Ouch.

Tip #5 - Choose a car in a lower insurance group

Choosing a car that’s in a lower insurance group is one really obvious way to save money.

The lower the number of your car's insurance group, the cheaper the insurance is likely to be. Cars like the Nissan Micra, Volkswagen Polo and Vauxhall Corsa are all in lower insurance groups so you can expect their insurance costs to be relatively low. On the other hand, vehicles in higher groups, like the BMW 7-Series, Mercedes AMG GT Roadster and Audi RS3 Sportback are likely to be much more expensive to insure.

Tip #6 - Increase your voluntary excess

Offering to pay a larger voluntary excess figure can help to lower your insurance too. You’ll need to pay this in the event of an accident but that’s usually well worth the discount you’ll get in your insurance policy. As the saying goes, you’ve got to spend to save. 

Tip #7 - Improve the security of your car

Investing in a decent security system should reduce the risk of your car getting stolen quite a bit. As a result, your insurance company is likely to offer you a cheaper policy. You’ll usually get a fairly tasty saving of 5% on the cost of your policy.

 

how to lower car insurance quote

Can car insurance technology help me?

These days, there's a gadget for just about everything you can think of. Some of these pieces of technology can be used to improve your car safety, reduce your likelihood of claiming, helping to lower your insurance premiums. Car technology is a good shout for those who are being quoted extortionate insurance costs. 

These pieces of car technology might help you out:

Black Box

The black box we mentioned earlier is also called "telematics". It's the size of a mobile phone and when it's fitted in your car, it collects information about your driving behaviour. Accounting for things like the time of day that you take your car for a spin, whereabouts you drive, your acceleration and braking habits, it calculates how safe a driver you are. This gives your insurance company concrete evidence that you're someone to be trusted and not to be burdened with skyrocketing insurance premiums.

They can encourage you to adopt healthier driving habits but it can feel like you're being scrutinised by a computer like in a Black Mirror episode. Plus, the installation of the black box doesn't come cheap. You need to decide whether you think the costs work in your favour.

Dashcam

You can grab a discount on your insurance if you have a dashcam, a video camera mounted on your dashboard. It's an all-seeing device that will record the events of any potential accidents. This evidence helps to speed up insurance claim processing, saving insurance companies time and money wading through reports. You can pick one up fairly cheaply, around £50 a pop.

Security Equipment

Features like padlocks, vehicle tracking systems, and steering locks all make your car much more secure, deterring thieves. If you put these things in place, insurance companies will feel more at ease that your car isn't going to get hijacked by a joyrider.

 

car security equipment

Car Insurance Explained

Car insurance isn't exactly the most riveting topic in the world but the more you know about it, the better (and the fatter your wallet stays).

When you’re picking the right insurance policy for you, think about what type of coverage you need, whether you’d benefit from some added security tech, and what add-ons you absolutely need with your policy. Your choices will determine how expensive your policy racks up to be, so think hard!

Now you should know all the tricks for protecting yourself properly and for suppressing your insurance premiums! Happy driving.