Teens and Car Insurance – How It Works and How to Get the Best Rates
When teenagers first begin to drive, they quickly discover that auto insurance is and will continue to be a major factor — and cost — in their driving lives.
First, they discover that it is required by state laws. In most states you cannot buy a car, get tags, or drive a car without at least a minimum level of auto insurance.
Second, they discover that insurance is expensive, especially for teenagers, and especially for male teenagers under 18 years old — and that they can’t buy it on their own.
Third, teens often don’t understand why insurance is important and why it is needed, and why it is smart to have it. It sometimes leads to bad decisions being made.
Why do I need car insurance?
Teens often question the need for car insurance, especially when it is so expensive — and they don’t expect to ever be an accident anyway.
Let’s ask this question a slightly different way.
Under what conditions would you not need auto insurance?
If you were financially wealthy and didn’t care about the risk of losing a substantial portion of your wealth, you could self-insure. That is, you would use your own money to pay for accident repairs, a replacement vehicle if your current vehicle is stolen or destroyed, towing and storage charges, rental car charges, medical bills associated with an accident, lawsuits by other parties when you are at fault in an accident that causes damages, injuries, or death, as well as attorney fees, and property damages.
However, those who might be able to self-insure don’t for two reasons.
First, the cost of auto insurance is relatively small compared to the large potential financial losses associated with self-insurance. Why risk losing thousands or millions of dollars in an at-fault lawsuit? Let the insurance company take that risk.
Second, most states have laws requiring liability insurance as a way of proving financial responsibility in case you cause an accident. Although a bank full of cash might seem to accomplish the same thing, most state laws don’t see it that way. State laws vary, so car insurance in New Jersey is not the same as in California.
Banks and finance companies require it
Another reason for having auto insurance for those who buy a car with a loan or lease is that bank and finance companies insist on it. In fact, most require “full coverage” insurance, which exceeds minimum state law requirements. They want to protect their investment during the time of the loan or lease. If the vehicle is destroyed or stolen while they still have money invested, they want to be sure they are paid first.
Finally, for those teens who think, and actually believe, that they will never cause an accident because they are such good and careful drivers, there is bad news — other drivers will cause accidents. If another driver causes you to have an accident and they don’t have adequate insurance to pay you for repairs and medical bills, guess who the costs fall back on? You. However, if you have your own auto insurance coverage, your insurance company will take over and pay your costs, even though you were not at fault.
In summary, you need car insurance to protect you, protect your finances, protect your family, protect your finance company, and protect other parties and property for which you might be responsible. Insurance is all about protection.
Insurance for teens — types of insurance
An auto insurance policy might include one or more of the following types of coverage:
•Liability – Protection from risks associated with property damage and personal injury to others. Legal actions against at-fault drivers is becoming more common and more expensive. Multi-million dollar legal settlements are not unusual. Without insurance, a single accident could easily ruin an unfortunate family’s life. For this reason, liability coverage is the most important part of such a policy. Liability insurance is required by law in most states.
•Comprehensive – Protection from the cost of non-collision damages, vandalism, theft, weather-related damage, or natural disasters. Comprehensive coverage typically pays for the cost of repairs, or in the case that the vehicle is totally destroyed or stolen, the cost of a replacement vehicle – at “cash value” of the old vehicle. A deductible lessens the amount you are paid.
•Collision – Protection from the cost of repairing damages to your own vehicle. A deductible lessens the amount you are paid, but also reduces premium cost.. If the cost of repairs exceeds about 75% of the value of the vehicle, the insurance company may decide to “total” the vehicle and pay fair-market replacement cost.
•Medical – Pays medical costs to you or other parties for accidental injuries associated with your automobile. There are limits specified in your policy regarding maximum amounts paid for each incident.
•Uninsured Motorist – Protection from costs associated with an accident caused by another driver with insufficient liability coverage – or no liability coverage.
•Towing and Labor – Pays cost of towing and storing your damaged or disabled vehicle. Maximums usually apply.
•Rental Reimbursement – Pays cost of renting a replacement vehicle after an accident.
•Gap Coverage – Pays the difference between the amount owed on a loan or lease and the “cash value” paid by your insurance company in case of theft, fire, or accident. A gap waiver or gap insurance is usually provided with most leases, but not loans. Some auto insurance companies offer it and some do not. If you are going to be “upside down” on your loan, it’s good coverage to have.
Teen auto insurance — how much insurance do you need?
Many teen drivers view auto insurance as a necessary evil and buy as little coverage as they can get by with to minimize costs. State laws may dictate what and how much liability coverage is required, and whether no-fault coverage is required. If you buy with a loan or lease, the finance company may dictate minimum coverage requirements. They may even tell you the maximum deductible you can choose.
Beyond the requirements of your state laws or finance company, you have some ability to determine the kind of coverage you want, how much, what deductible, and what add-ons you want. Generally, the more coverage you have, the better you are protected.
For example, you can add more liability coverage, which can be a smart thing to do in these days of multi-million dollar legal settlements, especially when medical costs are involved. Many policies only cover $50,000 or less. If your auto insurance policy doesn’t cover the full cost of a large settlement, you or your family are personally responsible for the remainder.
The huge risk of not being adequately insured is not fully realized by many teen drivers who are simply looking for the cheapest car insurance rates.
How to reduce insurance cost
One way to reduce your insurance cost is to adjust your deductible amount, within limits. If you have sufficient cash available in case of an accident, you can set a high deductible to reduce your premium cost. However, many people who set high deductibles really can’t afford to pay but bet on the chance they’ll never have to. Not a smart move.
Look at every possible discount option that the insurance company offers — for good grades, driver’s education courses, multiple car discounts, for special safety equipment on car, for safe driving record, and for smaller sensible cars rather than for powerful sports cars.
Dropping collision and comprehensive coverage is another opportunity to save money. You should only do it, however, if you can afford to buy a replacement vehicle or pay for repairs from your own pocket. As mentioned previously, your loan or lease company may require this coverage even though you feel you don’t want it. This option is usually only viable for old cars on which there is no loan or lease.
Your credit score may be a factor
Many insurance companies now look at your credit score and offer lower rates to people with high scores – 700 and above. You should know your credit score before you begin shopping for insurance. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
Whose policy is it anyway?
Until a teen becomes 18 years old, they cannot buy insurance on their own. Therefore, most teenagers are simply added to their parents’ policy, which is less expensive than a separate policy anyway. Some teens believe that they can simply not inform the parents’ insurance company and avoid the high cost. Not very smart. It might work until the first time the teen is involved in an accident. At that juncture, the insurance company can and will declare no responsibility to cover the costs or lawsuits associated with that accident — and will likely cancel the parents’ policy.
How much does auto insurance cost for a teenager?
There is no simple answer to that question. It depends on the type of car (see Cheapest Cars to Insure), where the insured lives, where the car is driven, how many miles it is driven, for what purpose it is driven, and what discounts apply. Furthermore, insurance companies are regulated by state laws and rates can differ widely across state lines, even for the same insurance company. In some cases, a teenager may pay as little as $500 a year while in other cases can pay $3000 a year or more.
Get insurance rate quotes
If you are buying a new policy or adding a teenager to an existing policy, the Internet makes it easy to shop for the best rates. Most people are already paying too much for their auto insurance. Companies frequently adjust rates such that no one company stays in the low cost leader slot very long. Unless you get new quotes every year, you never know that you might be able to get better rates from a different auto insurance company. It’s easy to get free rate quotes online.
We recommend Esurance, one of most respected auto insurance companies in America, rated A+ by A.M. Best and enjoys great customer satisfaction ratings.
Because car insurance is already expensive for teen drivers, it is even more important to know how to get the cheapest rates, which usually means shopping and getting quotes from several insurance providers.