The Ultimate Guide to Car Insurance

Running a car is expensive. The financial commitments don’t end when the car itself has been purchased - there are ongoing regular costs for the motorist and owner to consider.

These include filling the car with fuel - whether that is petrol or diesel, or - and vehicle tax, which is paid for either every six months or 12 months. You’ll also have other costs, such as MOTs and general maintenance to consider.

Car insurance is another expense, and it’s a non-negotiable one. There’s no way around it - if you drive a car you need to have car insurance.

It’s illegal to drive without car insurance unless you have submitted a Statutory Off-Road Notification (SORN) for your vehicle. So for example, if you own a car but can’t actually drive it - perhaps it needs extensive repairs or you are living overseas and don’t need access to it for a while - then you must actively declare it ‘off road’ by completing a SORN.

If you complete a SORN, your vehicle must no longer be driven or parked on a public road. It must be parked on private land, on a driveway or in a garage.

If you are not driving your vehicle, you cannot simply leave it uninsured. If your circumstances change and you then plan to drive the car again, you need to have a valid car insurance policy in place.

So, how does car insurance work? What type of insurance do you need? In terms of pricing, how is car insurance calculated? Don’t worry, our ultimate guide to car insurance will answer these all-important questions, enabling you to have a better understanding of your car insurance policy.


How car insurance works

Car insurance works by looking at risk. More specifically, by calculating the probability of risk, such as the risk of being involved in an accident or risk of theft. The higher risk you are deemed to be, in the eyes of a car insurance provider, the more expensive your car insurance policy is likely to be.

Statistically, young drivers are more likely to be involved in an accident than older drivers. In fact, road safety charity Brake states that one in four drivers aged between 18 and 24 years old are involved in a crash within two years of passing their driving test.

So, if you’re a young driver who has recently passed your driving test and have had very little experience on the road, your car insurance will likely be more expensive than a 40-year-old motorist who has driven for 20 years without being involved in an accident.

Why? Because there’s a higher risk that you, as the younger driver, will have an accident. That makes sense, doesn’t it?

But road experience is not the only factor in calculating car insurance…

young man driving a car

How is car insurance worked out?

We’ve covered the element of driver risk when understanding how car insurance is calculated, but that’s not the only factor. Driver experience is certainly one, but other factors involved in how a premium is calculated are:

Make and model of car 

Every single make and model of car belongs to an insurance group. There are 50 car insurance groups, ranking from No.1 up to No.50. These groups are determined by the Group Ratings Panel and Thatcham Research.

Put simply, smaller and modestly priced cars are in the lower groups and are cheaper to insure than expensive, high performance cars. A Fiat 500 will be cheaper to insure than a Ferrari F40!

Security features on vehicles are also taken into consideration. If your car is fitted with an alarm, tracker or immobiliser, it should be in a lower insurance group as it is considered at lower risk of theft.

Driver occupation

Your occupation - in other words your job - can have a bearing on the price of your car insurance premium.

Some occupations can result in higher car insurance prices. Why? Professions with extreme levels of stress, or those that require a lot of time spent driving on roads, are considered to be ‘higher risk’ when calculating car insurance. As such, premiums can be higher for such occupations.

Home address

Where you live has an impact on how much you could pay for your car insurance. If you live in a postcode area that has a higher rate of crime, or an increased incidence of accidents, car insurance providers will identify this, as your car is perceived as being at higher risk of theft or being involved in a collision.

Where you park and store your car overnight might also have an influence on car insurance cost. Parking in a secure garage or on a driveway could be considered safer than on the road, but this may not always be the case.

The different types of car insurance

To fully understand your car insurance policy, it’s important to know exactly what you are covered for. If you’re taking out a policy for the first time, you’ll be presented with the choice of three main types of car insurance:

Third Party car insurance

This is the lowest level of cover. It covers any damage you might cause to another vehicle or to property - but not to your own vehicle. So, if you have a prang with a car in a supermarket car park, third party car insurance would cover the cost of repairing any damage to the other vehicle - but not to yours.

Third Party Fire and Theft car insurance

This is the next level of car insurance up, and includes cover if the insured car suffers fire damage or is stolen. It also covers everything included under Third Party car insurance.

Fully Comprehensive car insurance

Fully comprehensive car insurance offers the most protection and the highest level of cover, covering damage to the insured vehicle and damage to other vehicles. It also provides cover in the case of fire and theft. Some car insurance policies might also allow you to be insured while driving another vehicle, providing you have the owner’s permission, of course.

Two cars parked next to eachother

What is multi-car insurance?

Multi-car insurance allows you combine cover for several vehicles onto one policy for ease of administration. This is useful if your household runs more than one car; you could get cover for cars driven by yourself, your spouse, and any children who drive all on one policy. Many car insurance providers will also offer a discount if you insure multiple vehicles with them.

Specialist car insurance

Standard car insurance doesn’t suit all motorists. If you have specialist requirements when it comes to car insurance, you might need a more bespoke policy. Many car insurance providers offer a wide range of policies, including:

Temporary car insurance - offering short term cover from a single day to one month

Learner Driver Insurance - offering cover while you’re learning to drive

Classic Car Insurance - cover for cars of a vintage age

Black Box Car Insurance - suitable for new and younger drivers, this uses telematics to monitor driver behaviour

Business or Commercial Car insurance - cover if you drive for a living, including fleet van insurance, truck insurance and taxi insurance

Modified car insurance - provides cover for cars that have had modifications, such as changes to the exhaust, tinted windows or changes to the suspension

Cars parked in a line

What is Black Box Car Insurance - and how does it work?

Black Box Car Insurance is a type of car insurance that monitors driver behaviour through the use of a telematics system.

A small black box is installed discreetly in the car, and this tracks speed, the distance you travel and when you drive - time of day or night, and so on.

By assessing how you brake, accelerate and take bends and corners, it creates an overall picture of your driving behaviour.

This data is analysed regularly by the insurer. If this shows that you drive safely and smoothly, stick to speed limits and are generally a considerate motorist, some insurers might reward you with a reduction in the price of your car insurance premium when you renew your policy.

On the other hand, if you drive too fast, brake too sharply or drive late at night, this will likely have a negative effect on your driving score, and as such could reduce or remove any discounts you may be eligible for at renewal.

Getting a quote for car insurance

These days, getting a quote for car insurance is quicker and easier than ever before. While you can contact an insurer directly via their website or on the telephone, be mindful that this means you’ll only get their best available price for their own products.

Remember, the best car insurance policy for you is not necessarily the cheapest one. As such you should consider the cover you require when getting an insurance quote. There are different types of policy, core cover, and optional extras to choose from, so you should take the time to think about what it is you need.

The details you need to provide to get a car insurance quote include:

  • Name
  • Age
  • Address
  • Length of driving experience
  • Make and model of car being insured
  • Details of any other drivers to be included on the policy
  • Any No Claims Bonus - and number of years
  • Where the car will be left overnight
  • Your estimated annual mileage
  • Your occupation

Get a quote for RAC Car Insurance.

What is a no-claims bonus?

A no-claims bonus - or no-claims discount (NCD) - can apply when a motorist has been driving for a number of years without making a claim on their car insurance. If you have a no-claims bonus it suggests you are a lower risk driver and are less likely to make a claim on your insurance.

A driver with as little as 1 year NCD will often qualify for a discount. This will then increase every year, providing you don’t claim. Most insurers will often have a maximum number of years they will apply a discount for.

Drivers who have built up several years of NCD might also choose to protect it by paying a little extra. This enables them to keep it, even if they have to make a claim. Losing your premium bonus completely because of one minor accident in ten years, for example, could be frustrating.

Insurance documents

Paying for your car insurance premium

There are two main ways of paying for your car insurance.

One way is to spread your annual car insurance premium over 12 monthly payments, or in some cases an initial payment at the policy sign-up stage, followed by 11 monthly payments instead.

Paying monthly helps to spread the cost instead of paying in one lump sum, and you can do this by direct debit so the same amount comes out of your bank account on the same day. That way, it’s easy to budget for.

However, if you choose to pay by monthly direct debit you’re effectively borrowing the money to pay for the car insurance policy, so there will usually be a small interest charge for this. Quite often, you will end up paying slightly more for your policy if you pay by monthly instalments.

If you can afford to pay for your annual car insurance in one sum, it works out cheaper in the long run - but that’s easier said than done!

Two cars parked closely together

Renewing your car insurance policy

How long does car insurance last? Well, policies are issued on an annual basis so you’ll need to renew your car insurance every 12 months.

Your insurer will usually contact you approximately three to four weeks before your renewal date. If you have opted for auto-renewal of your policy, you won’t need to do anything in order for your policy to renew, as long as all the policy details are still correct.

You will be given the details of your renewal, and any price changes. It’s common for the price of your car insurance premium to go up at renewal, even if only slightly. At this point you have the opportunity to ‘shop around’ for a better deal should you wish to.

If you find a more suitable car insurance policy with another provider, you can choose not to renew your existing policy, and start a new policy instead.

Just make sure you inform your existing provider that you won’t be renewing, and cancel any direct debit payment arrangements with your bank if you paid by monthly instalments.

Ways to reduce your car insurance

Long term, the best way to reduce your car insurance premium is to build your NCD, which indicates you are a smaller risk and therefore a safer driver.

However there are other ways to reduce the cost of your car insurance - bear in mind all answers and information you give to secure a policy must be accurate. Any incorrect information may invalid a claim or your insurance policy altogether.

Black Box Insurance: 

For younger and newly qualified drivers, taking out a Black Box Insurance could really help as it rewards safe driving by allowing you to monitor your driving performance and improve it, journey by journey. As such, your black box insurer might choose to reward you with a discount on your premium for driving safely.

Other tips for new drivers are covered off in this article, and include paying a higher level of excess and adding an older named driver to the policy.

Adding additional drivers:

You could see a reduction in your car insurance price if you add another driver to your policy. Why? Well, again it comes down to how car insurance works. If another driver will be using the car for at least some of the time, it lowers the risk of that vehicle being damaged by you.

This could be of particular use to a young drivers to reduce premium cost, however it’s important that if you are the main driver of the car, then you tell your insurer this when you get a quote – if someone else (e.g. a friend or parent) insures themselves on your car as the main policyholder and adds you as a named driver, this is known as ‘fronting’, and is illegal.

Choice of car and where you keep it:

You could choose a cheaper car, belonging to a lower insurance group, and make it as safe and secure as possible. This includes keeping it parked on the driveway at your house or in your garage overnight, instead of on a public road.

Avoid points on your license:

It should go without saying, but points on your license means a higher premium. Below is a list of avoidable scenarios that could land you with points on your license, or further prosecution if it results in an accident:

  • Tyres below the minimum legal tread depth
  • Incorrectly positioned mirrors
  • Speeding
  • Using a mobile device without a hands-free kit
  • Not stopping for a red light
  • Poorly maintained vehicle
  • Driving under the influence of alcohol or drugs
  • Driving with undue care and attention

Annual mileage:

Lowering your annual mileage can also help. If you drive 20,000 miles a year, your insurance premium is likely to be higher than if you clock up 10,000 miles.

More details on RAC Car Insurance.

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