Auto and Homeowners Insurance Basics That Everyone Needs to Know
Most people will have an auto or homeowners insurance policy during their life. Learn the basic terms to understand your policy and find out how you might be able to save money.
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Having the proper types and amounts of insurance can be a core component of managing your finances.
Auto insurance and homeowners insurance are especially important because lenders often require you to purchase coverage if you have an auto loan or mortgage. Most states also require a minimum amount of auto insurance coverage.
Additionally, the right policy can keep an unexpected event, such as a collision, storm or theft, from draining your emergency fund or putting you deep in debt.
The Basic Insurance Terms to Learn
Insurance policies are filled with fine print, but here are some of the most important terms you'll come across when comparing insurance quotes or reviewing your current policies:
- Premiums. The policy's premium is how much you pay to keep the insurance coverage. You might be able to pay the premium monthly, biannually, or annually.
- Deductibles. Your deductible is how much you have to pay before your insurance starts covering expenses from a claim. For example, if your deductible is $500 and you file a $2,000 claim, the insurance company may only pay or reimburse you for $1,500. The deductible is generally per claim, so you'd have to cover $500 again if you file another claim later.
- Coverage limits. Your policy may also have maximum limits for different types of coverage. Such as a limit on liability, collision and comprehensive claims for auto insurance, and on dwelling and personal property claims for homeowners insurance.
- Riders. A rider is an add-on that amends your policy to include or exclude specific coverage or events. For instance, a homeowners policy might have a $2,000 limit for jewelry-related personal property claims. If you have jewelry worth more than $2,000, you might want to pay for a rider to increase the coverage limit.
- Exclusions. Insurance policies may also exclude certain events or risks, such as flood or earthquake coverage on a standard homeowners policy.
- Actual cash value versus replacement cost. You may also want to see if your insurance policy uses the actual cash value (ACV) or replacement cost. With ACV, you'll only receive benefits based on the current value of the item, such as a vehicle or TV, which could have decreased significantly. A replacement cost policy will pay to repair the item or replace it with a comparable item.
There are many other terms and fine-print items that you may want to learn about. The National Association of Insurance Commissioners has a glossary you can review. You can also ask your insurance agent if you have specific questions about your policy.
Find Out What Affects Your Insurance Rates
In addition to understanding what insurance generally does and doesn't cover, you may want to look for ways to save money on your insurance premiums. A lot of factors can affect your rates, but some of the main ones are:
- Your deductibles and limits. You'll generally pay less for a policy with high deductibles and low coverage limits. However, weigh the benefit of saving money today compared to having to pay more if you file a claim.
- The types of coverage. Adding or removing different types of coverage or benefits, such as roadside assistance with an auto plan or identity theft services with homeowners insurance, can also affect your rates.
- Your history of filing claims. Insurance companies can purchase reports to see your history of filing insurance claims, similar to how credit reports show your history with credit accounts. Your eligibility and premiums can depend on your previous claims.
- Discounts. You might qualify for various discounts, such as a discount for having multiple policies with the same company, staying with the company, using automatic payments, paying the bill biannually or annually, not having any recent claims or having safety systems in your vehicle or home.
There may also be factors that are outside of your control, such as where you live and the make or model of your vehicle. But you can get quotes and consider how these could affect your rates before buying a home or vehicle.
Regularly Shop for Insurance to See if You Can Save Money
Although you might receive a discount for sticking with one company for a long time, it's still a good idea to occasionally shop around and compare home insurance policies and auto insurance policies. Some people make a habit of gathering quotes every six months or year to see if they can save money by changing insurers.
Insurance companies might consider different factors or discounts when determining your rates, and you might be able to switch companies and get similar coverage for less money. You can also usually cancel your current policy and change at any time, and you may get a refund if you prepaid for your current policy.
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Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.