6 confusing car insurance terms and what they mean
Car insurance can be confusing. A cynical person might argue that insurance has been made excessively complicated in order to trick users into purchasing more insurance than they need or to stop them from making claims to which they’re entitled.
Realistically, though, insurance doesn’t have to be confusing if you ask your broker questions and do some research. Here are some examples of confusing car insurance terms:
1. Premium
Your premium is the amount of money you pay to be insured. When you’re quoted $900 a year for insurance, your premium is $900 for an entire year of coverage.
2. Deductible
A deductible is the amount of money you have to pay out-of-pocket when you make an insurance claim. Say you have an accident and the damage is $2,500. A person with a $500 deductible only receives $2,000 from the insurance company to cover the cost of the damage. A person with a $1,000 deductible receives $1,500. Generally speaking, the higher the deductible, the lower the premium, because you are responsible for a larger portion of the cost.
3. Collision insurance
Collision insurance covers damage to your vehicle in the event of an accident. This coverage applies to most accidents, including when you hit a stationary object while driving.
4. Comprehensive Insurance
Comprehensive insurance is a bit trickier to quantify than collision insurance. Comprehensive insurance covers damage to your vehicle from non-accidents like falling objects, vandalism, natural disasters, and other items. If you’re driving down the street and crash into a pile of garbage, the damage is covered under collision insurance. If you’re driving down the street and someone throws their garbage out the window and hits your car, the damage is covered under comprehensive insurance.
5. No-fault Insurance
No-fault insurance has a deceiving name. Having no-fault insurance doesn’t mean you’ll never be blamed for an accident. With no-fault insurance, you lose your right to sue either completely or to a certain degree, depending on the province. Instead, regardless of who caused the accident, damage to each vehicle is paid out by each vehicle’s insurance company.
If Person A runs a red light and hits Person B’s car, Person A’s insurance will cover damages to Person A’s car while Person B’s insurance will cover damages to Person B’s car. Person B may have the right to sue, depending on the province but will not see his insurance rates increase. Person A, who caused the accident, will have to pay a higher insurance rate.
6. Effective date
The effective date is the date your insurance policy starts covering you. This could be a big problem if you switch insurance providers. Say your current insurance policy expires on a Friday but you make a mistake and tell your new insurance company that it expires on Monday and you purchase a new policy with an effective date of Monday. The weekend between when your old policy expires and your new policy starts will be a weekend where you have no insurance – both a dangerous and illegal problem.
Make sure you understand these insurance terms so you know what you’re getting into when you sign on the dotted line.