How does car insurance work?

What does car insurance cover?

It really depends on the type of car insurance you buy. All car insurance policies come with third-party protection, which means that the policy will pay out if you are at fault for damaging other people's property. Additionally, all car insurance policies provide protection for injury claims that are made against you. Car insurance can also include protection against fire and theft and there is a fully comprehensive option that will pay out in the event of damage to your own vehicle. We explain the different types of car insurance below, including the optional extras available, or you can check out our article ‘What are the different types of car insurance‘ for a more detailed explanation.

What different types of car insurance can you buy?

There are three main types of car insurance and we explain each of these below.

Third party car insurance

Third party car insurance is the most basic type of car insurance. It provides you with the minimum level of car insurance required in order to legally drive in the UK. Third party car insurance only insures against damage to other people's property, meaning if an accident is proven to be your fault, you'll have to foot the bill for any damage to your own vehicle. Third party car insurance does provide cover for any compensation claims made against you, however, including injury claims from passengers and other drivers. If you are involved in an accident that is not your fault then you should be able to claim against the policy held by the driver at fault and so in this event, your own vehicle is likely to be covered.

Third party, fire and theft car insurance

Third party fire and theft car insurance offers the same protection as third party car insurance, however, your own vehicle will also be insured against fire and theft. So, in addition to third party cover which pays out for damage to other people's property, you may receive a payout if your car is stolen or destroyed by fire.

Fully comprehensive car insurance

Fully comprehensive car insurance offers the highest level of protection. You'll be covered for damage to other people's property as well as damage to your own vehicle, including vandalism. You'll be covered for compensation claims made against you and you'll also be insured for any personal injuries that you sustain, whether the accident is your fault or not. Policies vary from insurer to insurer, however, some include handy little extras including access to a courtesy car and windscreen repair and replacement. We explain the optional extras that you can add to your car insurance quotes later in this article.

How are car insurance premiums worked out?

Your car insurance premium is worked out by combining a number of factors including the type of policy you choose, the car you drive, your driving experience, your planned usage, the amount of excess you choose and your personal information such as your age and location. We explain each of these in a little more detail below but for more information on how these factors affect how much you pay for your policy, read our article ‘How much does car insurance cost?‘

Personal information

When buying car insurance, you'll need to provide your full name, age and address. Your age will play an important factor in the final premium you pay with young drivers typically being charged more. Your address will also impact the premium you pay with those that live in areas with high crime and those who park on busy roads paying more.

Policy type

When deciding on the best car insurance for you, you have a choice between third party, third party, fire and theft and fully comprehensive. Surprisingly, third party can be the most expensive type of car insurance with third party fire and theft costing a little less. Fully comprehensive can sometimes be the cheapest type of car insurance despite it providing the highest level of cover and will pay out if your own vehicle is damaged in an accident, even if you are at fault. This is why it is always a good idea to compare the cost of different car insurance policies to find out the most suitable policy for you. Find out more in our article, ‘How much does car insurance cost?‘

Car age, make and model

The car you drive will impact the amount you pay for your car insurance. Insurance companies tend to look at two main factors; the cost of repairs/replacement and the potential risk that the vehicle poses. Newer cars can be expensive to insure because of how much it will cost to fix or replace them whereas older cars can be expensive to insure due to them having fewer safety features. Engine size is an important factor too and vehicles with larger engines will typically cost more to insure. Finally, if you have made modifications to your car, expect to pay more. Insurance companies are notoriously nervous when it comes to modifications as the statistics prove that those who make modifications are more likely to make a claim. Our article, ‘What is the cheapest car to insure in the UK?‘ has more information on how a car's make and model can affect the cost of car insurance.

Driving history

One of the key considerations when comparing car insurance quotes online is your driving experience. A car insurance provider will ask you how long you have been driving, when you were last involved in an accident and if you have any driving convictions. Car insurance providers sometimes reward safer drivers with a discount often referred to as a ‘no claims bonus‘. Experienced drivers who have not claimed for several years could receive a no claims bonus that equates to as much as a 60% discount. Newer drivers will typically be charged more, however, that isn't always the case. Experienced drivers with a poor claims history or those who regularly commit driving offences could be quoted significantly more as a result.

Planned usage

You will be asked a number of questions about the intended usage of your vehicle. Will you be using the vehicle to drive to and from work, how long is that journey and where will the car be parked? How many miles do you drive in total each year and will you be using the vehicle for business use? All of these factors will play an important part in the final premium you are quoted.

Excess – Compulsory and voluntary

An insurance ‘excess' is the amount you will need to pay in the event of a claim. A compulsory excess is an amount set by the insurance company and cannot be altered, however, you may be given the option to select an additional voluntary excess and this can be decided by you and will usually be within a range. If you consider yourself to be a safe driver, you may want to select a higher voluntary excess and this will help to bring down the final quote. When it comes to a claim, the excess is sometimes payable upfront, but it can be deducted from the amount that is due once the claim has been finalised. You can often get your excess refunded if you've had an accident and can prove that you were not at fault as your insurance company will claim it on your behalf from the third party. For further information, read our article ‘Car insurance excess explained'.

Failure to disclose the correct information is considered a criminal offence and so it is extremely important to be honest when you are obtaining car insurance quotes. At the very least, your insurance policy will be invalidated if you fail to disclose any relevant information.

Car insurance optional extras explained

There are a number of optional extras that can be added to your online car insurance quote. Below, we explain the most popular optional extras that can be purchased when buying car insurance. It is important to note that some of the extras we list below may be included as standard with some car insurance providers. Always check the full details of the quote or alternatively, if you have already purchased your car insurance, check the policy documents to see what is included.

Courtesy car

If you have no alternative transport or access to another vehicle then it may be wise to add a courtesy car to your policy. Adding a courtesy car to your car insurance policy will ensure that you have access to a replacement vehicle while your vehicle is being fixed or replaced. Some car insurance providers include a courtesy car as part of the standard policy whereas other providers may charge extra. The cost could be as much as an additional £50 on your annual car insurance premium.

No claims discount protection

If you have not made a claim for a number of years then it is likely that you have built up a healthy no claims bonus (a discount that insurance providers apply as a reward for being a safer driver). You can take out ‘no claims bonus protection', which is essentially an insurance policy on your no claims discount, meaning you'll still retain the discount when your car insurance comes up for renewal, even if you end up having to make a claim. The cost of protecting your no claims discount will vary depending on a number of factors, however, it is likely to cost 5%-10% of your policy price. To learn more about no-claims discount and whether it is worth protecting, read our article, ‘What is no-claims discount and is it worth protecting?‘.

Breakdown cover

Breakdown cover can be added to your car insurance quote, however, it is always wise to shop around as you may be able to get the cover cheaper if you buy it separately. It may also be worth checking to see if you already have breakdown cover as some financial products – such as packaged bank accounts – include breakdown cover as part of the package.

Legal cover

Legal cover provides financial assistance in the event that you are involved in legal proceedings following an accident. It will protect you up to a pre-agreed limit and provides financial assistance for the purposes of prosecuting someone else or in the event that you need to defend yourself in court. Again, it is worth checking to see if you already have legal cover as you may have adequate cover through other insurance policies such as your home insurance. We explain more about how legal cover works in our article, ‘Car insurance legal cover explained‘.

Replacement key cover

Key cover will pay for the replacement of your vehicle keys in the event that they are lost, damaged or stolen. Some policies may also pay out if the locks on your vehicle are damaged or need to be replaced. We explain more about how car insurance key cover works in our article, ‘Car insurance key cover – is it worth it?‘.

Windscreen protection

Windscreen protection ensures that the windscreen in your vehicle can be repaired or replaced in the event it is chipped or damaged, and many policies extend this cover to all glass (windows and sunroofs) in the vehicle. Windscreen protection is included as standard with some policies, and the excess is usually between £10 and £25 for a repair but tends to be higher should your windscreen need to be replaced, usually around £75 – £115. Always check the details when comparing policies as it tends to vary from insurer to insurer.

What information do you need for a car insurance quote?

In order to obtain a car insurance quotation you will typically need to provide the following details:

• Personal details – You will need to provide your name, age, occupation and address. You may also be asked about your marital status, whether you have children and if you own your own home.
• Vehicle registration number – You will then be asked to confirm the vehicle age, make and model.
• Estimated annual mileage – You will need to provide the annual mileage that you expect to complete each year.
• Additional safety features – You may be asked whether the vehicle has an immobiliser or tracker installed or whether you have a dashcam or black box fitted.
• Modifications – You will need to confirm whether you have made any modifications to the vehicle, such as changes to the suspension, engine, tyres, wheels or bodywork. Modifications may result in being quoted significantly more.
• Driving experience – You will be asked how long you have had a licence, whether you have had an accident (usually in the last 5 years) and whether you have any motoring convictions such as points on your licence.
• Named drivers – You will be asked whether you want to add another driver to your policy, known as adding a ‘named driver'. A named driver should be someone who uses the car occasionally. If the ‘named driver' is likely to use the car more than the main policyholder, you should name them as the main driver instead.
• Where the vehicle is kept overnight – You will need to confirm where the vehicle is parked overnight. Options usually include a private garage, driveway or parked on the roadside/street.
• Intended use of the vehicle – You will need to confirm how you intend to use the vehicle. Options usually include social domestic and pleasure, social domestic and pleasure with commuting to work or social domestic and pleasure with commuting to work and business use.

Is it best to pay car insurance monthly or annually?

It is always better to pay your car insurance policy annually and upfront if you can afford to do so. If you select to pay monthly then insurers will usually charge you interest on top, the rate of which varies greatly depending on various factors such as the provider, who is taking out the insurance and the type of vehicle. It is worth noting that by paying monthly you will be entering into a credit agreement and so you should expect to see searches appear on your credit file.

In the table below we illustrate the difference in cost by paying monthly vs annually for a fully comprehensive policy for a 21 year old driver living in the South East. The vehicle used to compile the quotes is a 2018 plate Citroen C1. We have assumed a maximum annual mileage of 10,000 and the insurance covers driving for social activities and commuting to and from work. We have used the 3 cheapest quotes from comparison site Quotezone*.

Monthly vs Annual car insurance – Cost comparison

	Annual price	Total annual cost of paying monthly	Difference	% difference
Insurer 1	£2242.60	£2493.87	£251.27	11%
Insurer 2	£2593.98	£2900.00	£306.02	12%
Insurer 3	£2942.69	£3192.80	£250.11	8%

(quotes correct as of 19/03/24)

Can I drive other people’s vehicles on my car insurance policy?

You may be insured to drive other vehicles if you have a fully comprehensive car insurance policy, however, it will usually only be on a third party basis. So, while you may be legally insured to drive, it is likely that you'll have the most basic type of car insurance cover and any damage to the vehicle you are driving may not be covered. Always check your policy, as well as the policy held by the owner of the vehicle. If you are in any doubt, consider purchasing a specialist temporary car insurance policy so that you can be insured on a fully comprehensive basis. Temporary car insurance is a type of car insurance policy that can protect drivers for a limited period and is especially useful when you need to drive another vehicle for a period of time.

Do I need car insurance if I am not currently driving my car?

There is legislation known as continuous insurance enforcement which means that drivers must keep their vehicles insured, even if they are not currently being driven. If, however, you are unlikely to drive your vehicle for the foreseeable future, then you can make a Statutory Off Road Notification (SORN), meaning you will no longer have to pay road tax or car insurance on the vehicle. The vehicle cannot be used or parked on public roads and so should be kept in a garage, driveway or on private land. For more information on how and when you can make a SORN, visit Gov.uk

How to buy car insurance

One of the quickest and easiest ways to purchase a car insurance policy is via a comparison site as they allow you to compare multiple providers at once to get the best deal. We have partnered with Quotezone* so that you can search and compare quotes from over 110 UK car insurance providers. It is worth considering, however, that comparison sites are not always whole of market so you could get a better deal with a provider elsewhere or with a provider not featured on a comparison site.

 

 

If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses – Quotezone