Everything you need to know about taking out car insurance

We give you the lowdown on how car insurance works and what to do to keep costs down

As excited as you might be to take your new car out for a spin, there’s something you need to do first. Buy car insurance.

In the UK driving without insurance is a crime. You risk an unlimited fine and a driving disqualification if you aren't covered. The police can even seize and destroy your car.

Car insurance also gives you peace of mind. If you damage someone else’s car or your car gets damaged or stolen, you won’t need to pay everything out of your own pocket. The insurance company will cover most of the cost.

In the most basic terms, car insurance works this way: a policyholder pays a premium to a car insurance provider, and in return the car insurance provider will pay out on any valid claims up to the limit of insurance (less any excess, of course). If a policyholder makes their premium payments, sticks to the terms of the policy and a claim meets the criteria, then a claim will be paid.

Each car insurance policy is subject to a list of terms and conditions, and certain situations will be excluded from cover. For example, car insurance policies usually exclude theft claims if a car was left unlocked.

1. Third party only

This is the most basic type of insurance and is the minimum coverage required by law. It covers damage and injury to others if an accident is your fault. It doesn’t cover any damages to your own car.

2. Third party, fire and theft

This offers the same level of cover as third party only insurance. But on top of that, it covers damage to your car if it’s caused by either theft, attempted theft or fire.

3. Comprehensive cover

Comprehensive policies cover both the damage you cause others and your own damages. It doesn’t matter if the accident is your fault or someone else’s.

Car insurance is calculated based on two primary considerations: the perceived risk of insuring a certain car and driver, as well as the product and features being quoted by an insurance provider.

To calculate the perceived risk and generate a quote, an insurer uses an internal pricing model that factors in many details about the car and driver - and the more risk in an application, the more expensive a quote will be. As part of this, insurance companies rely heavily on Thatcham Research, which administers the Association of British Insurer’s (ABI) Group Rating system. Every car sold in the UK is issued with an Insurance Group Rating that indicates the relative risk to insurers.

Pricing models also incorporate many factors, such as the value and engine size of the vehicle as well as the age, experience and claims history of the driver. For example, a more expensive car would cost more to repair or replace if it’s in an accident, so insurance rates would typically be higher. And cars that are stolen most frequently might cost more to insure since there’s a higher chance an insurer will need to pay out on a theft claim.

Location can also drive differences in insurance rates as insurers take into account the risk of accidents and theft in different neighbourhoods. Rates can even vary from one post code to the next, so you might pay a different rate if you simply move down the street.

The second main consideration when calculating car insurance quotes is the product being sold - that is, how much cover is being provided by a policy. There are two main factors at play here.

First, is the policy TPO, TPFT or comprehensive? You’d expect comprehensive policies to cost the most because they provide the widest cover (covering your car for fire, theft and accident damage, as well as the mandatory third party cover). However, comprehensive plans can sometimes come in cheaper - it seems insurers view drivers who want to cover their car as lower-risk customers who warrant a discount compared to drivers only looking for basic protection.

Second, what features are provided by the policy? There are many “optional” features that can either be included as standard or available as an add-on for an additional premium. Generally speaking, the more features a policy includes, the higher the car insurance quote.

The level of cover isn't the only thing that affects the price. Risk is also important. The more likely it is that you'll make a claim, the more expensive your insurance will be.

Here are some of the things that insurers think about when setting your premium (how much you have to pay for the policy):

Your age

Certain age groups are statistically more likely to claim. This raises the premium for everyone in that bracket. Drivers aged 18 to 25 tend to pay the most.

Your driving history

You can expect to pay more if you’ve had accidents or driving convictions.

Your car

Luxury cars and other high value vehicles cost more to repair, which raises the premium.

Where you live

Densely populated areas and areas with statistically high crime rates make claims more likely. Londoners pay up to four times as much as motorists elsewhere in the UK.

How much mileage you do

The more you drive, the greater the chance you’ll have an accident and make a claim. What you use your car for - your work, for instance - may also influence your premium.

Your job

Statistically, entertainers have the most expensive car insurance in the UK. By contrast, paramedics tend to pay the least. (Although maybe don't change your career just for cheaper car insurance).

Factors such as your age, occupation and place of residence are mostly out of your control.

But you can still make your insurance more affordable. Here’s how:

Pay a voluntary excess

The excess is the amount you have to pay out of your own pocket first when you make a claim. This is set by the insurer and it's called the compulsory excess.

However, you can also choose to pay an additional sum when you claim. This is called a voluntary excess. You’ll have to pay more if you claim but you could save if you don't.

Invest in security

Alarms and immobilisers make cars harder to steal. For this reason, many insurers offer premium discounts if you have them installed. To qualify, your system must be Thatcham-approved.

Watch where you park

Car insurance is typically cheaper if you park somewhere secure, especially overnight. Surprisingly, parking in your driveway is cheaper than parking in your garage.

Buy a telematics policy

Telematics or black box policies involve installing a device on your car or downloading a smartphone app. Your insurer will use this to monitor your driving. If the data proves you’re a safe driver, your premium will go down. The downside is that your mileage may be restricted. Some insurers also operate a curfew system, which means you won’t be able to drive during certain times.

Use multi-car discounts

A multi-car discount allows everyone in your household to insure their car under the same policy. This usually works out cheaper than multiple, individual policies. If this isn’t possible, try adding a more experienced driver - a parent, for instance - as a named driver on your policy.

The UK car insurance market is quite competitive, and there are lots of different providers and policies at different prices out there. This means it pays to shop around.

But don't just think about the price when you're making your decision. Cheaper policies tend to have trade-offs. Usually, these involve you paying a bigger portion of the costs out of your own pocket.

Here’s what you should compare between policies:

The excess

This is the amount you have to pay out of your own pocket every time you make a claim.

A higher excess means your insurer has to pay less in the event of a claim. So, the policy will usually have a lower monthly rate. The trade-off is that you’ll have to fork out a larger portion of the costs if you do make a claim.

Any limits on how much you can claim

Some insurers put a cap on how much they’ll pay out on certain parts of a claim. For example, an insurer might put a cap of around £150 per claim for travel expenses (the cost of traveling from the site of an accident to your home). This might not be enough if you tend to drive long distances.

Exclusions

What a policy doesn’t cover is just as important as what it does cover. Some exclusions are standard. For instance, insurers won’t cover a drunk driver. You may also find that certain insurers don’t cover a particular cost - breakdown assistance, for example - while others do.

Your policy may also have conditions that invalidate the policy, for instance if you intentionally put incorrect information on your application. So make sure you read up on the terms and conditions before opting for a policy.

Yes, the Road Traffic Act 1988 specifies that car insurance is mandatory if you use your car on roads or public places. Registered keepers are required to insure a car with at least TPO insurance - this is the minimum level of car insurance required by law.

TPO insurance covers damages and injuries to third parties, but not to you or your car.

It’s not compulsory to buy a higher level of cover (e.g., TPFT or comprehensive). However, those with a valuable car or who could not easily afford to repair or replace their car if it was stolen or damaged in a collision will want to consider buying a TPFT or comprehensive policy. While not required by law, these higher levels of cover can provide valuable protection for your car and your personal finances.

There is one exception to mandatory car insurance - when a vehicle is declared to be “off the road” via a Statutory Off Road Notification (SORN) with the Driver and Vehicle Licensing Agency (DVLA). In that case, the vehicle cannot be driven on public roads. A SORN car doesn’t need insurance, tax or an MOT. That said, some vehicle owners still opt to insure a SORN car to protect against theft, fire or other damages.

A car insurance excess is the amount you must pay towards a claim. Anytime you make a valid claim with your car insurance provider, you’ll be required to contribute an amount towards the claim. The amount contributed by the policyholder is called the excess. The insurance provider will pay the rest of the claim, up to the limit of insurance.

For example, imagine you make a claim for a stereo worth £300 that was stolen from your car. If your policy has an excess of £100 and a limit of £500 for factory-fitted entertainment equipment then your insurance company would pay out £200 (£300 less the £100 excess that you pay).

It’s critical to arrange car insurance for a new car before you drive it home. Driving a new car home without insurance is illegal and can result in fines and points - and in some situations end in being disqualified from driving or having your car seized or even destroyed. Luckily, there are a few choices for sorting out insurance for a new car.

If you know which car you’re buying ahead of time, you can arrange your annual insurance before you go to pick up your car. Car insurers will quote for policies with a future start date, so you can investigate prices and sort out your policy days or even weeks in advance. Of course, you’d only want to buy a policy when you’re sure of your car purchase, because car insurance policies can come with hefty cancellation fees. Keep in mind that the cost to cancel car insurance is typically cheaper during the 14-day cooling off period.

Another option is to buy short term cover for your car. Temporary insurance can be purchased to cover your car for hours or days, and can give you some time to arrange an annual policy if you haven’t done so before you pick up your new car. This can be especially useful if you buy a car spontaneously and haven’t researched and locked in a policy ahead of time.