Car insurance explained

If you own, are the main driver of a car, and drive on UK roads, car insurance is a legal requirement in the UK.

Car insurance protects you if your car is stolen, if you are involved in an accident, or it catches fire or is vandalised.

As well as covering your vehicle, car insurance covers you for any damage you might cause to other vehicles, to other people’s property, and any injury to other people.

There are several types of car insurance policy, with some policies covering much more than others, and various add-ons available.

If you’re buying car insurance for the first time, read on to find out exactly what you will need.

If you own a car and drive it, or keep it on a public road, you need car insurance.

In the UK it’s illegal to drive a vehicle on a road or in a public place without at least third party insurance.

If you’re caught driving without insurance by police, the consequences can be severe. First of all there’s a fixed penalty of £300 and six penalty points.

But if you’re taken to court it could get much worse. You could get an unlimited fine and/or be disqualified from driving. The police also have the power to seize and destroy your car.

Police can look up whether your car is insured or not on the Motor Insurance Database (MID). This is a central record of all live motor insurance policies.

The main exception from the requirement to have insurance is if your car is declared as being off the road. To do this you need to make a SORN (Statutory Off Road Notification).

This involves taking your vehicle off the road, storing it on private land and not driving it. Only when you have a SORN in place can you stop taxing and insuring your car.

There are three types of car insurance:

Third Party

Third Party is the legal minimum and the most basic cover. This type of cover only covers damage to a third party, such as another vehicle, a building or a person. It won’t cover the cost of repairing or replacing your car, or any injury you sustain.

Third party, fire and theft

This is the same as third party but also offers cover if your car is stolen or catches fire.

Comprehensive

Comprehensive car insurance offers the highest level of protection. It includes everything covered by third party, fire and theft but also cover for you, your car, your passengers and property.

It’s up to individual drivers as to what type of policy they take out .

Comprehensive insurance offers a lot more protection than third party or third party, fire and theft.

Comprehensive cover is the only type of policy that will pay out for repairs to your car, or for medical bills for your own injuries if you cause an accident.

Third party insurance will be cheaper. But if you have an accident that’s your fault and your car is destroyed, you’ll be left with nothing. However, if your car isn’t worth much, you rarely drive it and you could afford to replace it if it was written off, third party cover might be all you need.

The level of protection depends on the policy you choose. Some policies just offer the legal minimum, while some offer extras either included in the policy or as paid-for add-ons.

These extras might include:

A courtesy car. This is a car you’ll be given to drive while yours is being repaired after an insured event such as an accident.

Legal cover. This will pay for legal expenses if you take action against another driver to recover ‘uninsured losses’ not covered by a standard car insurance policy. These might include loss of earnings or the excess on your policy.

No claims bonus protection. Having a no claims bonus reduces the premium you’ll pay in future years. You can pay to protect this discount so that you can have a certain amount of claims without the bonus being affected.

Possessions and personal effects (in your car). This will cover you if items are stolen from your car.

Breakdown cover. Similar to AA or Green Flag cover, this will cover the cost of a mechanic attending and roadside repairs if your vehicle breaks down.

Key cover. This covers the cost of a new set of car keys if yours are lost or stolen.

Excess cover. The excess is the amount you’ll need to pay towards a claim before the insurer pays out. You can pay extra for this amount to be covered too.

Driving abroad. This will cover you if you take your car outside the UK.

Windscreen cover. Damage to your windscreen, such as chips and cracks.

Audio or sat-nav cover. Cover if your car radio or sat-nav is stolen or damaged.

Uninsured driver protection. This will cover you for legal action if you are involved in an accident with an uninsured driver and it’s their fault.

If you cause an accident your insurance company will pay out to cover the costs above the excess.

The excess you will be required to pay in the event of a claim will be set out in your policy.

As well as covering the costs, your insurance company should do the legwork involved in getting your car or another driver’s car repaired, arranging a hire or courtesy car (if included on your policy) and arranging medical treatment where necessary.

Car insurance is sold by general insurers, banks and building societies. It’s also sold via price comparison sites and brokers.

If you use a price comparison site you will only need to enter your details once to generate quotes from multiple insurers. But not all insurers will be on price comparison sites.

It’s important to shop around and get several quotes for car insurance, especially if you are young or are buying car insurance for the first time. The difference between the highest and lowest quotes can be hundreds of pounds.

The cost of cover can vary considerably between insurers. An insurance company which might offer cheap insurance to one person may charge more for a different driver or for a different car.

It’s best to repeat the shopping around exercise each time your car insurance comes up for renewal (i.e. each year).

Your existing insurer will try and keep your custom by sending you a renewal quote. Some insist you sign up for ‘auto renewal’ which means your policy will automatically renew after 12 months and you’ll be billed automatically.

While it might sound convenient, auto-renewals tend to result in sneaky price hikes, with insurers often charging loyal customers more than they would new customers.

You should cancel auto-renewal and compare policies and premiums from different insurers instead.

Make sure you compare like for like — you need the right cover, not just the cheapest price.

Check your credit report before applying for car insurance

Car insurers check your credit report when you apply for car insurance — so you should check it first.

There are two reasons insurance firms check your credit report:

Insurers run a soft credit check as they will give you the option to pay for your insurance annually or in monthly instalments.

The soft search won’t show up on your credit report, but if you buy a policy and opt for monthly payments, the insurer will run a hard credit check. This will show up on your record and can be seen by other lenders.

It’s best to pay for car insurance annually in one lump sum, if you can. But if you want to pay in instalments throughout the year, you could consider taking out a 0% purchase credit card and using it to spread the cost.

Before you apply for car insurance, sign up for your TotallyMoney Free Credit Report and check if all the information it contains is correct. If you think information held on your credit report is wrong, you can raise a dispute.

The price you pay for your car insurance is known as the ‘premium’.

Customers always have the option of paying an annual premium, or paying for it monthly.

When calculating your car insurance premium, insurance providers will assess the risk you pose. To do this, an insurer will want answers to various questions such as:

The insurer will also use statistics and claims data to calculate your premium.

When you apply for car insurance, the insurer will ask you about:

All car insurance policies come with a compulsory excess. This is the amount you will need to pay towards any claim before the insurer pays the rest.

You will have the option to add a voluntary excess — this can lower your premium, as the higher the total excess (compulsory + voluntary) the less chance the insurer will have to pay anything at all.

For example, a policy might come with a compulsory excess of £250. Adding a voluntary excess of £150 would make the total excess £400. This is the amount you’d have to pay for a claim before the insurance kicked in. Adding the voluntary excess would make your premium cheaper.

The excess is the same regardless of the value of the claim, but it may vary depending on the type of claim - for example, there may be a different excess for windscreen damage.

Not making a claim will earn you a no claims bonus which you can build up each year and transfer between insurance companies.

A no claims bonus means you qualify for discounts on future premiums.

Young and new drivers won’t have a no claims bonus at first. But as you continue to drive, building a no claims bonus will make a big difference to your future car insurance premiums.

Some insurers also give you the option of paying to protect your no claims bonus so that one prang doesn’t wipe out years of careful driving.

If you make a claim on your car insurance, you’ll lose some or all of your no claims bonus. In some cases, notifying your insurer about a minor incident where no claim was made can result in a high premium at renewal time.

Car insurance policies usually last for 12 months.

You can pay upfront for a year's car insurance — or pay in monthly instalments.

But paying monthly will normally cost you more. This is because you’ll effectively be taking a loan from the insurance company and repaying it with interest.

If you can’t afford to pay the whole premium at once, consider taking out a 0% purchase credit card to spread the cost.

Multi-car insurance means insuring two or more cars registered at the same address on a single policy with the same provider.

This can simplify your admin as you can align the insurance renewal date for each policy instead of having to renew your insurance for various vehicles at different times.

There are two types of multi-car insurance:

Linked policies

This type of policy allows each car to have a different level of cover, if required, a different excess, and different add-ons to the policy.

One policy

This means all the cars would be on a single policy, with the same level of cover for each car.

In either case you can normally have multiple named drivers on the policy — but check this with your insurer.

Each car insurance policy will have a ‘main driver’. This is the person who drives the car most often.

You can also add ‘named drivers’ to your policy and these people can legally drive the car. If you’re a young driver, adding an experienced named driver with a good driving record (i.e. a parent) to your policy can reduce your premium.

When you take out a car insurance policy, you need to be honest about who will be the main driver. It may be tempting to put a parent with a decent driving record as the main driver on a car mostly driven by their child. This will result in a cheaper premium. But this is called ‘fronting’ and it’s illegal.

Most policies also let you temporarily add another driver to your existing policy, typically for one to 28 days. There will be a fee for this — how much it will be will depend on factors such as the other driver’s age, claims history, and the make and model of the car.

You can legally drive someone else’s car if you are a named driver on their policy. You can normally have up to three or four named drivers per policy.

If you’re not, you usually can’t drive someone else’s car.

However, a few policies will include ‘driving other cars’ (DOC). DOC is a clause on your policy that allows you to drive someone else’s car without being a named driver on their policy.

Not all insurers offer DOC. Those that do normally only offer it to drivers aged over 25 with their own comprehensive policy (it won’t be offered on third party policies), and you’ll only have third party cover when you drive the other car. The other car must have its own insurance and you’ll need the owner’s permission to drive it.

The key thing you can do to keep the cost of car insurance down is be a good driver. This means not:

There are loads of other ways to reduce the cost of your car insurance. Read about how to get cheaper car insurance here (link to cheaper car insurance guide).

A growing number of insurers offer “black box” or telematics policies that measure how well you drive. It’s also known as GPS car insurance or smartbox insurance.

This type of insurance is usually aimed at young drivers who haven’t had time to prove they can drive safely — so their driving is monitored instead and insurance premiums charged accordingly.

A blackbox policy will track your vehicle and look at:

Currently, all UK car insurance provides the minimum third party cover to drive in the European Economic Area (EEA). The EEA is made up of EU countries plus Iceland, Liechtenstein and Norway.

You should check with your insurer if your policy has extra cover for things like theft or damage to your car abroad. If not, you may be able to add this on.

But this is just the case while we are in the Brexit transition phase up until 31 December 2020. We don’t yet know what deal will be done regarding driving in Europe from 1 January 2021 onwards. However, it is likely that drivers will need proof they are insured.

In non-EU countries, a ‘green card’ proves that your insurance covers the minimum cover in the country you’re driving in. So EU countries will probably also require a green card from 1 January 2021 onwards.

You can get a green card from your insurer — there might be a fee.

Every car insurance policy is different so make sure you read the policy details.

However, there are a few things that are generally excluded. These include: