Drive a car and you have to have insurance to be legal, but understanding some of the terminology isn’t always easy. Before you buy an insurance policy it’s essential that you get to grips with what’s on offer; here’s how to decipher the code.

Types of cover

Legally, you need only Third Party insurance which covers claims by someone if you cause an accident that damages them or their property. The next level up is Third Party, Fire and Theft (TPFT) which adds protection against fire and theft to your Third Party cover. Fully comprehensive insurance covers you for everything, even if the accident is your fault. It’s not always the most expensive, but even if it is, it’s worth the extra because of the added protection. For more on the different types of car insurance check out our recent blog.

No-claims discount

For each 12 months that you insure a car without making a claim, you’ll earn a year’s no-claims bonus (NCB) or no-claims discount (NCD), usually up to a maximum of five years. How much this is worth depends on the insurer, but it’s not unusual for a five-year NCD to cut your premium by 60% or more.

Normally, you need to have a policy in your own name to start earning your NCD. But if you’re a named driver on someone else’s policy, some insurers allow you to build up NCD of your own, if you then take out your own insurance with the same company.

Excess

The excess is the contribution you have to make in the event of a claim, before your insurer coughs up; it’s there to stop people making trivial claims. A typical excess is anywhere between £50 and £500. A higher excess will cut your premium but be careful before signing up. A recent study by vouchercloud.com found that more than a quarter of drivers had opted for a big insurance excess, to slash their premium – despite knowing that in the event of an accident, they’d be unable to pay up.

Insurance groups

All cars have an insurance group or rating, which in theory dictates how much you’ll pay for cover. There are 50 groups; the higher the number, the greater the cost. The more valuable and more powerful a car, the higher its insurance group. However, insurance companies build up their own claims profiles for the various models, so a group 3 car could cost more to insure than a group 5 for example.

Telematics insurance

Young drivers tend to crash but the safer ones somehow need to prove to their insurers that they’re not a liability. That’s what telematics insurance is there for. This puts a black box into the car which logs how it’s driven. If driven badly the premium will go up or stay the same, but if driven well the premium can plummet by three-quarters after just a year.

Extras

An array of extras can be included with your insurance policy, so spend a bit of time reading through the details before you pick the ones you want. See if the policy includes legal cover (for legal advice and fees when claiming for uninsured losses), personal accident cover (if you’re injured), and windscreen cover (if your windscreen is damaged). If there’s anything you don’t understand, there’s usually a number you can call for advice – and, if nothing else, it’s a useful test of the insurer’s customer service.

Learner insurance

Professional driving tuition is expensive, which limits the amount of time learner drivers can get behind the wheel. But getting as much practice is key when learning which is why learner insurance has been created. This is a type of cover that allows learner drivers to insure someone’s car in their own name, and they’re covered as long as they’re driving with supervision.

The cover is fully comprehensive and in the event of a prang the car owner won’t have to claim on their own insurance. To take out learner insurance the car being covered must have a conventional policy on it too, while there are typically value and insurance group limits too (usually £30,000 or so and group 30).

Fronting

This is when a young driver tries to cut costs by insuring their car in a parent’s name, even if the parent never even gets behind the wheel. Not only does it prevent the young driver from building up their own no-claims discount, but in the event of a crash the parent will lose their no-claims discount. Worst of all though, fronting is an offence as it’s fraud because it involves making a false declaration to an insurance company. Get found out and the insurer can charge a penalty or cancel the policy which could make getting insurance in the future very difficult.

GAP insurance

If your car is written-off or stolen soon after you take out a finance agreement, you could find yourself in a nasty situation. You could potentially owe more than the car is worth, especially if you’ve put down a small deposit and the car depreciates heavily within the first few months.

For example, buy a brand new car for £12,000 and write it off after a year, and your insurer may offer you £8000, because that’s what the trade guides say it’s worth. But if you still owe more than £8000 on the loan, you’d be in a situation where you owe more than the car is worth, potentially leaving you well out of pocket. To avoid getting into financial difficulties, the solution is to take out GAP (Guaranteed Asset Protection) insurance. There are two types of gap insurance:

• RTI (return to invoice) insurance: This pays out the difference between the amount you paid for your car and the amount the insurance company say it’s now worth.
• Finance shortfall insurance: This ensures you don’t have any finance outstanding on your written-off car after you make a claim. However, it differs from RTI in that it doesn’t give you any money back; it covers only the value of the outstanding finance.

Richard Dredge

March 2016