What sort of car insurance is right for you?

Are you getting value for money out of your comprehensive car insurance premiums?

That $25,000 small car you bought for the family a decade ago is probably worth no more than $4000 now – and you’re still paying insurance premiums of $800-plus a year.

Ask yourself these questions:

If the car was written off tomorrow, would I buy another just like it – same year, same specification, same value – or find the extra cash to buy a newer car?

Do I have that extra cash to spend on a newer car?

If not, would I borrow to buy a newer car?

Is the extra I’m spending on comprehensive insurance each year worth it for the peace of mind it brings, knowing that much of the premium also pays for third-party liability insurance?

Is the premium I'm paying each year costing as much as 25 per cent of the car's value once I've deducted the excess I must pay after a crash?

That being the case, would extended third-party insurance meet my needs better, for considerably lower cost than comprehensive insurance?

What is my tipping point, where the cost of insurance each year outweighs the value of the car?

To answer these questions it helps to understand how your finances would be affected by the loss of your current car and what the various types of motor vehicle insurance are.

The most expensive insurance option available is comprehensive motor vehicle insurance.

Crash your car or have it stolen and the insurance company (the ‘insurer’ or ‘underwriter’) will pay a repairer to have the vehicle fixed, or else the insurer will pay you a lump sum for the value of the car if it’s a total constructive loss (‘a write-off’) and is uneconomical to repair.

Comprehensive insurance will also cover the cost of repairing damage incurred by causes other than crashes – hailstorms, for instance.

If the car is a write-off, your car becomes the property of the insurer, which will sell the wreck to a parts dismantler (‘a wrecking yard’) for its salvage value.

The sum the insurer will pay you is either of two amounts: the vehicle’s agreed value or its market value.

Whether the car is written off or repaired, the amount the insurer pays out will be reduced by an excess or deductible amount that ‘the insured’ (that's you, the vehicle owner) will be required to pay for each and every claim.

This excess is likely to be at least $500, but could be $1000 or more if the driver at the time of the crash was inexperienced and therefore subject to a higher excess, in accordance with the insurance contract.

In addition to cover for damage of your car or theft, the comprehensive insurance policy also covers you for third-party liability.

If the crash involves damage to another vehicle or any other form of property, the comprehensive cover will pay that cost also – assuming the driver of your car is at fault.

A cheaper alternative to comprehensive cover is third-party, fire and theft insurance. This is a type of insurance that won’t cover your car for damage resulting from a crash.

It does cover the cost of damage to a third party’s property, however, so spearing into the side of a near-new Mercedes S-Class in your 1989 Mitsubishi Colt will not drive you into a life of penury.

You will pay an excess, though, just as you would with full comprehensive cover – but the excess may not be as steep.

And of course if the Colt is unroadworthy, reinstating it to roadworthy will be entirely at your cost.

In addition, third-party, fire and theft will cover your car in the event that it’s stolen, or – to use one example – if it is left a smouldering ruin by a blaze in the garage at home.

You will still pay the excess – as you would for third-party damage – even if the car is stolen by joyriders, abandoned and set alight.

This type of insurance policy may appeal to owners of older vehicles – vehicles lacking an immobiliser perhaps, or known for leaky fuel lines.

There is often some confusion between compulsory third-party insurance (see below) and extended third-party insurance – also known as third-party property damage insurance.

Extended third-party insurance is the very cheapest form of motor vehicle insurance cover available, and it should be just about mandatory for all motorists, even if you’re among Australia’s wealthiest individuals.

This type of policy only covers the liability claim, a claim from the owner of the car or other property damaged or destroyed in a crash involving your car.

There is no additional cover for damage to your own vehicle.

When you arrange extended third-party insurance, you bear the cost of fixing your own car after a crash, or having the write-off towed to the wreckers at your own expense.

Something to remember about extended third-party and third-party, fire and theft cover: if the driver of your car was not at fault, you can legitimately claim the cost of repairing or replacing your vehicle from the third party.

And that includes the excess you would otherwise pay.

This is the motor vehicle insurance cover that you are required to have, by law.

All Australian states and territories insist that every registered vehicle on the road be underwritten for compulsory third-party insurance, which covers death and injury to pedestrians, cyclists and other drivers struck down by your vehicle.

This cover falls due at the same time as your registration, and is usually administrated or underwritten by the respective state’s registration authority.

In Queensland, vehicle owners can choose the underwriter for their compulsory third-party insurance, but in Victoria you can’t shop around for CTP; everyone pays the same premium to the registration authority, VicRoads.

Unlike other forms of motor vehicle insurance, compulsory third-party cover doesn’t necessarily apportion culpability (blame) for a crash.

A negligent pedestrian who steps out in front of your car will still be covered by the third-party policy for which you pay an annual premium.

The insurer decides how much you should pay (the ‘premium’) for your annual insurance cover on the basis of three factors: the car you drive, who will be driving the car, and where the car is usually parked at night.

These three factors are collectively known as ‘the risk’.

The level of risk to the insurer determines how much you, the insured, will pay for the annual premium and how much you will pay for the excess in the event of a claim.

If you’re just recently off your P plates, you’ve purchased a new Subaru WRX and you live in Carjack Central, with the WRX parked on the street at night, expect to pay a lot – both for the annual premium and the excess, in the event of a crash or theft.

If you’re a middle-aged mum with a very safe driving record, you own a Corolla in Upper Prudentville and the Toyota is parked in a lock-up garage, the annual premium and the excess will both be considerably less.

Your first year's claim-free motoring can earn you a discount of 30 per cent with most companies, which then rises steadily up to the usual maximum of around 60 per cent for five years of careful driving. Some companies, however, offer extra discounts for longer periods of driving without making a claim, so it's worth hunting these out if you have a good record.

Some insurance companies will recognise a claims-free record under a third party property policy so this may be a good way to build up a no-claims bonus if you can't afford a comprehensive policy.

If you have earned a healthy discount, you can protect it for a little extra each year while others offer incentives like lifetime protection of your no-claims bonus – again read the small print.

Anyone with whom you exchange contact details after your two cars have collided is a ‘third party’.

The third party is anyone not a signatory to the insurance policy – not you, nor the insurer – someone who is making a claim against you or the driver of your vehicle for damage done to his or her property.

The third-party property damage is usually another vehicle, but can be anything your car slams into or sets on fire, so a wheat field could be the subject of a third-party claim against your comprehensive insurance.

That’s why the liability sum insured is usually in the millions of dollars.

Making the choice to change your vehicle’s insurance policy from comprehensive cover to extended third-party is a gamble, in the eyes of some, but a calculated risk in the eyes of others.

If you’re saving hundreds of dollars a year and you plan to retain the old car for some time – which is a low-risk motor car, always garaged, driven only now and again, etc – the gamble is more of a calculated risk.

Comprehensive policy – pays for repairs to your car and any other vehicle in the crash, assuming you were the driver at fault

Third party, fire and theft – pays for repairs to the other vehicle if you are at fault, but also pays for repairs to the insured vehicle or its replacement in the event of fire or theft

Extended third party – only pays for repairs to the other vehicle; if the other driver is at fault the insured driver recovers the cost of repairs or a replacement vehicle from the third party

Compulsory third party – pays medical expenses for a pedestrian, cyclist or other road user; doesn’t cover the cost of damage to property

Policyholder or ‘the insured’ – the vehicle owner who has arranged insurance for his or her car

The third party – a person who is not a signatory to the insurance contract making a claim against the policy for a monetary loss resulting from personal harm or damage to property

Underwriter – the company accepting a proposal for insurance from a vehicle owner (‘the insured’)

Claim – a demand for reimbursement within the terms of the policy for damage to the insured property and/or damage to third-party property

No claims bonus – a discount you earn on a sliding scale for each year you have been insured without lodging a claim, typically ranging between 30 per cent discount for the first year up to 60 per cent discount for five years free of claims

Excess – an amount the policyholder agrees to pay in advance of the insurer settling the claim for the monetary balance

Premium – an amount paid by the policyholder annually to maintain insurance cover for the vehicle insured

Sum insured – an agreed amount the insurer will pay the insured in the event of a write-off (a total constructive loss)

Market value – what the insured vehicle is deemed to be worth to hypothetical buyers at the time of the crash